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Business premises lease between connected parties

For SDLT calculations there is a requirement to value the lease between connected parties on an arm's length basis. Does such rules apply for income tax / corporation tax?

Owners wish to lease the premises to their limited company that operates out of it. They incur mortgage interest personally and would be more tax efficient if their annual rental payments from the company simply covered the personal interest expense. Not sure if there is a similar anti-avoidance rule for income tax as there is for the SDLT though?

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By Ruddles
01st Nov 2018 16:18

You forgot to mention capital gains tax

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to Ruddles
01st Nov 2018 17:05

I did, however the market valuation states it is rare for premiums to be charged on ST leases so I can't see an immediate CGT impact.

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By Ruddles
to Harrison88
01st Nov 2018 18:10

Can’t you? I can.

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to Ruddles
02nd Nov 2018 09:25

In what way? I did post asking for advice so more than grateful to be pointed in the direction I should be looking.

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By Ruddles
to Harrison88
02nd Nov 2018 12:14

TCGA 1992 ss17 and 18

Have a look at HMRC's view as well - CG70825

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01st Nov 2018 18:43

It's a deemed premium for CGT and SDLT purposes. Also possibly an immediately chargeable transfer for IHT purposes depending on who owns the company.
Broadly a lower rent puts value in the lease.

What about ER?

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to Galaxian
02nd Nov 2018 09:20

The estate agent valuation states that a short lease on the market for such a retail property would not normally attract a premium and has provided an annual suggested market rental value.

I can see the SDLT valuation based on NPV of the rental payments but does that same calculation apply to CGT?

Is it more efficient to go with market value annual rental or apply a much lower rental in the contract and pay the deemed value SLDT?

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01st Nov 2018 18:43

It's a deemed premium for CGT and SDLT purposes. Also possibly an immediately chargeable transfer for IHT purposes depending on who owns the company.
Broadly a lower rent puts value in the lease.

What about ER?

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01st Nov 2018 18:44

It's a deemed premium for CGT and SDLT purposes. Also possibly an immediately chargeable transfer for IHT purposes depending on who owns the company.
Broadly a lower rent puts value in the lease.

What about ER?

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01st Nov 2018 22:34

A much better question than your last on this case. And thank you for dropping the "hey guys" opener (or whatever it was).

CGT isn't an immediate issue as there's no current gain, if I recall the facts correctly. But it will munch into the freehold base cost in return for a wasting (or wasted) base cost in the company.

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to Tax Dragon
02nd Nov 2018 09:34

Thank you.

I would assume these circumstances are quite common. I generally tend to avoid property aspects and push the client to obtain specialist advice. I figured it was similar to the standard question around extracting profits.

In my mind, the client will have to pay SDLT either way as there is a deemed NPV in excess of the threshold based on market annual rent.

For CGT, I don't think there is CGT on the premium, as there is no premium - but there is the conflict with ER relief on any potential future sale of the building per the reply below?

For income tax/corporate tax, I don't know of any legislation which would require the annual rent to be market value. This is key thing for me at the minute - as it would be less taxing to set the rent around the mortgage interest level rather than market value.

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to Harrison88
02nd Nov 2018 09:41

Check Galaxian's comment about a low rent putting value on the lease - which means on the lease premium.

The estate agent valuation might state that a short lease on the market for such a retail property would not normally attract a premium. That assumes that the rent is at full value. Lower the rent, increase the (market) premium. The two go hand in hand.

Galaxian is right. (As is DJKL.)

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By Ruddles
to Tax Dragon
02nd Nov 2018 12:21

Quote:
CGT isn't an immediate issue as there's no current gain

Only if claim is made under s242
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to Ruddles
02nd Nov 2018 12:34

Having written my comment, I did wonder whether that had been based on what we had previously been told or on what I had previously assumed.

But either way, I agree my comment was not properly founded.

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By DJKL
01st Nov 2018 22:55

I would have thought the CGT issue might be more re the lease limiting ability to claim ER on the property in the future on part of the period of ownership of the property if say it were to be sold in the future when company wound up.

Example 4

https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-se...

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to DJKL
02nd Nov 2018 09:33

"some of the period during which the associated asset was in use for the business falls after 5 April 2008 and for that period after 5 April 2008 you received any form of rent for letting the business use it"

So, really in order to avoid losing ER on any potential sale of the premises, the individual needs to not receive any rental income for the use of the building? However, if they do that, they don't get any relief for the mortgage interest.

It would have been so much easier if the company had bought the building...

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02nd Nov 2018 13:37

Forgot that if I reduce the annual rent, as well as the CGT on the capital element of the deemed premium, there is also the balance as chargeable to income tax in current year.

Therefore, more efficient just to run with MV amounts for all items.

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By Ruddles
to Harrison88
02nd Nov 2018 13:40

Quote:

Forgot that if I reduce the annual rent, as well as the CGT on the capital element of the deemed premium, there is also the balance as chargeable to income tax in current year.


Are you sure?
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to Ruddles
02nd Nov 2018 14:47

Well, working it through (ignoring SDLT, and CGT on any future sale of building):

If the lease is on market terms -> market rent and no premium. The NPV of the rent over the lease is £500k. Rent is higher than mortgage interest = income tax due for rental profits. No immediate CGT as no premium.

If annual rent is set at mortgage interest, the balance of the NPV of the rental income is deemed as a premium per discussion above (£500k less £200k = £300k premium). CGT on the capital element of the deemed premium calculated using relevant formula. That would indicate the balance was income in the year of the lease issue. Do we ignore the income element as it was only a deemed premium? That would seem like missing a potential to tax by HMRC.

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to Harrison88
02nd Nov 2018 14:54

There is no deemed lease premium for income tax purposes. Only capital gains tax purposes.

The whole of the any premium is subject to CGT, less any amounts subject to income tax.

Not convinced you should be advising on this, if I'm being honest.

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to Portia Nina Levin
02nd Nov 2018 15:13

Quote:

Not convinced you should be advising on this, if I'm being honest.

I mentioned to Dragon that I recommended they speak to a Property Tax specialist but he wasn't willing to pay the fees. Everything is being drafted between the solicitor and mortgage advisor. Client has agreed I don't provide advice and I haven't provided input. This is more of a learning exercise for myself.

Looking through my technical subscriptions such as TaxInsider, etc doesn't have much on the granting of leases between connected parties outside of SLDT.

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to Portia Nina Levin
02nd Nov 2018 15:35

Agreed. I was going to say the same thing but am busy for a Friday afternoon ;-)

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By Ruddles
to Harrison88
02nd Nov 2018 15:35

Quote:
Do we ignore the income element as it was only a deemed premium?

As Portia says, yes (strictly, as again Portia says, there is no income element to ignore)
Quote:

That would seem like missing a potential to tax by HMRC.


Possibly - but if part of it were to have been taxed as income one presumes that the tenant would have been entitled to relief on that same income element.
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