My contact is a design & build contractor ("Lake"). He has a client, ("River"), that wants to buy a parcel of land for development and use my client, "Lake", to undertake the work.
River does not want to pay the full price as consideration for internal boardroom political reasons. So, River has suggested that Lake buys the land from the vendor at the full market price, with the benefit of back-to-back contracts to River.
One of those contracts would be for the land but would be at the maximum value that his board would accept, i.e. less than the market value . The balance of the price paid by Lake to the vendor, would be included in the other contract, which would be for the design and build work. River would pay Lake's SDLT, which would be based on the full market value.
I cannot see any problem with this from an accounting point of view but am worried that I am missing something fundamental.
What do you think about the proposal from Lake's POV? I am not concerned about River's position, although I think they have issues to address!
Replies (12)
Please login or register to join the discussion.
Presumably the fee for the design and build work is inflated, just as the land price is deflated?
Am I missing something? Is it proposed that the directors are misled as to the nature of the complete transaction?
But the risk to your client is that one or more of the misled directors take issue with your client's design and build fee on the grounds that it is excessive, as of course it is. How would he get out of that one?
Follow the money
If your client Lake pays full price out day 1 but only recovers a part of this from River day 1 then is out of pocket at this juncture. Fine having the build contract but what happens if River runs into financial difficulties?
Does Lake keep any security over the land once sold below cost to River? Given he has no interest in the land, except insofar as completion of the design and build contrac,t if this were put to us by River (we are a property group) I would be on the phone pronto to our solicitors but doubt I would be taking it to our directors for approval until I ironed out our exposure
It is a risk/reward proposition, and of course we do not have the numbers, but our cardinal rule is if plan A fails have a plan B. Currently not sure re plan B.
tax
I am puzzled by this from a tax point of view.
Lake is going to buy a piece of land at market value and sell it to River for less.
Either Lake has a capital loss (or would the nature of its trade mean this is a trading loss?) or it has a no gain no loss situation for CGT (being all at deemed mv)
Then it is going to get a higher income stream than otherwise over the years on which it will pay more tax than otherwise (assuming of course all goes to plan).
Have you worked out if in real terms this is all pretty much tax neutral? It doesn't feel that way to me.
Surely it will be tax neutral (apart possibly from timing) as the land purchase will be a trading expense.
Misleading the directors
and high ethical values. An interesting combination. :-)
Why won't (some of) River's directors accept full MV? Is it in fact an inflated value? I would suggest that Lake's solicitors are going to have to crawl all over this to mitigate the risk to an acceptable value.