Company selling property

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    Company selling property

    I have inherited a property and I'm not sure the best way to proceed. Initially I planned to form a company and let the property out. I already hold 9 properties personally and so it made sense to use a company for any further purchases. However, I may be able to sell the property to a developer for approx £250,000 more than it was valued for probate. I know I could move into the property and live there for 6 months and claim PPR relief but I have a tenant in there at the moment and don't really want to do this but don't want to pay 28% CGT either. If i transfer the property into a company, as I was initially intending to do, and then sell the property to the developer a chargeable gain will arise. However, if I use all the money to buy more properties can i offset this against the chargeable gain or do I need to apply for roll over relief. Although I may sell this one generally I'm not a trading company so can I use roll over relief or is it only for trading companies? If I reinvest the profits can I just pay corporation on my yearly profit or do I need to treat the disposal of an asset as a separate thing?
    Thanks

    #2
    Several problems.

    1. I'm unhappy with your probate valuation. Presumably the estate was over the IHT nil rate band. Unless circumstances have changed since the property was valued for probate you should revisit the IHT return and pay more IHT; failure to do so exposes you/the executor to criminal sanctions. HMRC do trawl through land registry records, and might come back to you for more tax for up to 20 years.

    2. If it's now worth 250k more than it was worth on acquisition, then if you put it into a company you are making a capital disposal which must be done at market value and pay CGT at 28%. Again, failure to do this correctly exposes you to significant risk when HMRC review land registry returns.

    3. No you cannot have rollover relief.

    4. No you cannot move in for "6 months" and claim PPR relief. I'd suggest two years at the very least, and possibly more - given you are already planning your exit route. And anyway, see my first point.

    I think you're stuck with at best CGT at 28%, and quite probably IHT at 40%.

    Comment


      #3
      Hi, thanks for your reply. The property is realistically worth the probabte valuation of £400,000 and worth about £500,000 once renovated. A developer owns some land adjacent to the property. He must acquire a ransom strip from me to proceed with his development which would be a substantial property he plans to build. This is why he would pay over the odds. Without my help he cannot proceed. Therefore, it is an opportunity for me to sell him something with a market value of £400,000-500,000 for more than that. No IHT was due as my relative's husband had died previously leaving it to her and so the solicitor handling it used this allowance as well i think. I'm assuming i can transfer the property to a company for market value so no CGT will be payable, only stamp duty. If i then sell the property for an inflated price can i reinvest my profits and pay corporation tax on rental income from my new acquisitions?

      Comment


        #4
        Originally posted by jackboy View Post
        Hi, thanks for your reply. The property is realistically worth the probabte valuation of £400,000 and worth about £500,000 once renovated. A developer owns some land adjacent to the property. He must acquire a ransom strip from me to proceed with his development which would be a substantial property he plans to build. This is why he would pay over the odds.
        Therefore market value is - and always was - higher than 400k.

        Market value is what you can sell it for. The solicitor's surveyor undervalued the property as he didn't have all the information he needed to value the property.

        You absolutely cannot put it into a company at anything other than the value that you know it to be worth. Whilst maybe not the full 650k, there needs to be some account taken of the hope value - the hope that you can sell it to this bloke has an associated value.

        If you can get the probate value adjusted then you may find the IHT less than any CGT. In any event, the probate valuation is WRONG.


        And for your final question, see my answer 3 above. NO!!!

        Comment


          #5
          I do appreciate your comments. However, i don't really understand how the market value can be £650,000. I might transfer it to a company at that value and then the developer decides not to buy it. I have then had a huge CGT and Stand Duty bill for nothing. Only one person in the world would pay (potentially) £650,000. To the rest of the population it's only worth £400,000. If that one person wont buy then it is only worth £400,000. Regarding my question of corporation tax rather than CGT HMRC website says:

          Property trading
          If you buy and sell property as your business you pay Income Tax rather than Capital Gains Tax on any profits you make from the property. This applies whether you are a sole trader or in a partnership. This may include a one-off purchase and sale of a property. You usually pay any Income Tax due by completing a Self Assessment tax return.

          If you are a director or shareholder in a company which carries out property trading, any profits on properties disposed of are part of the company's profits. The company will pay Corporation Tax on its profits.

          Comment


            #6
            Originally posted by jackboy View Post
            I do appreciate your comments. However, i don't really understand how the market value can be £650,000.
            I never said it was. Merely that it is more than £400,000. It's obvious that the value is more than £400,000 because if I were to offer you £500,000 would you accept?

            I might transfer it to a company at that value and then the developer decides not to buy it. I have then had a huge CGT and Stand Duty bill for nothing.
            Not for nothing. You made a commercial decision that the potential saving in tax was worth taking the risk. You don't think that HMRC like giving tax away, do you???!


            As for the rest of the post, what point are you trying to make? HMRC's statement is correct.

            Comment


              #7
              Originally posted by Telometer View Post
              I never said it was. Merely that it is more than £400,000. It's obvious that the value is more than £400,000 because if I were to offer you £500,000 would you accept?.
              In answer to your question, the point I’m trying to make is that you wouldn’t offer £500,000 and nor would anybody else except for the one person who would obtain an additional advantage. Even if I could persuade you to pay well over the valuation you would also need to convince your bank that the property was worth more etc for mortgage purposes.

              Originally posted by Telometer View Post
              Not for nothing. You made a commercial decision that the potential saving in tax was worth taking the risk. You don't think that HMRC like giving tax away, do you???!.
              If I transferred it at the higher value of say £600,000 I would pay more capital gains tax and my company would pay more stamp duty on the higher valued property. If I then couldn’t sell it to the developer, the one person who might pay more than the valuation, then it’s only worth £400,000 and I’ve paid a lot more tax than I should have


              Originally posted by Telometer View Post
              As for the rest of the post, what point are you trying to make? HMRC's statement is correct.
              My point is that if my company buys the property and then decides to sell it according to the HMRC I should pay income tax on my profits, not capital gains tax.


              This idea of transferring the property for more than the valuation just didn’t seem right to me so this is what I’ve found out. There is such a thing as the International Valuation Standards Council of which RICS is a member and their headquarters are in London. They define market value as the price that would be obtainable in the wider market and that this is distinct from the concept of ‘fair price’ which is specific between two parties and takes into consideration any additional advantages or disadvantages that each will gain from the transaction. If a fair price between two parties is higher than for the wider market, this special value should be disregarded for the purposes of obtaining a market value. Below is a quote I found.

              The latest edition of International Valuation Standards (IVS 2007), clearly distinguishes between fair value, as defined in the IFRS, and market value, as defined in the IVS:
              So as the term is generally used, Fair Value can be clearly distinguished from Market Value. It requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Although Market Value may meet these criteria, this is not necessarily always the case. Fair Value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable on the wider market. On other words Special Value may be generated. Market Value requires this element of Special Value to be disregarded, but it forms part of the assessment of Fair Value.[1]

              Comment


                #8
                Originally posted by jackboy View Post
                In answer to your question, the point I’m trying to make is that you wouldn’t offer £500,000 and nor would anybody else except for the one person who would obtain an additional advantage.
                Yes I would offer £500k BECAUSE I would have a chance of selling it to the developer for £650k. If there's a better than 40% chance of the developer saying yes (ignoring other costs) that's easy money for me.

                I note what you quote from RICS and agree with them. The additional premium over 400k is the value of the ransom strip which is probably "hope" value. This is less than £250k, but more than nil. I personally have no idea what value the "hope" would have, but it would not be nil. You could sell the property for 400k and still retain the ransom strip which would be worth something up to £250k. Any valuer worth his salt would have seen the ransom strip on the plans and valued it appropriately. As a general rule probate valuations tend to be lower than higher, so he may well have allocated £nil to it. Now that you know differently, you cannot use that nil value on transfer to the company.


                This is easily illustrated if you answer my question: "Would you accept an offer of £500k from me?"



                My point is that if my company buys the property and then decides to sell it according to the HMRC I should pay income tax on my profits, not capital gains tax.
                If the company sells the profit then the company pays corporation tax on chargeable ["capital"] gains, you don't pay any income or capital gains tax at all (apart from on winding up the company/receipt of a dividend from the company).

                Comment


                  #9
                  Originally posted by Telometer View Post
                  Yes I would offer £500k BECAUSE I would have a chance of selling it to the developer for £650k. If there's a better than 40% chance of the developer saying yes (ignoring other costs) that's easy money for me.

                  I note what you quote from RICS and agree with them. The additional premium over 400k is the value of the ransom strip which is probably "hope" value. This is less than £250k, but more than nil. I personally have no idea what value the "hope" would have, but it would not be nil. You could sell the property for 400k and still retain the ransom strip which would be worth something up to £250k. Any valuer worth his salt would have seen the ransom strip on the plans and valued it appropriately. As a general rule probate valuations tend to be lower than higher, so he may well have allocated £nil to it. Now that you know differently, you cannot use that nil value on transfer to the company.
                  HRMC says properties transferred between connected persons should be at market value. The definition of market value used by RCIS specifically states that any element of ‘special value’ should be disregarded. I do understand what you are saying and you have formed the opinion that the ransom strip imparts an additional intrinsic value to my property but I don’t think it’s right to say that because I believe the developer needs to use some of my land in order to change the use of his land from garden land to building land means that my property should be valued higher. It is only my opinion that he needs it in order to build on it. I might never sell it to him and he might not want to buy it. I would only sell it for a large sum of money and he might decide this would cut into his profits too much and sell the land on as extra garden for the properties that are already there. At this stage I have no way of knowing if I will ever sell it to him. I’m not trying to be clever or get out of paying tax that is lawfully due, I just don’t think in this case you can come up with a figure of what my property is worth based on events that might or might not happen in the future. There is no ransom strip shown on any plans, it’s merely my idea that additional access would be needed by the developer. If my property is transferred at the probate valuation and my company subsequently does sell it for a lot more, tax will become due then. Surely this is the correct way to be taxed, when the profits are made, not based on this ‘hope’ valuation?

                  You say that I cannot use a nil value for the ransom strip on transfer to the company but how can I determine a value for it? Where does your information regarding 'hope' value come from? I will try and look into it?

                  Do you think it would be fair for me to pay more CGT and my company to pay higher stamp duty even though I may decide not to sell any off my garden in the future?

                  Originally posted by Telometer View Post
                  This is easily illustrated if you answer my question: "Would you accept an offer of £500k from me?"
                  Possibly I would. It’s a guaranteed £100,000 extra for me now vs a potential but by no means definite £200,000 possibly at some unknown time in the future. It’s deal or no deal isn’t it.



                  Originally posted by Telometer View Post
                  If the company sells the profit then the company pays corporation tax on chargeable ["capital"] gains, you don't pay any income or capital gains tax at all (apart from on winding up the company/receipt of a dividend from the company).
                  Sorry, I meant corporation tax. What I was trying to find out with my original question was is the sale of each individual property treated individually for tax or are the profits lumped together and taxed at the end of the year. I think you’ve answered this by saying it’s treated individually, if the company sells then it will pay corporation tax on chargable (capital) gains. I cannot reinvest all of the profits so that the company makes a bigger profit, and therefore pays more tax, the next year. Tax will become due on the sale of each individual property rather than the total yearly profits made by the company.

                  Thanks

                  Comment


                    #10
                    You need to consult a taxation accountant to discuss the options available to you.

                    Comment


                      #11
                      Originally posted by jackboy View Post
                      Telometer: would you accept an offer of £500k from me.
                      Possibly I would. It’s a guaranteed £100,000 extra for me now vs a potential but by no means definite £200,000 possibly at some unknown time in the future. It’s deal or no deal isn’t it.
                      "possibly" isn't a yes. If the property were really worth only £400k then you should snatch my hands off at an offer of £500k. That you haven't proves it's worth more than £400k, and I suggest from our little experiment that £500k might possibly be roughly the right sort of number. It's almost enough to tempt you to do the deal. I bet you'd say yes to £550k without thinking twice.


                      In answer to your question "how do you value it" the answer is to get a valuer to value it. They spend their entire time doing things like this - and on bigger transactions the methodology can run to tens of pages. If you needed to sell the property now, e.g. to fund inheritance tax, then you'd need a valuer's help.

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