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Capital value to use on bank purchase of property

Is this actually a disposal for the value of the loan written off, rather than a repossession?

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Client has had a property acquired via their bank in Cyprus.

The open maket property value is (say) £100,000, but the bank offered a "forced sale" value of £70,000, being 30% below the OMV, or a "current market value" of £85,000, allowing for the fact the property is not easily marketable due to the loan which is (say) £150,000.

The bank agreed that in exchange for £15,000 payment, the bank would take control the property, and write off the debt.  The client did have the option to sell the property privately and pay the bank £85,000 in lue of the debt (ie they write off the debt of £65k), or oddly to retain the property and pay £70,000 to write off the debt in full (so the bank write off £80k).   

My client agreed to pay the £15k and walkaway.

However what is the disposal value for CGT purposes? Or is there actually a dispsoal?

Ordinarily in a repossession, the bank sells the property and your debt is reduced by that value, and they come after you for the balance, so the sales price is quite clear, and TCGA92/S26 (2) comes into play.

However this looks like an exchange of the property for loan write off, which under section (3), you normally work out as buyers payment + debt taken on = asset price.  Which in this case would be the £150k less the £15k payment = £135k sales price. 

Any useful pointers? I feel I am missing something here.  I have got some of the legal docments, but they seem to relate largely to the loan write off, and nothing much about the aquisition by the bank of the property. 

I doubt it makes any difference but it doesnt meet the FHL rules.

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By Tax Dragon
16th Oct 2019 17:48

We had the same thing on a case last year. 'Twas the US of A, rather than Cyprus (…incidentally, by "their bank in Cyprus", I assume you mean "their" in the sense of "their accountant" or "their street", not "their company"… else we didn't have the same thing last year!), but I doubt that makes any difference.

As I recall, I thought the rules effectively allowed a loss to the extent that the taxpayer had a suffered a loss. If the bank is writing off the debt, it's not the taxpayer that is suffering the loss and it makes sense that that write-off of the debt should be included in the way you say. (Unless I miss your point... and/or unless I did it wrong [or remember it incorrectly], either of which is always possible.)

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By ireallyshouldknowthisbut
16th Oct 2019 18:05

@Tax dragon, no my client doesn't own the Bank, I see your possible confusion.

From what I can see the client exchanged it for the debt value, well over market value (!) Which is a bit of a punch in the guts as they have a stonking big gain in the year on another asset which they were looking to offset here, and will have one here too.

The only angle I am looking at is as the property was "acquired" about 6 months before the debt was written off, if the bank acquired it at a given price, and the debt write off (which would normally be a tax nothing) was somehow all fine, we might be OK. But I feel a "I think you are stuffed, do you want to pay £500 to a specialist to confirm?" moment coming on.

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Replying to ireallyshouldknowthisbut:
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By whitevanman
16th Oct 2019 22:41

HMRC's CG manual at CG14500 explains (albeit briefly) that the capitalised value of the relief from a liability is consideration for a disposal. So I think the value of £135k is probably the correct answer (no doubt resulting in that stinking gain).

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
17th Oct 2019 09:33

ireallyshouldknowthisbut wrote:

….and will have one here too.

I'd say that's unusual (banks don't tend to lend at more than 100% of the cost), but surely the same principle applies. If there's a gain, it's because the taxpayer has made money on the transaction. If the taxpayer hasn't made money, I'd recheck your workings.

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Replying to Tax Dragon:
By ireallyshouldknowthisbut
17th Oct 2019 10:13

The tax payer has stopped paying the mortgage some time ago, and made an extra draw down on it at some point (we have been disallowing a portion of the interest for some time) hence the balance being so high.

I was pondering this in the shower (second best thinking time to the lunch time walk!), and I wonder if we can apply section (2) and not section (3). I think I need to dig a bit deeper on what happened exactly, as the loan write off paperwork seems to be about 6 months later than the repossession.

It might be a repossession, sale and then write off. The "payment in" seems to be part of a compromise agreement not to pursue my client in the UK courts for the balance. Client isnt helping by being really vague about it.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
17th Oct 2019 10:25

OK, so if he's had tax relief for interest he hasn't paid (possibly an issue in its own right) then why should he also get CGT relief?

(Apply legislation not logic, but this is one situation where I think those diverse subjects succeed in overlapping.)

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