Capital Gains/ Corporation Tax Issues

[allewitor]

Can anybody tell me the best way to manage the sale of a new build on top of an existing Freehold building where the plot is held in personal names but build was carried out by an associated Company. Is it possible to split the sale so the plot and the building are sold seperately?

[TaxationPete]

Who funded the building costs. You may be entering the domain of an adventure in the nature of trade and Income Tax is the issue not cgt. You need to explain the situation and the company association. Regards Peter

[allewitor]

The Company financed and carried out the construction of the new build. The association of the plot owners to the Company is that they are both Directors, but do not currently have a principle residence.

[TaxationPete]

Directors of the same company, or the associates company. If the company remain the owners of the property thaen it can not become your PPR and be exempt from CGT. If you purchase it for a nominal value then it will be deemed a disposal at OMV and taxed accordingly. Regards Peter

[allewitor]

Sorry I think I am confusing the issue here. The plot is owned by Mr & Mrs A. Mr & MRs A are the principal directors of the Company who have undertaken the constrution of the new dwelling. If Mr & Mrs A do not move into the property before it is sold, how will the sale be apportioned. Would the sale of the plot need to be seperated from the purchase price or would the total sale belong to Mr & Mrs A, who would then be required to pay the build costs back to the Company.

If the latter is correct, what taxation rules would apply, Corporation Tax or Capital Gains? For what period of time would Mr & Mrs A have to live in the property to eliminate any tax burden?

[Grange]

Why did the company build the house?

I can see (at least) two possible scenarios here. It's quite complicated and you're not going to get a satisfactory answer without paying for advice and meeting somebody.

Let us say land £100k, company spent £50k on construction but would normally charge a client 75k to build a house like that, value of house £500k.

In an ideal world, Mr&Mrs would have commissioned Co to build them a house on a plot of land they own. They would pay 75k to the company, and live in the house for a 'respectable' period of time and sell it tax free. The company would pay corporation tax on TRADING profits (the company has become a house builder by trade) of £25k (£75k-25k). (Possibly there has been a s419 loan to a Director if the company has not insisted on normal trade terms, but again this isn't going to cost, relatively, too much.)

In a rather less ideal world Co and Mr&Mrs have entered into a partnership to build a house. Cost to Mr& Mrs is £100k, cost to company is £50k. Mr&Mrs buy it from the partnership at Open Market Value (OMV) £500k, partners pay income tax (Mr&Mrs) or corporation tax (Co) on the full £350k TRADING profit. Again, I should argue that Mr&Mrs are trading here, if they have a partnership.

Where is Jeffrey? I don't know enough about land law to decide what happened in Pete's suggested scenario. What agreement is there between the Co and Mr&Mrs? A company cannot just go and build a house on land that does not belong to it, and then expect to sell it. Land can only be sold under very specific circumstances. I am not *certain* that the company owns anything that it has the right to sell; it has no interest in land, surely? I have difficulty in imagining what the company has that it could sell on the open market. The value of the bricks and mortar it put up, if it had no permission (and as I understand it, but am happy to be corrected such permission probably has to be in writing, by deed) is at best nil, and possibly negative, being the restitution costs of the land.

Disagree? What if you went to build a house in the middle of Hyde Park. At best it would be worthless, and at worst you would have to pay to restore the land.

Sorry, more questions than answers.

[Grange]

Following a short chat with Jeffrey, he shared my doubts that the company had anything to sell. The company has no interest in land.

If the house is given to the Directors then the building costs would constitute a taxable benefit in kind - which would be computed at marginal cost - i.e. 50k in my example above.

Quite possibly the best route to follow. Provided the Directors live there for a respectable length of time before selling, I'd suggest 2 or 3 years as they are builders, then PPR should apply.

[jeffrey]

Can anybody tell me the best way to manage the sale of a new build on top of an existing Freehold building where the plot is held in personal names but build was carried out by an associated Company. Is it possible to split the sale so the plot and the building are sold seperately?
As Grange states, co. cannot maintain claim to the land or interest in land. At most it might have a claim for cost of building work.
Of course, a similar position applies if A owns undeveloped land and B wants a house on it.
1. If A sells vacant land to B, B pays SDLT on land price only- even if B then contracts for A to build house.
2. If A builds house first and then sells land + house to B, B pays SDLT on value of entirety: much more expensive!