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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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Tony I have a property developer client that has owned a property 20 years.

Customer Question

Hi Tony
I have a property developer client that has owned a property for over 20 years. It was originally part commercial, part residential (single flat above). He has in the past let this out although the flat has (for at least some of the time) been his Principal Domestic Residence (even if he has not always lived there).
He is now doing a wholesale re-work of the property - keeping the shell but converting the building into 7 flats. He intends to live in one and probably to rent out the rest (though he may sell one or two to realise cash for other projects). Obviously this will require the creation of new leases and he will drop the freehold (with nominal ground rents) into a new SPV Ltd co. Will he be hit for tax on unrealised profits - and are there any problems/hazards in this? When he sells the properties will this be subject to Income Tax or CGT?
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. You say that he is a property developer. HMRC are very keen to declare that repeated trading in landed property, that department has, in the past, so classified a taxpayer as such for just one property. Therefor any gain made on this transaction, the disposal to the new company, might be subject to Income Tax. If he is not so classified then of course CGT will apply, but at a discount as for a period part of the property was his sole or main domestic residence. Also his taxable gain would be reduced by his Annual Exempt Amount (AEA) of 11.1K and by Lettings Relief (LR) up to 40K. I do hope that you have found my reply of assistance.
Customer: replied 1 year ago.

Thanks Keith - but I think you have misunderstood. The transfer of the freehold into a separate company is purely to get around the legal difficulty of having the leases owned by the freeholder - there will be no value in this transaction (say 999 year lease @£1/year). I am concerned about the possibility of tax on the notional profit arising once the development is complete. Bearing in mind that he did not originally buy the property with a view to development - but nevertheless he has developed it - we do not have the normal developer problem of the asset being transferred from development "stock" to long term fixed asset.

Expert:  bigduckontax replied 1 year ago.
The transfer of the freehold to the company is a disposal which will, in my opinion, trigger a tax charge. Whether it will be Income Tax or CGT depends upon which way the HMRC cat jumps. Companies are not subject to CGT. Any gains made on land transactions merely form pert of the company's income for computing Corporation Tax (CT).
Customer: replied 1 year ago.

As I have said - there will be no value in the transfer to the limited company. I am not worried about this transaction in its own right (unless you are saying that I should be?). It is the unrealised profit that he is sitting on personally that concerns me.

Expert:  bigduckontax replied 1 year ago.
Yes, I think you should be. HMRC are sure to view the transfer as a disposal for CGT purposes. or even worse as income. The consideration (nil) is irrelevant; it is the current market value which will be used to determine the gain.
Customer: replied 1 year ago.

But the point is there is no value in that transaction - a freehold with just the benefit of a 999 year lease yielding £1/year is worth nothing - the value is all in the lease - and he is retaining the leases personally.

Expert:  bigduckontax replied 1 year ago.
As I said the consideration for the transfer is irrelevant. A land holding has been disposed of to a company and that triggers the tax charge.
Customer: replied 1 year ago.

So what would he be taxed on then. If say each apartment is worth £1m and his total cost is £3m. The value of the freehold in the limited company might be say £100 (and that is all he is selling) - what will he be taxed on?

Expert:  bigduckontax replied 1 year ago.
It would be taxed on the current market value at the date of exchange of contracts with the company less the original acquisition cost plus and improvements.
Customer: replied 1 year ago.

But the current market value of what? - are you saying that he will be taxed on the £4m unrealised gain (on the leases that he is retaining as a personal asset) or is this just on the £100 realised gain?

Expert:  bigduckontax replied 1 year ago.
It is possible, the transfer would count as a disposal. The fact that the company grants him a lease merely starts the process all over again. He could apply for Roll Over Relief, but this merely postpones CGT to the ultimate sale. CGT is a thoroughly nasty tax prone to raise its head and bite on at most unexpected moments.
Customer: replied 1 year ago.

But surely that is the whole point - if the gain is subject to CGT AND he gets roll over relief then he is not going to be called upon to pay any tax until he sells the properties. And this is exactly the issue I have been attempting to find the answer to - will he have to pay tax now on the unrealised gain?

Expert:  bigduckontax replied 1 year ago.
He well might; HMRC are all but certain as to regard the transfer as a disposal thus triggering CGT. The fact that the gain is unrealised is irrelevant. I know of one case where a father bought a house for his son to live in at uni and later gave it to him. It cost him 39K in CGT for his generosity. In my opinion HMRC will view this transaction with the deepest suspicion and may regard roll over relief in these circumstances as tax evasion.
Customer: replied 1 year ago.
Relist: Answer quality.
Please try another expert - I really feel this expert is out of his depth. He is now talking about tax evasion which is patently nonsense when the necessity for the transaction lies in the law of the land.
Expert:  bigduckontax replied 1 year ago.
jave repeated warned about the proposed transfer being a disposal for CGT purposes and it seems to have fallen on deaf ears.

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