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Ash
Ash, Solicitor
Category: Property Law
Satisfied Customers: 10916
Experience:  Solicitor with 5+ years experience
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I am looking to purchase a cafe/tea room, with residential

Resolved Question:

I am looking to purchase a cafe/tea room, with residential accommodation incorporated.
The size of the commercial part to residential is roughly the same 81 sqm to 80 sqm.
Our banks have valued the residential part at £180,000.00 - and we have secured a mortgage at £144,000.00 - our deposit will be £36,000.00 for this side of things.
As for the business side of things, the sellers have valued this at £69,000.00 - fixtures & fittings at £5,000.00 then goodwill at £64,000.00. So total value of business & residential is £249,000.00.

I have opened up a Limited company to purchase the business side of things in order to take advantage of the "qualifying loan interest" - loan interest is therefore tax deductible.
And in terms of the residence I would hold this in mine and my wife's name.


The sellers have now requested that we pay £244,000.00 for the freehold property (which they will apportion £180K for the freehold and £64K for the business) as a whole and then fixtures & fittings at £5,000.00.

They say that the reason for this is to avoid paying CGT twice, as if we did they I wanted they would pay CGT on the business and also the residence due to the fact that when they purchased it they made the split (residence to commercial) a 70/30 split.

I'm not too interested in how they wish to apportion it, I'm just interested in how this is going to effect me going forward, as I say I wanted to take advantage of the Qualifying Loan Interest - then I intended to rent the business side from the residence - and apportion 50% of the running costs, electricity, rates, water etc, to the business.

I need to understand how things will change if I go down the route of paying £244,000.00 for the freehold and then £5,000.00 for fixtures and fittings ? Instead of my original plan, of £180,000.00 for the freehold (personal capacity) and £69,000.00 for the fixtures fittings & goodwill (in a limited company) ?

Thanks
Submitted: 3 years ago.
Category: Property Law
Expert:  Ash replied 3 years ago.

Alex Watts :

Hello my name is XXXXX XXXXX I will help you with this. Please note that I am a working Solicitor and may be on and offline as I have to attend Court and meet with clients, even at weekends. As such you may not get an instant response when you reply as this is not an ‘on demand’ live service, but rest assured I will be giving your question my immediate attention upon return. There is no need to wait here, you will get an email when I reply.

Alex Watts :

Quite simply this is tax evasion

Alex Watts :

They should have thought about potential consequences when they split.

Alex Watts :

Does it affect you in any way - no

Alex Watts :

Would it affect them - possibly.

Alex Watts :

HMRC could investigate because of course if CGT was payable then they would want ti

Alex Watts :

it

Alex Watts :

But they would NOT pay CGT twice, they would only pay it once

Alex Watts :

In any event it would only be the DIFFERENCE between purchase and selling price and then taking off the allowance of £10,600

Alex Watts :

They would only pay it on the difference portion not the whole amount

Alex Watts :

I would therefore be very wary of what they say.

Alex Watts :

If they only want the £5000 then clearly they would only pay CGT on the £5000 itself.

Alex Watts :

However I suspect it is more a plan to avoid stamp duty.

Alex Watts :

If this is the case you need to be very careful.

Alex Watts :

HMRC are alter to these type of schemes and both you and the buyer could be in trouble.

Alex Watts :

If the fixtures are really worth £5000 then that is fine

Alex Watts :

But if this is just for the sake of avoiding tax - it is not fine

Alex Watts :

Can I clarify anything for you about this today please?

Customer:

I'm really only concerned about my position and how I can run the business going forward - not to interested in their issue with HRMC

Alex Watts :

It wont really affect you in any way. You would only be liable for CGT when you sell which would be the difference between purchase and selling price.

Alex Watts :

That would be your gain.

Alex Watts :

Then you would pay tax on the difference.

Alex Watts :

So whether it is split or together, does not really make an awful lot of difference.

Customer:

The issue of Qualifying Loan Interest - renting the commercial space and writing off 50% of running costs - all still possible - although we have only purchased the residential freehold ?

Alex Watts :

You need to check the details, but I suspect not.

Customer:

Many thanks

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