Property development company - Opinions re complicated situation

Property development company - Opinions re...

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Hi,

I would be most grateful for any opinions and thoughts regarding the following situation:

I am the new management accountant at a property development company (not property investor).

The company specialises in premium quality properties ranging from £1million to £5million.

In this instance part of the land that will be developed (house built upon it) and sold immediately is currently owned by director of the company who had received the land as a gift from their father. The land was part of the father's estate on which his main residence was also located (large plot), but as it was surpluss to requirements and not being utilised in any way, the father decided to give it to his daughter. (No IHT or other tax assuming he lives 7 years?)

The money being used to fund the development is also a loan from the Father, which will be fully repaid once the property is sold. Until the property is sold, the father has received shares in the company (the majority) to ensure the safety of the funds and to maintain some control over how they are used. The father will give back the shares on repayment of the loan, and will not take any money out of the company in any other way (e.g. through salary or dividends).

The company will then go forward without need of funding from the Father.

I seek the opinions and thoughts of members regarding:

> a company developing land owned by a director of the company, when originally the land was received as a gift from their father who is also a temporary shareholder, but only for the reasons of security rather than for any actual commercial benefit or to escape CGT. (the father is actually very very risk averse and against tax avoidance schemes and similar)

> VAT - developing property is zero rate, allowing reclaiming of input tax incurred in construction. However, does the current closeness of the directors/shareholders to the land/project affect this?

> Should interest be charged on the loan? Any rate above base or HMRC official rate?

> Anything I may have missed?

Please let me know if there is any information that is vital that I might not have mentioned, there is probably quite a bit. The company is a trading company as per the badges of trade except this complication above.

Thank you

Replies (4)

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By girlofwight
30th Oct 2012 21:15

Quick thoughts
Re previous ownership. Don't see any issues for company so long as land has been transferred at OMV. Has Fathers CGT been considered? PPR sounds dubious on facts given.

Re vat, don't see any issues re relationships.

Re interest - think this is personal preference / commerical issue between parties. Bear in mind requirement to deduct tax at source if Co pays interest.

Other issues? One that comes to mind is CGT on the share transfers, given there is no CGT exemption between parent and child. It may be possible to get around this with Business Asset Gift relief, but not sure how that would work on a double transfer, if the shares haven't yet gone into fathers name then it may be better to leave in daughters name and simply give him a charge over them or a call option.

Thanks (1)
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By John - Horler Tax
30th Oct 2012 22:55

Lots of issues

 

Father has CG on disposal of land = connected party so Open Market Value

Daughter owns property on which her/her dad's company builds a house, so who gets the sales proceeds, guessing the daughter as she owns the land, so company needs to charge commercial rate for work to avoid an income tax charge, and daughter faces a potential income tax charge on profit.

If daughter cannot pay for work until property sold then s455/loan benefit as well.

Transfer of shares to father - OMV disposal for CG purposes

Transfer of shares to daughter - OMV disposal for CG purposes (unless of course the reconveyance rules make it an income tax charge).

Have you considered the Stamp Duty issues on the second transfer, given that part of the arrangement is the the repayment of the loan (consideration)

I think the interest is the least of your issues!

 

 

 

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By blok
31st Oct 2012 08:35

.

also, it appears that the gift is one with reservation for the father so won't fall out of his estate until shares are handed back.

it begs the question as to why he wanted the shares as security? 

in hindsight, a basic security of the land would have been much better.

It looks like the company is not acting as the devloper in this instance, but is acting as construction contractor.

 

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By micalijo
31st Oct 2012 09:38

Agree with last comment.  The

Agree with last comment.  The daughter is the developer (sole trader) and the company is the contractor.

Loan goes into the company - company builds the house using the cash from the loan.  House is sold and proceeds go to the daughter - who uses the proceeds to pay the company for work undertaken - which reduces her D1 profit and maybe creates prfoit in company depending on any margin charged.

I assume the intention here is to have all the profit in the company, liquidate and extract cash at 10% after corporation tax?  Not sure if this is possible as it stands without the freehold being in the company.

Thanks (1)