Transfer of 2 sites to a new company

Transfer of 2 sites to a new company

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I inherited a new client – a construction company which builds houses for end clients and also owns two sites with outline planning permission. The directors want to transfer the two sites into a new company in order to shelter them from any risk arising from their construction activities. One site cost £150,000 and the other cost £170,000. At the same time if they make a considerable profit from developing/selling those two sites and decide to liquidate the new company, then entrepreneur’s relief could be claimed. Both companies would be under the common control of the two directors/shareholders.

Am I right in stating:

  • Corporation Tax – as it is simply a transfer of trading stock between associated companies, then presumably an election under S167 CTA 2009 is all that is needed.
  • SDLT – payable at 3% as the value of stock falls within the band £250k - £500k. Or could it be at 1% if each site was bought separately? SDLT group relief……directors not interested in a group structure.
  • VAT – an option to tax has been exercised on one site. So vat would be charged on the sale of one site to the newco and not on the sale of the other which would be vat exempt. The new company would obviously be vat registered so it could reclaim the vat.
  • Purchase of the 2 sites to be financed by director’s loans rather than by issuing shares in the new company, otherwise ownership of the sites would remain with the old company by way of its shareholding in the new company.

The directors considered transferring the construction activities to the newco instead of the transferring the 2 sites, so the above issues could be avoided. However all of their house building compliance is in place within the old company such as NHBC, H & S, entries on approved contractor lists, trading history, credit history etc, etc.

Readers views would be most welcome.

Replies (6)

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By bggoose1
10th Jun 2014 14:26

Not really enough information but here are some initial thoughts

CT - Yes you should be able to use a section 167 election for the stock transfer.

SDLT - there may be a possibility of claiming relief under section 75 FA 1986 but this would need to be worked through

VAT - could the sale be a TOGC? Depends what is happening to the land.

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By Alastair Johnston
11th Jun 2014 12:41

Partly right

CT - as there does not appear to be any cessation of a trade, no S176 election can be made. However if the current owner simply sells at cost (including any expenses incurred on the sites, e.g. applying for OPP), then that should be OK.  That is provided that it can be said that the land is trading stock and that its sale will be in the ordinary course of trade - if not, then deemed market value sale. 

SDLT - the two transfers might well be linked transactions, so the rate of SDLT will be determined by reference to their aggregate value.  Simply separating the transfers by a short period does not get round this.  But it is not always clear what makes two transactions linked.  The mere fact that they both have the same vendor and the same purchaser is not necessarily enough to link them.  Note however that SDLT will have to be based on market value, not cost.  If you are in a rising market, the values you quote may be out of date.  And if the curent owner bought without OPP and then obtained it, it is very likely that the site values will have risen considerably. They might even be in the 4% SDLT band.  A partnership or LLP could help here, but it might be bad from an income tax & CGT point of view, so maybe not desirable overall. 

S75 FA86 is a stamp duty relief, not relevant here. 

VAT - as things stand, there would be VAT on one site and not the other, as you say.  That would mean some irrecoverable VAT and possible PE problems for the current owner. Maybe it should OTT the other site as well.  To get TOGC the current owner would have to start development work on each site. 

Finance - to lend money to the buyer, will the directors have to take it out of the seller company first?  If so, it would be better to leave the price on inter-company loan.  No point taking taxable income out of one company just to put it back into the other one. 

As ever in this sort of situation, you have to do the sums to see which of the many possible courses of action will cost least tax (and be best in other ways). 

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By Mike Smith1
14th Jun 2014 17:54

Many thanks for your comments.

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By NewACA
28th Aug 2014 14:25

No ER

I don't think you'll get ER, as ER follows the old "retiring relief" rules. 

They'll only get ER if they are retiring from building houses and do something else.

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By Mike Smith1
29th Aug 2014 08:52

Hi NewACA,

Thanks for your response.

However I cannot see any restriction of ER in HMRC's manuals based upon not 'retiring' from a specific type of business. Doesn't the following extract support my client's intended claim....

'Entrepreneur's relief may be claimed on more than one qualifying disposal as long as the lifetime limit of qualifying gains, applicable at the time you make the disposal, is not exceeded'.

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By NewACA
29th Aug 2014 18:51

Anti-avoidance legislation

There are two anti-avoidance provisions to look at, the most important is:

 

1. Transactions in Land, Part 13 of Chapter 3 ITA 2007. In essence, this prevents those that trade in land converting trading income into a capital gain on sale of land transactions. This is what they are trying to do right? Normally, to shelter the risk of the other company, this is done by making one the subsidiary of the other, rather than it being in a separate company owned by an individual person, so not under the control of the main company which therefore doesn't make commercial sense.

You'll need to ensure these rules are not breached. If they are, then not only is ER not available, but the whole income will be taxed as to income tax and not capital gains tax on the shareholder of the company.

 

Less important is the anti-avoidance provisions for "transactions in securities", where a person attempts to get a tax advantage by converting an income into a capital gain, where there is not commercial reason: the example I have in my CTA books explains how a travel agency would be denied ER relief if they closed down, got ER and opened shop again tomorrow under a new company, because there would be no commercial reason to close the company the first time, it was just to get a tax advantage. The legislation for that can also be found in ITA 2007.

I cannot spend any more time on this, sorry, and good luck!

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