We are currently running a pub with seven years to go on a 10 year lease. We have had the business valued at c.£70-75K, based on recent years accounts. We are hoping to assign our pub lease in the near future, to two employees, who although keen to take the business over, have insufficient funds to pay the asking price outright. We thought we could get round this problem by settling for an initial payment (say 10k) when we sell, and then receiving deferred payments of the balance over the next few years.
My question is - how will the Inland Revenue view these payments? Are they income or capital gains? How will the Revenue treat deferred payment?
sylvia burdon
Replies (6)
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Selling a pub
Being a licensed trade specialist , I have some comments for you on the practicalities . There have been some excellent observations on tax consequences namely:
1. The sale will be treated as being in full on date of settlement by the Revenue triggering a CGT situation , whether you defer receipts or not .
2. The CGT premium will be the value in excess of fixtures and fittings ( which will be dealt with in the Income Tax return )less any premium / goodwill you paid . The gain will then be further reduced by the number of years you have held the lease , if before 1/4/1998 then only 25% of the gain will be chargeable to CGT and this will be split between the partners , presumably equally , whom each have an annual exemption of £7,200 for 2000/1 . So as long as you have held the lease for more than 3 years ; CGT is likely to be minimal if F&F is valued around say £15K (The lower the F&F value the better for you)
3. Practical problems may include privity of contract which makes the headleaseholder effectively liable for rent if assigning the lease and that assignee lessee does not pay rent as it falls due . Check your lease or consult your landlord .
4. In many instances the proposed lessees have to be approved by the pub company landlord .
5. I would not advise any of my clients to sell on a deferred basis , it is difficult enough to make a profit out of a tied lease without having to find the extra cash to pay you off aswell . My advice is to try and obtain full payment and ask them to raise their own finance or find another buyer , unless you do not consider your lease will sell very easily .
Privity of Contract
You are quite correct Sylvia. If you assign the lease fully, you will have no further obligations under the lease.
However, this is conditional on you having the right to assign. Your lease may not give you this right, or the landlord may be able to require you to underwrite some or all of the assignees obligations. If the landlord has reasonable doubts about the assignees ability to perform, he can refuse to assign at all.You cannot assume you have an unfettered right to assign.
I'm just advising caution.
Security
If you were my client, I'd want to talk to you about security of your sale proceeds.
How will you deal with the balnce of the proceeds if the new owners do a thoroughly bad job, and can't pay? What if they skip with the money and leave the rent unpaid, will you be liable for it?
The value of the business is not the same as the value of the lease premium. What about fixtures and fittings, stock?
I'd take some professional advice before you go any further.