Purchase property from a related company

Purchase property from a related company

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Dear colleagues i would be most grateful for your comments. The son of a director/shareholder of a property company client wants to purchase a buy to let property but because the property is in very bad condition and hence not lettable he cannot get the loan. He wants his fathers's company to buy it, he (the son) will pay for the renovations and buy it back from the company at the original price bought after the renovations are completed. The son is neither a director or shareholder of the company. He believes that once the property is in lettable condition he will be able to raise finance to buy it off the company at the price originally paid by the company. I don't believe his plan will work because HMRC would want Corporation tax to be paid on the market value after renovation and stamp duty to also be charged on the MV. If he pays for the renovations himself, obviously the company will end up paying a much higher CT bill. I would appreciate your thoughts.

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By MBK
20th Aug 2015 12:40

Wouldn't it be simpler ...

... if father's company loaned the son the money to buy and son then refinances to repay the loan when the renovations are complete? That way all the market value stuff and SDLT stuff is eliminated. Possible BIK and S455 issues, but I'm sure they can be covered off.

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By MGD
20th Aug 2015 12:47

The company would not have the money to lend to son. I thought about this and yes I agree there wouldn't be 2 lots of SDLT to pay if the company had the money. Just a thought - if the son pays for the renovations himself and no expenses are going through the co how will HMRC know that it was renovated and thus the value went up? Could the son therefore pay the original price to the company?

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Replying to Elgin:
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By User deleted
20th Aug 2015 12:57

Finance

MGD wrote:

The company would not have the money to lend to son.

 

This is somewhat contradictory to the info you posted earlier.

 

You say the son can't raise finance, due to the condition of the property.

Your solution is - the company buys it

Yet, the company has no money - it therefore, itself, needs to raise finance. But, no mortgage company will touch it

 

If the company has no money to lend to the son, the company has no money to buy the property. It will therefore need loan finance to do so. Where is this going to come from? The father? Can the son not, as was previously suggested, just raise the finance directly?

 

 

[Crossed with MBK]

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Replying to Pukka:
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By MGD
20th Aug 2015 13:01

He obviously spoke to his bank manager who said he will lend the company but not him.

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Replying to Elgin:
Stepurhan
By stepurhan
20th Aug 2015 12:57

Warning signs

MGD wrote:
...how will HMRC know that...
When a plan includes this phrase, what you are talking about is almost certainly tax evasion.

You can't have it both ways. The cost of the company being the one originally acquiring the property is that it takes a tax hit on the profit from renovation.

I'm curious though. If no-one will lend the son money because of the condition of the property, what makes you think it's more likely they will lend to the company? Is the company going to offer security on additional assets for the loan?

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Replying to Pukka:
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By MGD
20th Aug 2015 13:02

Yes the company would offer security on other properties

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By User deleted
20th Aug 2015 12:50

What would be logic behind the son renovating a property that the company owns??

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By MGD
20th Aug 2015 12:51

Precisely but he believes it's the only way to get this property he badly wants. I have not seen it but obviously he has his reasons for wanting it.

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By MBK
20th Aug 2015 12:53

So, if the company doesn't have the money ...

.... how is it going to borrow when son can't - particularly given that BTL finance is much harder to come by for companies than it is for individuals?

If the company can borrow it may be possible to structure something on a nominee basis so that the company is the legal owner, but the son the beneficial owner. That would then eliminate the double SDLT charge and also the corporation tax issue.

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By MGD
20th Aug 2015 12:59

Could this be done given that the son is not directly related to the company? Will a solicitor be needed for this or is it a matter for the bank? I have never dealt with an issue like this before so I'm not aware of the mechanics. How will the son become the legal owner after renovation? Will it not necessitate a sale by the co to him in which case SDLT will be charged? He obviously believes the company will be able to raise the finance. 

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paddle steamer
By DJKL
20th Aug 2015 15:16

Is it possible?

Is it possible for Company to raise funds solely secured on other property it owns but not on property in question?

If it is company raises funds and injects them into a property partnership with son who as  his capital injects the funds for the renovation. Property is renovated then partnership takes loan against completed property agreeing with bank that funds are to be used in part for son to buy out the Company's partnership share leaving son as effectively owner of property.

Stamp duty will probably only apply to the share of the property "sold" by the company to the son and corporation tax only payable on gain on share disposed.

Of course if above possible  then s455 route is  likely possible and it of course will likely be cheaper.(depending on timetable/cashflow etc)

It addresses relief for renovation cost against any valuation uplift post renovation and limits double stamp duty to the extent disposed of  by the company (i think, stamp duty not my favourite tax). Key would be what are the respective numbers(shares) needed from both company and son and can company raise the funds without using the asset as security?

 

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