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Tax on related party purchase

HI

My limited retail trading company happens to own a property which it rents out. I would like to buy the property but cannot afford the full market price (£1.3m). I have equity and can get a mortgage to £1m. 

If i buy for £1m but declare to the Inland Revenue that it is below market price of £1.3m what additional taxes must the business pay for the beneficial deal? What tax areas should i be considering?

thanks

Rando

 

Replies

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19th Feb 2012 09:47

Market value

Whatever price you pay the company for the property, it will be deemed to be at market value for the purposes of the company's capital gain, on which corporation tax will be payable.

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Also

Following Euan's point, if you only paid the company £1M, you would either still owe it £.3M (creating PAYE implications and more "S455" Corp tax to pay) or personal tax and maybe NI on being given £.3M in distribution or salary.

Could you not buy a proportion leaving the property jointly owned?

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20th Feb 2012 10:54

Are you sure, Paul?

If the company does a legal conveyance to the individual for £1M (ignoring the breach of the directors' fiduciary duties by selling the company's assets at an undervalue) and the individual pays £1M, is that not the extent of his liability to the company?

Or to put it another way, is the substitution of market value purely for tax purposes or does it also override the accounting facts?

Another point - if the individual pays £1M, but the company pays tax on the basis of £1.3M, what is the individual's base cost for CGT?

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Think so

Hi Euan - If any close company (which I assume this to be) transfers an asset at undervalue in a non-arm's-length transaction the undervalue is spread around the shareholders thus diminishing their base cost in a future CGT calculation however, since 2009, if the transferee is a participator the undervalue (.3M) is treated as a dividend (might be a capital distribution but think that depends upon the company closing?)  TCGA 1992 S125.

From memory there used to be a consession with transfers to employees/directors where the sum paid was substituted but, as far as I know any non-shareholding director or employee receiving an asset at undervalue would be charged to income tax with base cost being market value, see HMRC manual CG16270-16230.

So, if I'm right Rando, if you are a shareholder the undervalue would be dividend but if you were not a shareholder but a director or employee then the undervalue is charged to income tax.

Have to admit I've not had anything like this for years so the above is what I've got from good old CCH.

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