Tax on Freehold Company income from selling a lease extension

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  • Tax on Freehold Company income from selling a lease extension

    I have an unusual situation which I haven't been able to find any help on so far:

    I have two companies. The first (the freehold company) just owns the freehold on our building. The second (the maintenance company) manages the maintenance of the building.

    Recently, a leaseholder (who is not a member of the freehold company and owns no share of the freehold) has asked for a lease extension. This will cost roughly £60k.

    At the same time, the management company is about to spend £60k on some major repair works to the building.

    Can I transfer the 60k from the freehold company to the management company so as to show a zero balance sheet in both companies and avoid corporation tax?

    At the moment, the only way I can see to get the funds there is to pay out a dividend to the individuals comprising the freehold company (24% corporation tax plus 32.5% dividend tax for each individual on the remainder), and then have the individuals pay the funds into the management company.

    Is there a way around this?

    Thanks

  • #2
    If the freehold company can opt to repair and has not assigned all those duties to the Man Co in the leases, it can use its funds, and recover the balance of its costs from shareholders, if they all agree, and any non participants in service charge via the Man Co.

    The man co can also agree to allow the freeholder to do this work, however if the man co is made up of all leaseholders, and the freeholder company only some, this may raise objections as the man co would have to get 100% agreement from its members.

    it sounds like poor advice, normally if there are less than 100% participation in the freehold purchase, you would treat the % due from non participants as loan capital which is repayable ( through the sale of lease extensions or buying into the freehold) thereby reducing tax liability.
    Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

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    • #3
      If the freehold company receives 60k for lease extension, it will be counted as income and the year end profit is chargeable to 20% coporate tax ( small company profit below 300K is charged at 20% rate )

      Since the freehold company owns the building,it can decide to make repairs and the expense can be charged against the company's income to reduce the year end profit. The Man Co members will not object if the repair work to building is done at freeholder's expense and at no charge to Man Co.

      Best to check the tax situation with a local accountant who does the annual accounts for freehold company. Check if repair bills must be paid direct by the freehold company and what minutes of meeting are required on record to confirm the repair expenses are chargeable to income. A lump sum transfer to Man Co might to open to claim that its a loan.

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      • #4
        Originally posted by Gordon999 View Post
        If the freehold company receives 60k for lease extension, it will be counted as income.
        I could be wrong but wouldn't this be a capital gain rather than income? If a lease is extended that must reduce the value of the freehold reversion - so a part disposal of a freehold interest?

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        • #5
          OP's question was asking if they could spend their entire income on repairs in building and not leave any income liable to tax ?.

          Here's hmrc latest rates for charging corporation tax and it makes no mention of capital gains tax:

          http://www.hmrc.gov.uk/rates/corp.htm

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          • #6
            Originally posted by Gordon999 View Post
            OP's question was asking if they could spend their entire income on repairs in building and not leave any income liable to tax ?.

            Here's hmrc latest rates for charging corporation tax and it makes no mention of capital gains tax:

            http://www.hmrc.gov.uk/rates/corp.htm
            The proceeds from a lease extension isn't income - it's a capital gain on part disposal of a freehold interest. Companies are liable to Corporation tax on profits. Profits include capital gains.

            http://www.hmrc.gov.uk/manuals/ctmanual/CTM01110.htm

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            • #7
              Simon, what you are talking about here is called transfer pricing. If you want tips on that, you should talk to Starbucks who seem to be experts at it.
              The profit making company could pay a managment charge to the loss making company and effectively wipe out the profit. However, any charge that is made needs to be commercially justified. ie at an arms length price.
              However, the simplest soloution would be, if every shareholder agrees, is for the profit making company to do the repair.
              Incidentally, Mr Green is right. This would appear to be a capital gain, so indexation allowane would be available. Any gain after that would be chargeable to corporaiton tax and not capital gains tax.

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              • #8
                Thanks everyone. Plenty to think about over my coffee tomorrow morning. -

                Comment

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