Seller delaying exchange till April - offering us to rent in the interim

sj239

Hi,

I was hoping for a little bit of advice and to see if others had come across this scenario before. We were due to exchange contracts last Friday but were made aware by the owner that for taxation reasons they would need to delay exchanging till the new Financial year (April 2014). They are non-professional developers and had already sold a property this year and therefore couldn't claim CGT relief on this property if they sold it now. Apparently the taxman treats exchanging of the contract as a taxable event, not completion so we are asked to hold off until April before we can exchange. However they would like us to proceed with the sale, at the agreed price, and in the interim rent the property from them until April.

Obviously I'm a little wary since they managed to miss the tax issue in the first placer and feel like they might be delaying the sale and then just put it back on the market in April. They apparently are concerned that we as buyers may use the next 3 months to 'test' out the property then could leave in April if we don't like it or the neighbours for example. So they want another legal document which protects them and us from one of the parties pulling out in April. They want a security 'bond' or deposit of £10k to be held to compensate the other party in that event.

Has anyone come across a scenario like this before? I think their lawyers should draft this since it was their suggestion and problem in the first place. It all sounds a little dodgy to me and just wanted to reassurance that its fairly normal course. Also concerned how much this is going to add in terms of legal fees...

Thanks

Vincent.waldorf

Hi, whilst this makes sense it is a little dodgy.

I think that you should ask to live there at a big discount because it’s their fault and if they were savvy enough they should have known about the tax issue and they're right, you can "test" the house to see if there any issues etc. but what would you do if you didn't like it?

What happens if prices fall over the next few months, would you really want to pay more than its worth? What is the tax hit on these guys if they have to pay?

You will be heart broken if the house fell down in 20k and you were "forced" to buy or loose 10k. The benefit of buying now is that you know the price and "in the moment". Equally prices may increase and you have a bargain...

Now that the gov't have pulled the funding for lending scheme things may change, less demand will shift prices down as finance is harder to come by..

satchef1

I can't work out why locking you in is actually necessary if they have confidence in their property. If you walk away now, they'll have to re-advertise in April. If you pull out in a few months time because you don't like the place then they will have to re-advertise in April. You are obviously a serious buyer given you were prepared to push through with the sale now, so you're unlikely to walk away for no reason.

I would want a discount equivalent to the rent paid over the next few months, plus an extra bit (hard to say how much without knowing the property's value) for the inconvenience. I would want to keep my get-out clause. I would want to keep them locked in to the sale though, as you don't want them deciding it's worth more come April, with them shaking you down for the cash with the threat of putting it back on the market.

Renegotiate. The current terms service their interests more than they do yours. They are preying off you being smitten with the property.

G_M

Well, the risk to you is minimal.

* if prices fall,you simply negotiate a newprice before Exchanging
* if prices rise, you insist on the originally agreed price
* if the Developer backs out, or refuses to reduce price before Exchanging... you are a tenant, and cannot be evicted quickly. Not at all for 6months (Jan to June before eviction process can even commence)
* developer will have difficulty selling to anyone else while you are living there.
* insist on a low/nominal rent, and you are quids in
* the risk is all his.

Only downside for you is the feeling of not being 'settled' in your own,owned, home.

getmore4less

non-professional developer yeh with two houses in one year.

Might be they want to dodge income tax on what is in reality a business.


http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=tRNNy6edopA

antrobus

sj239 wrote: »

....non-professional developers and had already sold a property this year and therefore couldn't claim CGT relief on this property....

My guess here would be that the 'developers' have come to a realisation that if they sell two properties in one year, HMRC may well twig that they are in fact developing property, and raise an income tax assessment on their profits; i.e. what we have here is a little bit of tax evasion in progress.

Edit: I see getmore4less has made the same guess.:)

sj239 wrote: »

...exchanging of the contract as a taxable event....

If an exchange of standard contracts that legally commits you to buying the property at some future completion date gives rise to a taxable event, then I imagine that the exchange of a non-standard contract that legally commits you to buying the property at some future date slightly further into the future has much the same effect. A sale is a sale. Or to put it another way; I doubt these developers have received proper advice from a taxation professional on this issue.

sj239 wrote: »

....Also concerned how much this is going to add in terms of legal fees...

Well, obviously the other party will be paying ALL the extra legal fees that arise. They are the ones that want the delay; they are the ones that should be paying for it. For example, the rent payable should be something nominal, like the equivalent of a 0.50% annual interest on the sale value.

Kynthia

Will your mortgage offer expire before then?

System

Looks like they are being advised by an idiot!

The exchange of ANY contract will give them a CGT liability (as already said by Antrobus).

The accounting treatment of an exchange of contract (the regular kind - from the solicitor) is that it commits the buyer to purchase the property (and the seller to sell) and hence the predefined sales price is accrued income.

They seem to be oblivious to the fact that if they wish to get the level to detail that would be required to actually legally bind you to a purchase - they would end up with something looking like what a conveyance solicitor would have provided! End result - accrue the income in this year.

Keekles

You could always consider a future with an option, which would be in your favour in terms of the price of the house.

You'd be locking them in to selling at the agreed price with the option to withdraw yourselves should the property fall in price (fairly unlikely!).

The only setback is if your mortgage offer will be valid by April (most AIPs run for 3 months / 90 days).

It's also rather dependent on your position - are you selling somewhere in order to buy? Renting?

Ulfar

Tell them to take a running jump, they are trying to avoid tax this is illegal. As others have said if they exchange know they will trigger CGT.

Also if they rent to you, this would also potentially trigger CGT, unless they are not going to declare it.

Do not become party to this as you could land yourself in trouble.

eddddy

If you decided to do this, the legal stuff could be very straightforward... you just buy an 'option to purchase' from the developer.

e.g.
Let's say the house is worth £300k.

The developer sells you an option for £10k. The option is "An option to purchase the house in April 2014 for £290k"

If you excercise the option (i.e. buy the house) you end up paying £300K.

If you let the option lapse (i.e. you don't buy the house) you end up paying just the original £10k.

Developers frequently use options when they are buying development land, so most solicitors will be very familiar with the concept.



For tax purposes, the £10k transaction would be treated as this year, and the £290k transaction would be treated as next year. (It's then up to the developer whether he declares the money as income or a capital gain. It's not your problem,)

Check with your solicitor about your stamp duty liability - I strongly suspect that the option purchase and house purchase will be treated as linked transactions. (So using the example above, you would have to pay SDLT on £300k, not £290k)