Accounting for an Investment Property Loan -

Trading company invested in overseas property with borrowed funds

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A profitable small company client has invested in an off-plan overseas property development. Contractual cost around 900k with an up front depost of £116k, the balance payable in monthly instalments over 15 years at an annual 10% interest.
The property is to be constructed and ready for occupation  at the end of 3 years. The legal title to the property will only be transferred when 50% of the total cost has been paid.
I cannot get my head around the accounting (and tax treatment). My initial thoughts were debit an option account and credit a loan account. But the option is in actuality only for 50% of the total, whereas the loan is for 100% (less deposit). Where does the other 50% debit go? And interest on all the loan is being paid from day one!
I am missing something here. Does anybody have a solution that makes accounting sense? 

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By paul.benny
07th Jun 2021 17:35

I think the substance is a straightforward (ish) finance lease - although calculating the interest element and actual term will be a little tricky. I don't see any element that looks like an option.

It's a very high interest rate given that the seller has substantial security. I would hope it's on the remaining balance, otherwise it becomes extortionate. The interest rate also suggests the transaction isn't denominated in GBP. You'll need to retranslate the liability annually leading to an fx gain/loss.

Accounting aside, the transaction does have a touch of the piscine about it... I hope your client has done appropriate due diligence and had advice from an independent lawyer with appropriate expertise.

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Psycho
By Wilson Philips
07th Jun 2021 18:10

Is Mr Lloyd Webber downsizing?

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By David Ex
07th Jun 2021 18:14

If the online calculator I used is correct, that means 15 years of mortgage payments of £101,000pa.

Total interest paid will be £732,000.

Someone’s making money on the deal!

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By Hugo Fair
07th Jun 2021 18:57

Does the planned property share a shape with the mausoleums of the pharaohs?
Sounds like another variant of the you-pay/we-own schemes that we've all seen before.

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