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The standard condition in the leases of a block of 84 flats provided for a forfeiture clause in the event of failure to pay service charges.
In 1990 the flat management company was unable to collect arrears of £3,000 from one lessee and instituted forfeiture procedures, which were granted by the county court.
The standard condition in the leases of a block of 84 flats provided for a forfeiture clause in the event of failure to pay service charges.
In 1990 the flat management company was unable to collect arrears of £3,000 from one lessee and instituted forfeiture procedures, which were granted by the county court.
At that time the flat was probably worth about £90,000, and there was a building society mortgage of approximately £89,000. In an unusual oversight, the mortgage was not registered and therefore the forfeiture proceedings granted the flat management company an unencumbered property.
The lessee who had previously vacated was, at the time of occupation, holding one share along with each of the other 83 shareholders. The flat has now been sold for £175,000, and I am interested to learn how readers would calculate the capital gain, and whether they would consider the lessee to be connected to the company within the definitions given by section 286, Taxation of Chargeable Gains Act 1992 at the time of forfeiture, which would then substitute market value as the base cost.
(Query T16,050) - Old Cardiffian.
After one stroke of luck, it would be too much to hope that the lessee was connected with the flat management company, which would more than halve the chargeable gain on the disposal of the flat.
So what does section 286, Taxation of Chargeable Gains Act 1992 say? A company is connected with another person if that person has control of it (clearly not) or if that person and other persons connected with him together have control of it. It is unlikely that the former lessee was connected with any other lessee, let alone 42! Although any two or more persons acting together to secure or exercise control of a company are treated as connected, this scenario too is in the realms of fantasy.
The arrears of £3,000 represent consideration, in money or money's worth, given for the acquisition of the lease: section 38(1)(a), Taxation of Chargeable Gains Act 1992. This amount, plus the cost of court proceedings, is enhanced by indexation allowance for some twelve years, say about 45 per cent. If the lease when sold had less than 50 years to run, some of the cost must be restricted under Schedule 8 to the Taxation of Chargeable Gains Act 1992.
Allowing for any enhancement costs (reflected in the value on disposal) and the costs of disposal, the gain in the region of £165,000 is chargeable at the small companies' rate of 20 per cent.
The share relating to the flat would have been forfeited and should be transferred to the new lessee. Whereas the shares originally had a negligible value, they now have a value of, say, £165,000 minus £33,000 = £132,000 divided by 84 = £1,570 each, discounted as not realisable. However, if the company pays a dividend of this amount per share, basic rate lessees would have no tax to pay on it, and the shares would revert to having a negligible value. - The Captain.
It is unlikely that there are significant family or business ties between the majority of the 83 (individual?) shareholders. Section 286(6), Taxes Act 1988 says that a company is connected with a person if that person and persons connected with him together have control of it. There is no connection between lessee and company.
The effect of the county court order has been to vest the title to the lease in the company, resulting in a marriage of titles so that the company could not dispose of the (former) lease but would have to grant a fresh lease. The applicable reasoning echoes that in Kildrummy (Jersey) Ltd v Commissioners of Inland Revenue [1990] STC 657. The new lease could be created with a term and covenants corresponding to those previously in force.
It follows that the company has recovered, rather than acquired, a piece of its own property, namely that portion of the whole development which was formerly leased. The base cost remains that recognised at the time of the original disposal, supplemented under section 38(1)(b), Taxation of Chargeable Gains Act 1992 by the costs of the county court proceedings.
The 'sale', or rather the grant of a lease, for £175,000 requires a computation identical with that made when the original lease was created, with the further base costs mentioned above. If 'Old Cardiffian' hopes to escape tax on £90,000, he will be disappointed.- Bear.
Editorial note. There will no doubt be differences of opinion on whether the unpaid service charges of £3,000 can be claimed as consideration given for the acquisition of the leasehold interest.
As regards merger of the lease with the freehold, as I understand it this is not automatic and depends on the facts.
See Steele v EVC International NV [1996] STC 785 for analysis of 'acting together' to control a company. There is no evidence of this here.
