Property purchase from a Limited company for Below Market Value - Tax Implications for both parties

strevor

Hi,

I hope someone can advise on the following. 

I am currently renting and living in a property owned by a Ltd company. Part of the property is office space conversion, part dwelling. My mother is the company director and owner, one hundred percent shareholder of the company and would like to sell the property to us for the best mortgage I can get, to which I have an AIP for £300,000 with a lender, this is including a 20% deposit. The property has been valued by a Chartered Surveyor at £425,000. The limited company will be paying when sold a Capital Gains tax based on the full market value. So 19% of £425,000 is £80,750 capital gain tax to be paid. Because the property is being sold for under market value, are there any further tax implications to the limited company or myself as the buyer. An accountant has advised that the difference of £125,000 from sold price to market value, will have to handled as a load or dividends to the company owner (Distribution in Kind - ETM 15205), resulting in further tax to be paid at 7.5% on the first £50,000 and then 32.5% on the rest which is £75,000 because this was sold below market value. This seems a very confusing when the full CGT will have been paid on the full market value of the property to inland revenue and then there is further tax to be paid on the undersold difference. The tax advise line technician, said as long as the full CGT is paid then there is no further tax to be paid. Please if anyone can advise what the tax implications are to the limited company and if this is true that the difference of below market value will need to be taxed again or treated as a loan. Is the limited company simply not able to sell the property for below market value, pay the full market price CGT and be done with it? nothing else to pay. Thank you - Simon

Jeremy535897

This is a bit of a mess. The company should seek advice, not least because a company may not be able to sell assets to a non-shareholder or employee at less than market value. Are you currently paying a full market rent? If not, there are potentially other tax and legal issues. There is also the question of separating the title, as presumably there is one title at present? There may be a flying freehold, depending on the configuration of the property, or a long lease.

I would have thought that the company would have some sort of base cost, so corporation tax would not be chargeable on the full market value.

Both tax on the capital gain and tax on distributions is in point. EIM 15205 (if that's what you were referring to) is not likely to be the issue. Simplifying it by looking at your mother buying the property from the company at an undervalue, that is effectively the same as the company paying her a dividend equal to the undervalue, and her then paying it back to the company as additional consideration to bring the price up to market value. You can therefore see how two lots of tax arise. It can be worse: as your mother is an employee, the difference between the price paid and market value could be taxed as a benefit in kind at her marginal rate. Moving back to what is actually proposed, replacing your mother with you, the undervalue could still be treated as a benefit in kind on her. If she took a dividend and gave it to you, so you could pay market value, she would pay tax at her marginal rate on the dividend, and potentially there would be an inheritance tax consequence if she did not live for seven years after making the gift. (There is likely to be a chargeable transfer for inheritance tax by her if you just pay the company too little, see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14851 .) There is also the issue of stamp duty to consider.

This is not the sort of question that can be answered on a forum. The company, you and your mother need to take tax and legal advice.

strevor

Jeremy535897 said:

This is a bit of a mess. The company should seek advice, not least because a company may not be able to sell assets to a non-shareholder or employee at less than market value. Are you currently paying a full market rent? If not, there are potentially other tax and legal issues. There is also the question of separating the title, as presumably there is one title at present? There may be a flying freehold, depending on the configuration of the property, or a long lease.

I would have thought that the company would have some sort of base cost, so corporation tax would not be chargeable on the full market value.

Both tax on the capital gain and tax on distributions is in point. EIM 15205 (if that's what you were referring to) is not likely to be the issue. Simplifying it by looking at your mother buying the property from the company at an undervalue, that is effectively the same as the company paying her a dividend equal to the undervalue, and her then paying it back to the company as additional consideration to bring the price up to market value. You can therefore see how two lots of tax arise. It can be worse: as your mother is an employee, the difference between the price paid and market value could be taxed as a benefit in kind at her marginal rate. Moving back to what is actually proposed, replacing your mother with you, the undervalue could still be treated as a benefit in kind on her. If she took a dividend and gave it to you, so you could pay market value, she would pay tax at her marginal rate on the dividend, and potentially there would be an inheritance tax consequence if she did not live for seven years after making the gift. (There is likely to be a chargeable transfer for inheritance tax by her if you just pay the company too little, There is also the issue of stamp duty to consider.

This is not the sort of question that can be answered on a forum. The company, you and your mother need to take tax and legal advice.

Thank you this is a very informative answer. We will seek immediate tax and legal advice

Jeremy535897

Do not be afraid to question any advice you give, and ensure they think outside the box. Would it help if you became an employee or shareholder in your mother's company (if she would be willing)? Is the rest of the property used in the company's business? Is the company a trading company, and would a gift of shares be covered by business property relief? There are lots of questions, and you need to consider whether, for example, the company owned property is really the place you want to live in.

strevor

Jeremy535897 said:

Do not be afraid to question any advice you give, and ensure they think outside the box. Would it help if you became an employee or shareholder in your mother's company (if she would be willing)? Is the rest of the property used in the company's business? Is the company a trading company, and would a gift of shares be covered by business property relief? There are lots of questions, and you need to consider whether, for example, the company owned property is really the place you want to live in.

Hi Jeremy, thank you for this. It is something to consider and ask questions about for other options. There is of course the deductions of original purchase price to be considered as well when it comes to the initial CGT. It was bought for example back in the 1980's for a lot less, so it is only a small chunk to come off the total. Part of the property is converted to an office that is correct. The rent paid is based on the section of the property being used and fair split and based on market value for correct tax reasons. The impact of selling this BMV is just too much of a loss for the business in taxes to pay. It would be best if this was sold to someone at full market value, we have been advised on. You advice has been very valuable, thank you so much.