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Sale of property - when does capital gain arise?

Sale of property - when does capital gain arise?

HI all,

I have a client who is "selling" a property to a friend for £350k.  They will exchange contracts and he will receive £125,000 as a deposit and complete in 20 years time on expirary of the 20 year mortgage.

Will the capital gain for the £350k arise on exchange of contracts, or on completion when the property will then be placed in his friends name.

The mortgage will remain in my client's name and the friend will pay my client amounts equal to the mortgage during the 20 years.  If the buyer defaults on the mortgage paymetns then my client can take back the property.

I believe the contract is conditional and reliant upon payment of the mortgage, so the capital gain will arise in 20 years time

Any thoughts greatly appreciated

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26th Feb 2016 10:26

Presumably

if the mortgage remains in your client's name then so does the property in which case the contract is essentially to rent the property with the rent payments being equal to the mortgage payments.

I've never heard of such an agreement so maybe there are other rules specifically for this situation but if not then I would be surprised if HMRC would consider the amounts paid by the buyer to be anything other than rent if the property has not been transferred into his name.

If the property is to be transferred into the buyer's name then your client must have one of the more lackadaisical mortgage lenders as I would have thought they'd make it a requirement that he doesn't give away the property against which the mortgage is secured.

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26th Feb 2016 10:29

I'm still pondering on this one

It's almost a lease agreement with a lease premium with an option to buy at the end of the term.

 

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By JimFerd
26th Feb 2016 12:32

To me it just sounds like he is selling the property with plenty of deferred consideration.

The vendor in effect is also the mortgage company and he retains a charge over the property.

The part that muddies the waters for me is the legal title not changing hands - although it seems that the buyer has the beneficial interest, so possibly doesn't change things.

Hope they are getting proper legal advice on this one.

SDLT also to consider.

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By JimFerd
26th Feb 2016 12:38

I guess the old 'substance over form' kicks in too.

If there isn't a big final payment at the end, and the buyer would therefore be crazy not to make it, it's more of a sale than a rent.

Perhaps that just relates to accounting treatment rather than tax though.

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26th Feb 2016 13:28

.

What is the motive for this transaction?

 

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26th Feb 2016 13:43

Sounds like it should be

£350k on exchange with the potential for an interest charge on the client for the interest element of the mortgage paid by the friend with no relief for the interest paid on the mortgage remaining in the clients.

Also, what are they telling the mortgage company as the client has "sold" - I'll use your inverted commas - a property that the company holds a mortgage on.

The transaction does not seem to hold water, and the use of inverted commas around "selling" suggests it's a sham anyway. More like the friend has lent the client £125k, but even that is not quite right

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26th Feb 2016 13:51

If the buyer defaults

What does the contract say will happen if the buyer defaults on a 'mortgage' payment?  Is the whole deal unwound so that the seller has to repay what he has received from the buyer?  Or does the seller keep all the money he has received & keep the property as well?

RM

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By MBK
26th Feb 2016 13:58

It seems to me that ...

.... the contract is for payment of £125,000 plus further instalments over 20 years. 

That seems quite simple to me. There is nothing conditional about the contract - it simply provides (separately) for a penalty of handing teh property back if there is a failure to make the instalment payments due.

So that means the sale date for CGT purposes is the date of exchange.

The fact that the mortgage company might not like it and that the title to the property cannot be legally transferred are irrelevant to the tax position. CGT recognises only beneficial ownership and doesn't care about commercial matters. 

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26th Feb 2016 15:19

Weird

As previous answers have indicated, this is a weird transaction and it is certainly strange that the mortgage lender has consented to it (if, indeed they actually have).

It does not look like there will be an actual disposal of the property until the 20 years is up.

But there may be deemed part disposals under s22 TCGA - capital sums derived from assets - starting with the receipt of  the £125,000 deposit.

Or, perhaps, a full current disposal for £350,000 under s27 TCGA if the buyer gets the "use and enjoyment" of the property. 

 

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By kedgley
26th Feb 2016 16:08

the reason for this arrangement I believe is that the friend cannot get a mortgage, or the mortgage is not such a good deal, and he wishes to use the mortgage my friend has in place

 

I'm trying to work out what and when the point of disposal for capital gains tax from HMRC's point of view. 

 

My client's name will remain on the deed and the mortgage.

 

Per HMRC a disposal occurs when there is a binding contract between parties.

 

From reading the responses I believe this is not straight forward, can anybody recommend a capital gains specialist to help?

 

thanks

 

 

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26th Feb 2016 16:27

Clarity...

You need a bit more clarity here - "have a client who is "selling" a property to a friend for £350k.  They will exchange contracts and he will receive £125,000 as a deposit and complete in 20 years time on expirary of the 20 year mortgage."  Are you saying that at the moment your client owns the property which is subject to a mortgage from a third party?  And that your client will enter into a contract to sell which will not, he believes, cause an obligation to arise to repay the mortgage?  This being a contract where exchange takes place now but with delayed completion in 20 years time?

You need to speak to a property lawyer but from a CGT perspective the disposal, if what is outlined above is so, takes place when the contracts are exchanged because the condition you describe would not be one which makes the contract conditional any more than a vacant possession condition causes a contract to be conditional.  The contract is unconditional you simple have delayed completion.  The CGT would be payable on disposal.

Contracts for the sale of land need merely to be evidenced in writing, completion is merely an event where legal title is eventually conveyed to the purchaser, but the contract becomes binding on exchange.  Entering into such a contract would almost certainly cause the mortgage to become repayable.

Your client may be better granting an option to purchase to his friend for the agreed consideration which is itself completed at the end of the 20 year period where the consideration is for the granting of the option, but that would still trigger an immediate liability, but may not trigger an obligation to repay the mortgage.  If that proves possible.

There is some similarity between what you or your client proposes and a sharia compliant mortgage, legally referred to as an alternative finance arrangement.  This is why you need clarity as to what is actually being proposed.

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By kedgley
26th Feb 2016 17:02

You are correct, at the moment my client owns the property which is subject to a mortgage from a third party.  They will enter into a binding contract to exchange the property but not complete until 20 years time.

 

He will receive £125k now, payments equal to the mortgage for 20 years, and then £225k in 20 years. 

 

What is the proceeds for capital gain £350 on exchange or £125 on exchange and then £225k in 20 years.  Are the mortgage payments part of the computation, or are they rent?

 

Many thanks in advance for your help

 

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26th Feb 2016 23:33

Read the reply

The second paragraph states the answer.  The disposal occurs when the contract is entered into and the CGT is payable in respect of the year in which the disposal occurs.  Payment by instalments, even if set at a level equal to the mortgage paayments are not conditions which affect the contract of sale.  Getting planning permission could be a condition because it is outside your control.  You cannot delay a disposal by claiming a condition if it is within your control.

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29th Feb 2016 07:17

This is beginning to sound dangerously close to deliberate deception of  the mortgage lender in order to obtain a financial advantage. That could amount to criminal fraud that would require a report to the authorities.

 

No reputable solicitor would  use a Standard  Law Society Contract for the sale if only because the mortgage lender’s interest in the property would prevent the current owner  giving full or even limited Title guarantee.

 

If a non-standard contract were drawn up it is a moot point, again in view of the mortgage lender’s interest, whether that contract would operate to effect a disposal of the owner’s beneficial interest. If it did, then Paul Soper’s response above would be probably be apt. If it did not, my previous response may be more in point.

 

Either way, specialist advice on the criminal fraud aspects and reporting obligations should be taken.

 

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By Cleggy1
29th Feb 2016 08:54

Mortgage Fraud

Quite simply what is suggested is mortgage fraud.

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29th Feb 2016 10:04

Surely

The property cannot be sold without the consent of the mortgage company, so there is no sale no exchange no security and no (enforceable) contract. The deposit of £125,000 is therefore a loan to the current owner or even a gift....

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By MBK
01st Mar 2016 08:03

@memyselfeye I beg to disagree

There is a world of (very well  established) difference between legal ownership and beneficial ownership.

It is perfectly possible to have a fully enforceable complete contract to transfer beneficial ownership without going any where near the legal ownership. It happens all the time.

It almost certainly is a breach of the mortgage agreement, but I very much doubt that it is fraud. The original borrower remains liable to the mortgage lender and the mortgage lender has lost no rights to enforce their mortgage in the event of default.

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02nd Mar 2016 10:02

But...

Thdere is no suggestion in the original post that there is to be a separation of beneficial and legal ownership - there is simply delayed completion, not the same thing at all.

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By MBK
02nd Mar 2016 10:23

@PaulSoper

The contract in question would have to be a contract for the transfer of beneficial ownership - that is the nature of the contract. The transfer of legal ownership is consequent upon that contract - which will require the seller to transfer legal ownership.

The only difference here to a "normal" contract is that the seller is not required to transfer legal ownership until 20 years after entering into the contract. So the only difference is that the point of "completion" is 20 years down the road as opposed to the normal month or so down the road. The exchange of contract still happens at the same time - which is why the tax point for CGT is the date of exchange - back to answering the original question before it got sidetracked by whether this was mortgage fraud etc etc.

 

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02nd Mar 2016 10:26

With the mention of contracts in the OP, one would hope that the legal issues have already been covered by the legal persons that are drawing up the contracts.

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02nd Mar 2016 10:45

@MBK

The question is whether the seller can enter into a valid contract to dispose of his legal and/or beneficial ownership when he has previously entered into a legally binding commitment with the mortgage lender not to do so.

No reputable solicitor would draw up sale and purchase contract in these circumstances for fear of becoming complicit in mortgage fraud.

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03rd Mar 2016 09:07

Contracts for the sale of land

Unfortunately anyone can draw up such a contract as it merely requires evidence in writing (in England and Wales) so the scope for people drawing up their own contracts and creating all sorts of problems is huge.  Just because no reputable solicitor would draw up such a contract does not prevent themselves from drawing up such a contract.

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04th Mar 2016 07:56

@paul soper
Well yes, agreed.

My point really was to question whether, in the circumstances given, any such contract could effect a disposal of beneficial interest given that the mortgagor has previously committed to the mortgage lender not to sell without consent and to use sale proceeds to repay the loan, among other commitments.

In other words, does a mortgagor retain full beneficial ownership in the sense of being able to deal with the property at will and retain sales proceeds once he has encumbered a property with a mortgage?

Nice question for land law specialists, I should think.

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