.png)
.png)
Property portfolio query
We would like to offer our views on the reply offered by ANA to query number 20,124 (Taxation, 11 May 2023) and, in particular, the reply offered by ANA. We respectfully disagree with ANA’s views, but that’s the nature of these difficult questions.
We were particularly interested in the response to this query because we spent time on it ourselves – before client pressures got in the way – and we found it to be extremely complex.
Like ANA, we focused on two areas, the first being whether HMRC was right to grant relief under TCGA 1992, s 162, for the incorporation. Our concern in these scenarios is that incorporation relief depends on the transfer into the company not just of a business as a going concern but also of all of the assets of that business.
The received wisdom is that this is not restricted to chargeable assets, ie those assets to which the capital gains tax regime applies, but could include non-chargeable assets, such as debtors and cash. Indeed, the reference to cash as the only asset that can be left behind clearly demonstrates that the draftsman saw cash as an asset of the business. If that is the case, then our understanding of the starting position is that Complex’s client owned both the legal and beneficial title to all the properties and, therefore, the assets of the business would include both legal and beneficial ownership. If only beneficial ownership has been transferred into the company, has there been a transfer all of the assets of the business?
It may be, since HMRC did not challenge the right to incorporation relief, that it is their official view that a transfer of legal ownership in this context is not required. But it’s not entirely obvious why this should be.
The other area, which was the main concern of the question, was whether the company is satisfying a pecuniary liability of the client. The response given is that the tax position is governed by the loan relationships rules and must follow UK GAAP. But the more fundamental question is whether the company has any liability under a loan relationship, or any other arrangement. While the question states that the properties were transferred with encumbrances, this transfer of liabilities to the company may not be lawful, assuming that the lenders were unaware of it and that the terms of the loans precluded any change of ownership of the mortgaged properties, which is almost invariably the case. If the borrower is not permitted to transfer the liability without the permission of the lender, can the company be said to have entered into a loan relationship? Therefore, our concern is that the liability to repay the mortgages remains with the original borrowers, so HMRC may be right to suggest that the company is discharging their pecuniary liabilities, and not its own.
We have been aware of these schemes for many years and have been asked on more than one occasion to give our views. To be frank, our view was always that these are potentially fraudulent, as they clearly depend on a transfer of beneficial ownership of properties to the company without informing the mortgage lenders, whose terms and conditions almost certainly prohibit such a transfer without permission.
The general response has always been that, so long as they keep getting paid, the lenders will never know or care, which may well be true, but it nevertheless remains the case that the planning relies on deliberately breaching the terms of the loans, which is at least dishonest, if not bordering on fraudulent.
This question has, helpfully, focused our minds on some of the other tax issues that might arise in these cases, and confirms that our cautious attitude towards this planning is justified.
Pete Miller and Matt Neville, Jerroms Miller Specialist Tax.
ANA responds:
I share Pete and Matt’s view that these schemes are dodgy. I am surprised HMRC accepted that relief under s 162 applies, as property portfolios do not generally constitute a business. I wonder if there was substantial property development involved or else HMRC did not check the facts.
But I stand by my view that the loan relationships rules should apply (assuming that the properties and loans are shown in the company’s accounts). Basically these look to the accounting rather than the legal position with specific exemptions.
ANA.
Contact us
We prefer contributions to Feedback to be emailed to taxation@lexisnexis.co.uk. We reserve the right to edit letters or only use extracts.
