Capitalise freehold of a building

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PB Ltd is a UK-incorporated company that owns 15 flats in London. All the flats are leased to tenants on long leases (999 years). PB Ltd was the freeholder of the building.

The leaseholders of the flats formed a new company named 10TGL Ltd (our client) to manage the service charges for the building. However, after two years, 10TGL Ltd purchased the freehold of the building from PB Ltd to lease the airspace for £675,000. 10TGL Ltd did not have sufficient funds to pay the £675,000. Consequently, 10TGL Ltd entered a joint venture agreement with FP Properties Ltd, who would develop the airspace. The brief summary of the joint venture agreement is below:

FP Properties paid the £675,000 for the freehold on behalf of 10TGL Ltd, along with all associated legal costs leading up to and including the transaction.

In return, 10TGL Ltd granted Fruition Properties an airspace lease to develop the space on top of the building. As part of the agreement, FP Properties will also contribute £40,000 to the sinking fund of 10TGL Ltd and allocate 15% of profits (after developing the building in the airspace and selling it to people) towards upgrades, repairs, and maintenance costs of old flats.

Question: As we are preparing the accounts for 10TGL Ltd, should £675,000 be capitalized though it was not paid by 10TGL Ltd? Additionally, would a loan relationship be created between 10TGL Ltd and Fruition Properties? If so, how much would be the loan value? It's worth noting that the exact amount of the loan is uncertain, as Fruition Properties will pay 15% of the profits, which are yet to be determined.

Replies (5)

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John Toon
By John Toon
25th Mar 2024 18:52

You make no mention of what the structure of the JV was and without this context it's impossible to say how the accounting should work. However, it appears, from the limited detail, that this may have been a joint arrangement rather than a JV. Clarity on this would help, as would you reading into the details set out in FRS 102 or whichever accounting standard you're intending to apply.

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By DKB-Sheffield
25th Mar 2024 19:14

Whatever the answer... many of these companies seem to exist as named in the OP?!

I suggest, if the real names are as stated, the post be heavily modified and redacted!

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By RetiredTax
26th Mar 2024 08:38

If the Co'y names are factual - and it looks likely - I am seriously concerned that you have give quite a lot of information ( possibly very commercial info) to us all on an open forum. I'd be surprised if your clients have given permission for this! I'd be surprised if they were unconcerned about this!

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Replying to RetiredTax:
By David Ex
26th Mar 2024 10:11

RetiredTax wrote:

I'd be surprised if your clients have given permission for this! I'd be surprised if they were unconcerned about this!

I’d be surprised if the OP is a professional adviser.

Thanks (2)
By paul.benny
26th Mar 2024 08:51

Agree with points made by John. A full answer would need sight of the airspace lease and the agreement between the parties - you probably need to buy in advice on this.

I'm far from being a tax specialist but I have a worry that this arrangement may have created a tax liability. That in turn may depend on the accounting treatment and I would review the proposed accounting with a tax specialist before finalising.

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