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Assigning a pub lease

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

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By KenKLM
02nd Jul 2001 20:21

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 .

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By admin
29th Jun 2001 22:08

Capital Gains on sale

Sylvia,

I should have also mentioned that the adavantage of getting your sale proceeds as capital rather than revenue is in Taper Relief you get. If you sale your business assets such as Lease, Goodwill etc you get Business Assets rate Taper Relief of upto 75%. therefore, if you are a higher rate tax payer, you will pay tax at 10% only. If you are basic rate tax payer than the the tax is even at lower rate (basic Rate * 25%).

I have just completed at tax comp for a client who will pay only £804 on total proceeds of £157,000! Thats not bad is it?

Best regards,

Jay Tanna

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By neileg
29th Jun 2001 10:37

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.

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By neileg
28th Jun 2001 14:01

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.

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By admin
28th Jun 2001 22:01

Sale of a business

Sylvia,

Although you may have fixed the price based on Turnover and Net Profit, it is a good idea to break this price into its various components. For example £5,000 may be for Fixtures & Fittings, Plant & Machinery and perhaps a Motor Car (if any). £50, 000 may be for the lease and balance for Goodwill.

The reason you should break the figure down is because it is in your interest to be assessed on profits as Capital Gain. Although, the tax rates for CGT and Income Tax are the same (you pay CGT at your top marginal rate) save annual exemption for you and your partner of £15,000 (7,500 X 2), should you decide to buy another business (within 3 years), then you can roll over the gains against the cost and so you effectively defer the gains until you are tired of everything!.

The buyer may insist that the bulk of the price is for F&F and P&M because they can claim Capital Allowances against a larger figure!. It is a question of striking a balance so that you get maximum Capital Gain and they get maximum assets eligible for Capital Allowances. Also, as Neil said get your accountant/professional adviser involved at an early stage so that he/she can do the draft calculations for you and also, he can draw your attention to the risk factor should the project fail by the new owners. Statistically, 65% of new businesses fail because of lack of experience of Financial Management. You may have very dedicated employees who are running your business but they may not be the right material for running their own businesses. This is a fact.

As to your question about P&M and F&F, they are all part of Capital Allowances. Incidentally, there was a typo in my previous message I meant unincorporated business (not incorporated business). I hope you worked it out that this is a misprint.

Please don't hesitate to ask any questions you may think of. We will try our best to be helpful.

Best regards,

Jay Tanna

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By admin
27th Jun 2001 21:00

Assignment of a lease

Sylvia,

Assignment of a short lease is wholly capital gains matter. The lease is a wasting asset and the cost is wasted away linearly and the appropriate cost is determined using the depreciation table given in Sch 8 Para 1 TCGA 1992.

When you say a business has been valued, you don't mean the shares of the company? Assuming you meant an incorporated business then it is necessary to put prices on each assets sold. For example you may have plant & machinery, lease, goodwill etc .

Plant & machinery will form part of your income tax computation and any proceeds received is deducted from the General Pool value brought forward at the beginning of the year of assessment. Goodwill and leases are capital gains matter.

As the consideration is received in instalments, the revenue may allow you to setle your CGt liability in instalments over a period not exceeding 8 years and ending not later than the last instalment. (see s 280 TCGA 1992). Interest is payable on any instalments paid late.

The Revenue will set the tax instalments at 50% of the consideration received to-date but this is negotiable depending on how good your accountant is!

Hope this helps but if you need further assistance please do not hesitate to contact yours sincerely. My catchment area is London/South East.

Best regards,

Jay Tanna

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