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Lease extensions
Does extending a lease create a capital gain?
I am the owner of one of four leasehold flats in a converted Victorian (London) house. Each flat is worth well over £1m. There are leases from the freeholder.
About 12 years ago the owners got together and bought the freehold of the building through a new company limited by guarantee. Each flat owner is a member. The company has never had any financial activity at all since incorporation and simply owns the freehold.
The existing leases, never touched since the acquisition of the freehold, are now getting a bit short for mortgage companies if and when any of the flats is sold. So far, so good but, in anticipation of problems ahead, the flat owners would like to extend their leases and thereby remove any future problem – just bring them up to date (they are quite elderly) and substantially increase the term. There is no money involved apart from the costs of drawing up the leases.
I had been under the impression that this was a domestic matter, nothing to do with HMRC. But now I am told that either the flat owners or the freehold owning company could have a capital gain as a result of extending the leases.
This leaves me completely baffled. Am I worrying needlessly – this hare having been set running by a property person – or is there something in it?
Query 20,031 – Spooked.
VAT on land disposal
Should value of property sale be apportioned?
I have an interesting scenario and would welcome reader’s views. A landowner who has let out his farm on a two year farm business tenancy (FBT) with one year break clauses, has been invited to contribute three or four of his green fields (kissed by the sun) to a large housing development in his village, under a promotion agreement.
It seems that a potential planning condition would require that, if planning permission were granted, the developer would have to build a school first, and then the houses. The developer typically requires vacant possession, but there is talk about possibly immediately re-entering into an FBT for a period after the sale with the existing tenant, until the school/infrastructure are complete and the developer is ready to build housing. There is a possible risk that if the land is not farmed, it could revert to land with high environmental value which could encumber the future development.
The interesting issue concerns the VAT treatment of the sale, given the sale value could be in the same range as the recent Haymarket Media case. If TOGC treatment applied, the saving on SDLT amounts to 5% on 20% VAT, effectively 1% of land transaction cost. Given the cost pressures we are all under, a saving of £0.5m to £1M seems material to me.
Everyone seems to be saying the sale will be for vacant possession, so SDLT will be charged on the VAT. However, I’ve noticed that, in the scenario described above. It seems to me very likely that, faced with a potential sale, the landowner will enter into an FBT (my preference) of two years or less, and so avail himself of the flexibilities that confers. For the pre-sale FBT, with the land opted, break clauses could be every 6 or even 3 months, so that the tenant could be required to vacate and vacant possession granted at the point of sale, once that is happening. But post sale, if they don’t develop the land immediately, for the reasons set out above, the developer will likely want the same break clauses, so that when they are ready, they can give notice and start the development.
It seems to me that there is possibility that this deal would, if the vendor’s tenant is transferred, and opted rents taken pre and post-sale, amount to a TOGC. I can’t find any artificiality here - the landowner (and potentially the developer) want the land farmed for a period on a proper commercial basis under legal agreements such as an FBT. I would presume a developer would have an investment side of their business eg PROPCO for land banking, so it seems to me that at the point of sale, if the developer wants an FBT for period and the existing one Is assigned, Propco would have the intention to continue the same kind of business. The HMRC Manual at VTOGC3550 clearly states: 'If a purchaser intends in due course to carry on a different kind of business using the assets purchased, the sale may still be a TOGC if he is to continue the old businesses initially.'
I still had my doubts until I re-read Intelligent Managed Services case- you look inside a VAT group at the business that is being operated and into which the business has been transferred. Here the purchaser has the option- it makes no difference to the vendor, except maybe making their land sale more attractive- input tax is deductible either way, on a VATable sale or TOGC referable to previous taxable business (Abbey National).
The only other issue that troubled me is whether value requires to be apportioned in relation to agricultural land with an FBT, which creates a TOGC, and the uplifted development value. I can’t see any such statutory provision, but there is a discussion in Haymarket about looking at the 'economic reality'. Buildings have to be apportioned (eg between residential and commercial element) only the latter can be a TOGC. Here however, there is a single asset which is capable of operation as a rental business, and I think VTOGC3550 should engage- the old business is continued initially.
Reader’s thoughts appreciated. Can the green fields be kissed by an SDLT saving on the VAT element?
Query 20,032 – Singing brothers.
Employment expenses
Potential HMRC enquiry into tax relief claims.
A client – a PAYE taxpayer – has claimed tax relief on employment expenses for a number of years. HMRC is now refusing part of the claim for the last two tax years and is telling my client that they need to complete a self assessment tax return so that they can consider opening an enquiry.
What are readers’ reactions to this suggestion? I had understood that HMRC had powers to enquire into claims made outside self assessment, so a return shouldn’t be necessary?
Query 20,033 – Concerned.
VAT on property conversion
Can VAT be claimed on chapel conversion into holiday let?
One of my clients inherited some land and buildings and has obtained planning permission to convert a chapel on the estate into a holiday let cottage. He will spend £300,000 on the conversion and renovation works and then let it out for £300 a night. The lettings will not take place for another two years.
Will builders charge him 5% VAT as this is converting a non-residential building into a residential property? And will he be able to register for VAT as a sole trader in order to claim input tax on the £300,000 of construction costs and professional fees? Or will it be better to claim VAT under the DIY scheme as this is a property that he inherited as a private individual?
Query 20,034 – Mansion Man.
