PRR on sale of freehold company shares

TimM2701

My son owns a share of freehold flat in a building with 4 other flats.

We’ve been approached by a company who wish to acquire all 5 flats simultaneously and revert the building to a single dwelling.

They propose to transact this by each vendor extinguishing their lease and then selling their shares in the freehold
management company to achieve the sale price. Via this method, they would enjoy a much lower rate of SDLT on the overall transaction. 

My main question is whether this proposal would render each vendor liable to CGT on the sale of their share and not eligible for the usual PRR.

My son lives in the flat and would satisfy the normal PRR conditions. 

Any guidance v much appreciated.

SDLT_Geek

TimM2701 said:

My son owns a share of freehold flat in a building with 4 other flats.

We’ve been approached by a company who wish to acquire all 5 flats simultaneously and revert the building to a single dwelling.

They propose to transact this by each vendor extinguishing their lease and then selling their shares in the freehold
management company to achieve the sale price. Via this method, they would enjoy a much lower rate of SDLT on the overall transaction. 

My main question is whether this proposal would render each vendor liable to CGT on the sale of their share and not eligible for the usual PRR.

My son lives in the flat and would satisfy the normal PRR conditions. 

Any guidance v much appreciated.

I have not heard of that as a structure before and think you are right to be cautious about it.

I do not know about the CGT, but I wonder if there is an SDLT problem.  It sounds as if the company, while in the control of the leaseholders of the 5 flats, would acquire the leasehold interests (by surrender) and so have an SDLT bill itself.

It sounds like one to take specialist tax advice on, probably a tax accountant.

user1977

Apart from the tax complications, the legal side will also involve much more work if there's a corporate sale of the company. Certainly not something the usual conveyancing factories could deal with. Is the buyer proposing to contribute (from whatever their tax saving is) towards the sellers' professional costs for doing it this way?

Also I presume the sellers are going to be seeking legal/tax advice collectively, so your son won't be trying to figure this out by himself.

eddddy

I'm absolutely no expert on this... but my understanding is that the surrender (extinguishing) of a lease is treated as a disposal of the lease at market value for CGT purposes.

So by my (possibly over simplistic) logic, as your son would benefit from PRR if he disposed (sold) the lease at market value, so he would equally benefit from PRR if he surrendered the lease.

But say each  flat has a market value of £200k - so this is treated as 5 transfers @ £200k = £1m

If the deal is that the freehold is then sold for £1.2m, the freehold company would have an instant £200k gain, which would be subject to CGT.

But I definitely wouldn't rely on my opinion!



But from a different perspective, the purchasing company's plans seem a bit strange. Converting 5 flats into 1 dwelling would normally result in a financial loss.

Developers generally make a profit by converting a large dwelling into multiple flats - not vice versa. So maybe...

The company has a wealthy client who is prepared to pay over the odds in order to live in that precise building

or

The company is fibbing about the 'singe dwelling  plan', and has a more lucrative plan. e.g. Demolish the block of 5 flats, and build 10 luxury apartments on the land instead.

user1977

eddddy said:

or

The company is fibbing about the 'singe dwelling  plan', and has a more lucrative plan. e.g. Demolish the block of 5 flats, and build 10 luxury apartments on the land instead.

In which case they'd almost certainly require the contract to be conditional on them getting planning/other consents, so should be clear enough from the outset what's going on.