Client sold a property for £100,000 but gave a builder gifted deposit for £20,000. It appears that this was to get around the purchaser having issues with the loan to value and the mortgage.
The completion statement shows this but the land registry shows the £100,000 as the sale price.
Hmrc have enquired into this and believe the sale price for CG tax is the £100,000. The sale value as far as our client is concerned has always been £80,000 as the solicitors restructured the deal just to get the sale.
So in my opinion the sale was £100k less a discount of £20k. They are not connected with the purchaser in anyway but are HMRC correct and is there any point in arguing the case?
Replies (25)
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May be a silly question, but is your client in the business of building/selling houses? If he is then CGT may not be on point anyway.
This link may help your thoughts but it is old, 2009
http://www.taxation.co.uk/taxation/articles/2009/07/22/19103/cashback-deals
I have no idea of the correct position here, whilst we have recently been selling former investment properties the purchaser inducements have been by reducing the recorded price rather than by what your client has done, which appears in effect to be a purchaser cash back.
It appears that the payment may possibly not be derived from the asset and therefore does not reduce the cost of the asset for later sale by the purchaser, however then nor would it reduce the amount received for the sale of the asset by the seller; the taxation article above suggests some guidance but a better man than I can interpret the position correctly, it is late on Friday and I am tired.
It may be your client can argue it is a selling cost, like advertising, legal and professional costs, and reduce the gross £100,000 by the £20,000 in computing their CGT. If your client had been trading I do not think I would have any issue reducing the profit by the payment of the cashback inducement but as it is not a trading transaction I am less sure that the cost relieves for CGT.
Interesting question, I will await someone much better at all this than myself giving a better formed answer.
My view on this has not changed since I encountered these "devices" nearly a decade ago - although the lenders were more likely to be aware of them then.
It is not a "gift" but a disguised discount.
I thought such idiocy had been stamped out by this year's MMR (Mortgage Market Review) - but obviously not.
Thoughts
I would suggest you supply HMRC with a copy of the completion statement showing the 'real' sales proceeds were £80,000.
Your original post refers to a "builder". Are you saying the purchaser was a builder?
I think you need to seriously consider whether you have reasonable grounds to suspect 'money laundering' (which you would need to report to the NCA under s330 PoCA 2002 / MLR 2007) in that the purchaser has (1) obtained a mortgage by dishonestly making a false representation that he paid £100,000 for the property, and / or (2) evaded tax by dishonestly treating his cost of the property as £100,000 for tax purposes (especially if he is a builder).
David
Completion statement
The mortgage lender would not see the completion statement. You need to see it to confirm to yourself what happened.
Clearly the reality is that the £20,000 was not a "gift" but was a factor in the sales proceeds - the purpose of the odd structure of the sale was to give the false impression that the property was worth £100,000.
I presume the purchaser was going to make improvements to the property and the £20,000 was paid to the builder whom he had instructed?
David
You said before that the mortgage company would have been aware of the true situation. Now you say that the solicitor would have been aware of it - but you seem to accept that the mortgage company would not.
It seems clear that the mortgage company was deliberately & dishonestly misled as to the real purchase price (which was £80,000 not £100,000).
Are you saying that you have no suspicion that the purchaser realised this was dishonest when he put the £100,000 figure on his mortgage application?
David
But how will the "wrong"
But how will the "wrong" figure of £100,000 on the Land Registry be explained to HMRC?
Do I understand this correctly?
It seems to me that your client is the vendor of the property, call him V. Then there is the purchaser, P, the solicitor, S, the builder, B, and the mortgage lender, M.
P wanted to buy the property for £80,000 but hadn't enough money to pay the deposit (or to put it another way M wouldn't lend him enough for him to be able to buy it).
So P told M the purchase price was £100,000. On that basis M would lend P enough for him to be able to buy it for £80,000.
But if the Land Registry figure was only £80,000 M would be likely to spot that P had deceived them.
So the sale was put through the Land Registry at £100,000. To cover that, P paid £100,000 to S and £20,000 of that was paid to B (not to V). That was called a 'gift' from V to B.
Is that what happened?
Was B going to do work on the property for P after he bought it - or did B originally lend £20,000 to P so that he could buy it for £100,000?
David
You keep changing your facts!
Right, are you now saying your client is P (but you have never met him)?
Are you saying in reality the £20,000 never existed?
What does the completion statement show? Does it show a purchase price of £100,000 but a gift back of £20,000 from V to P?
The key point is that P put a false statement on his mortgage application saying the price was £100,000. M has been deceived. The true purchase price was £80,000.
That is mortgage fraud.
David
OK
It seems clear that P has made a false statement on his mortgage application (saying the price was £100,000 when it was actually £80,000). That is mortgage fraud. That is what you are obliged to report to the NCA under MLR 2007 / s330 PoCA 2002.
David
V also in firing line?
V has not committed mortgage fraud themselves. However, it would appear that they have assisted P in committing mortgage fraud by agreeing to inflate the sale price. Furthermore, since the sale could presumably not have gone ahead otherwise, they have also received the financial advantage of selling their property at £80,000.
Presumably this means that a MLR is required for both P and V in these circumstances.
In the firing line
V has not committed mortgage fraud themselves. However, it would appear that they have assisted P in committing mortgage fraud by agreeing to inflate the sale price. Furthermore, since the sale could presumably not have gone ahead otherwise, they have also received the financial advantage of selling their property at £80,000.
Presumably this means that a MLR is required for both P and V in these circumstances.
Yes & if my understanding of the situation is correct the solicitor acting for the vendor also knew of this & was complicit in the mortgage fraud (from which he obtained his fee). So too perhaps the mortgage advisor.
David
Mortgage advisors vary in skill, knowledge & integrity - and are on a commission for deals they do.
This was not a case of a gifted deposit - this was a case of a false statement on the mortgage application.
A gifted deposit is where X is buying a property & borrows the deposit from a relative or friend of his.
In your case there was no deposit - the vendor sold for £80,000 not £100,000.
David
Background reading...
http://www.ftadviser.com/2011/10/25/mortgages/vendor-gifted-deposits-Gv8...
Note: However, the arrangement was only legitimate provided:
- Every gift or incentive was disclosed upfront.
- The property had been properly valued at the higher rate and the surveyor believed that the price was realistic and fair for the market. The price could not be overstated in order to ‘create’ a deposit.
- The lender agreed with the practice and was willing to lend on that basis.