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BIK on non-cash expenditure

BIK on non-cash expenditure

My client is director and controlling shareholder of the company which rents its business premises from him personally. The latest accounts for the company reveal that it spent over £80,000 building an extension to the property. 

As far as the company is concerned, the most obvious classification for the expense would seem to be tenant's improvements, written off over the term of the lease. But what of the enhancement to the director's property? This would, on the face of it, appear to be a BIK, but whilst the company occupies the premises for its trade, the director cannot convert it into cash, which seems to preclude the BIK charge.

Has anyone come across such a situation, or knows of any relevant case law?

Many thanks!

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By spuddle
22nd May 2012 12:45

BIK

It is always advisable for a full repairing lease to be drawn up between the director and the company in these situations, which requires the company to keep the building in good repair.  I believe that such a lease would also usually include a clause which require the company, at the end of the lease, to reinstate the building to the state it was in before the company took occupation, meaning that the company could be required to knock down any extension. 

I have always understood that this would mean that there would be no BIK for the director - although I have never seen it tested, and it may well depend on the value of any enhancement expenditure and the length of the lease.

 

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By Nickob
DJKL
22nd May 2012 13:06

Lease

Thanks for that, Spuddle, and your point about the lease is a good one, particularly the reinstatement clause. It had also occurred to me that if a benefit were to arise, it would be at the end of the lease, on the company's vacation of the premises, the point at which the asset becomes freely available to the director to turn into cash. If the benefit were to be assessed, at least the value of the benefit taxed would be available for relief against CGT. 

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By spuddle
Oppco
22nd May 2012 13:33

BIK

I'm not sure HMRC would agree that any benefit would arise at the end of the lease.  I presume that the benefit would first arise at the date of expenditure by the company as the director would presumably be able to sell the freehold, subject to the lease, and benefit from the enhanced value of the property at that date.

The completion of P11Ds at the date of the expenditure by the company would therefore be the first time for consideration of reporting the situation to HMRC.

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By Nickob
MBK
24th May 2012 12:37

Enhanced value

Hello Spuddle,

A very valid point; the client will be able to sell the freehold even though it is still tenanted. However, I am still not sure a benefit would not arise in the short term, as the rental value of the property will remain unchanged after the building of the extension. The tenant company would not expect the to pay for rent on a building which it had paid for itself.

Having said that, there is no doubt that a purchaser would see the underlying value of the freehold, and its potential once vacant, when full rents can be achieved. But how that could be evaluated in terms of a current BIK assessment would be a nightmare. If the lease was a short one, then it might be easier to value as the the full value of the freehold would be realisable in the near future. But with a long lease? Almost impossible, I would have thought. 

 

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By DMGbus
22nd May 2012 13:53

Deemed lease premium

Were it to be the case that the tenant (Ltd Co) were to have an obligation to improve the premises (extend them) then the landlord (the director) has a potential issue of being taxed on receiving a "deemed lease premium".

Compared to a benefit in kind no NIC arises on this alternative.

Here's some information about "Deemed Lease Premium":

http://www.hmrc.gov.uk/manuals/pimmanual/PIM1212.htm

 

 

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By DRMJOB
22nd May 2012 15:11

Capital Expenditure/

 

 

Looking at it from the tenants point of view this would seem to be Capital Expenditure so I do not see why one would expect a Revenue deduction for it. It is obviously not repairs and whilst it is accepted that the tenant loses any benefit when the lease expires that does not automatically mean there is a deduction for it. There seems to be no requirement in the lease requiring the work to be done so lease premiums etc are not considered apposite.

 

From the landlords viewpoint there may or may not be a benefit and the point about requiring the building back as first let is well made. Alternatively and this scenario is one I saw many times one can have the landlord funding the work and charging extra rent so giving the tenant a Revenue deduction and the Landlord a CGT deduction.  Alternatively there can be an agreement reached between the Landlord and Tenant that they will at the expiry of the lease have the building valued with and without the extension with the Landlord paying the tenant the difference or vice versa. There can be no argument that that a BIK arises during the term of the lease but there might be one at the end when the property reverts to the landlord. Even then if the work done is what an arms length tenant would have done for the benefit of their business then HMRC would be on sticky ground for success.

 

 

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By DRMJOB
22nd May 2012 16:25

Capital Expenditure/

 

 

Looking at it from the tenants point of view this would seem to be Capital Expenditure so I do not see why one would expect a Revenue deduction for it. It is obviously not repairs and whilst it is accepted that the tenant loses any benefit when the lease expires that does not automatically mean there is a deduction for it. There seems to be no requirement in the lease requiring the work to be done so lease premiums etc are not considered apposite.

 

From the landlords viewpoint there may or may not be a benefit and the point about requiring the building back as first let is well made. Alternatively and this scenario is one I saw many times one can have the landlord funding the work and charging extra rent so giving the tenant a Revenue deduction and the Landlord a CGT deduction.  Alternatively there can be an agreement reached between the Landlord and Tenant that they will at the expiry of the lease have the building valued with and without the extension with the Landlord paying the tenant the difference or vice versa. There can be no argument that that a BIK arises during the term of the lease but there might be one at the end when the property reverts to the landlord. Even then if the work done is what an arms length tenant would have done for the benefit of their business then HMRC would be on sticky ground for success.

 

 

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