Tax liability of profit on loan/debt

Tax liability of profit on loan/debt

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Trustees have a charge over a property.  Initially £150,000 but when called in the charge is calculated as a value equivalent to 28% of the value of the property.

A 28% share of the property is now worth £250,000.

What is the tax treatment of the profit? Is this a simple debt that isn't an asset and therefore not liable to CGT?

Replies (11)

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By johngroganjga
29th Sep 2015 11:50

Do you mean that trustees have a charge over a property to secure a loan, or for some other reason?

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By oddbod
29th Sep 2015 12:08

They have provided £150,000

They have provided £150,000 to purchase the property and secured a charge for that amount +28% when sold.

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Replying to gillybean04:
paddle steamer
By DJKL
29th Sep 2015 12:27

Funny transaction

oddbod wrote:

They have provided £150,000 to purchase the property and secured a charge for that amount +28% when sold.

Has a whiff of an overage agreement on an asset sale with all/part of initial price deferred. This may of course just be my imagination as by chance I am currently dealing with the sale of two sites with future profit overage payments; seeing things that are not there, so to speak.

However to be clear did the Trustees (A) by any chance sell the property to the party (B) in the first place i.e. was the £150,000 a straight loan to assist (B) re the purchase of the property from A N Other, with a price for said service of 28% of something (SP?) , or was it more part of the mechanics/construction of an original sale of the asset from (A) to (B)? 

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By johngroganjga
29th Sep 2015 12:10

Then in my opinion any surplus will be taxed as a capital gain.

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By oddbod
29th Sep 2015 12:17

Thanks John. Any idea in what circumstance it wouldn't be taxed as a gain as per "simple debts" referred to at CG53408?

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Replying to atleastisoundknowledgable...:
By johngroganjga
29th Sep 2015 12:27

CG53408

oddbod wrote:

Thanks John. Any idea in what circumstance it wouldn't be taxed as a gain as per "simple debts" referred to at CG53408?

Well as CG53408 itself says, for it to be a "simple debt" it can't be a "debt on a security".

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Replying to Wilson Philips:
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By oddbod
29th Sep 2015 12:50

But isn't this a secured debt rather than a debt on security.

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By pawncob
29th Sep 2015 12:19

I agree with john but,

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim39575

 

this says look in CG55400. But that doesn't refer to your sit.

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By pawncob
29th Sep 2015 12:32

Don't use HMRC search engine

http://www.hmrc.gov.uk/manuals/cgmanual/CG54030.htm

(for CT note)

Following the amendments in section 74 FA2002, loan relationships linked to assets other than land or qualifying listed shares, which would previously have been within section 93 FA1996, are within the main loan relationship regime from 26 July 2001. Guidance on the amendments to section 93 FA1996 and the operation of that section after the amendments is at CFM5900+.

Because their value will reflect the value of the underlying shares or other assets to which they are linked, only amounts relating to interest on these debts are brought into the income regime. Any profits or losses on disposal remain to be dealt with under capital gains rules. These rules are, however, modified as described below to ensure that gains on debts within FA96/S93 are always chargeable.

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By law man
01st Oct 2015 14:50

% of sale price as profit on loan

I am NOT saying the following risks apply, but merely suggest them as possibilities:

1. Is the 28% charge interest on the loan rather than a capital payment? On the test that interest is payment for the use of money (Yes) calculated by reference to time (No) may be not.

2. Is the sharing in profit on sale of the land such as to create a partnership for the venture? The 28% is NOT calculated on the profit made on resale but on the gross sale price of the land; so may be not.

I am not trying to raise irrelevancies, but mention them in case those who understand tax better can think of them.

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By Justin Bryant
01st Oct 2015 20:04

This
Might be taxed as income under s381A ITTOIA 2005 and even if it escapes that see Philip Savva and others v HMRC [2015] UKUT 141 and Malcolm Healey v HMRC [2015] UKUT 140 on failed attempts to get CGT free treatment. SK has commented similarly here: http://www.taxation.co.uk/taxation/Articles/2013/09/18/313671/inflation-...

See also: http://www.newbridge-consultancy.co.uk/probate/income-tax-on-index-linke...

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