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.

poseidon1

The leaseholders definitely require advice from a chartered tax accountant.

However my intial view is this suggestion may well save the purchaser significant SDLT but at the expense of CGT on the sale of the company shares by the flat owners.

Much will depend upon whether the leases are very long ( say 995 years) with peppercorn rent.

 In that scenario the Freehold  currently has virtually no value, so a zero cost base in the hands of the leaseholder shareholders.

If this is the case then surrendering the leases moves all the value of the flats into the freehold company shareholdings , is that uplift to their base cost of their shareholdings  tax free, or merely an introduction of new shareholder equity equal to the market value of the flats at point of surrender? 

What of their mortgages? Cannot imagine for one moment individual mortgage lenders would countenance this proposal , so on that basis alone proposal might be dead in the water

Putting that important point aside for a moment,  It can be assumed that for the purchaser there is greater value in the undivided freehold, compared to the separate leases. 

Since the Freehold  share holdings no longer represents  the homes which benefited from PPR relief , the flat owners would have turned  cgt free assets ( their homes ) into taxable share holdings. A particularly egregious outcome unless they are collectively selling their share holdings at a substantial premium over the market value of each flat to compensate for their personal tax bills

What the leaseholders have to bear in mind is that the freehold company has a separate legal identity from the leasehold flats they live in and selling the shares does not have the same tax effect as selling the leasehold  flats.

This is a particularly complex web of proposed leasehold disposals into a company shell , with property and company valuations to be conducted before and after each leg of the process, and of course dealing with mortgage lenders , prior to any of this. 

Seems to me that unless the purchaser is going to pay all the professional advice fees to determine tax /SDLT /mortgage outcomes for the leaseholders, ( ie a feasibility excercise), the proposal holds unknown potential pitfalls for the home owners, not to mention their future costs of  acquiring new homes thereafter ( eg will they have to rent on completion of the deal? ).

Are these flats in London or a particularly salubrious part of the South East? I cannot imagine we are talking about modest £200k flats here.

I am familiar with this kind of proposal in the case of expensive central London flat conversions, where converting back to a single dwelling gave rise to a more valuable single dwelling compared to the individual flats.  However, purchasers in that scenario more often than not, purchased each flat separately and merged into a single freehold post acquisition, taking advantage of multi dwelling SDLT relief along the way ( MDR abolished 2024).