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Disposal of residential buy-to-let properties

I would appreciate some advice please. A client who owns 12 residential buy-to-let properties with a gross annual rental income of £350K, is considering selling all the properties. This would realise a potential gain of approx £4M with CGT at 18% and no entreprenuers' relief. In addition, she has received an offer for the ‘goodwill’ on the recurring rental income of approx £450K. Would my client be entitled to entreprenuers' relief on this sum?

Thank you

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11th Apr 2019 17:01

Calling something goodwill doesn’t make it goodwill. But that’s not all that’s wrong with what you have said, as I imagine others will soon be telling you.

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to Tax Dragon
11th Apr 2019 17:31

Thank you for your response. I was calling it 'goodwill' for the sake of calling it something. I was hoping for some guidance as to whether the additional sum could be treated in a different way to the property disposal. I would also be grateful if you could tell me what else is wrong with what i said.

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11th Apr 2019 17:04

So she's been offered the equivalent of 15 1/2 rent over and above the (vacant possession?) valuations?

I suspect that no ER due. Has she managed the properties herself or used an agent?

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to Accountant A
11th Apr 2019 17:19

Hi. Apologies if I haven't been clear. These are student lets and the gain will be on the disposal value of the individual properties. The £450K represent just over 1 year's rental income. The potential purchaser intends to carry on with the student lets. The properties have been managed by my client. No agents involved.

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to steverose
11th Apr 2019 17:28

That’s hugely different.

Less is wrong with what you said than I thought.

It’s still not goodwill though.

And you want to be careful that it's not taxed as income (since that's what it reflects).

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to Tax Dragon
11th Apr 2019 17:32

Thank you. This is helpful and does give me some guidance.

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to steverose
12th Apr 2019 11:10

steverose wrote:

Hi. Apologies if I haven't been clear. These are student lets and the gain will be on the disposal value of the individual properties. The £450K represent just over 1 year's rental income. The potential purchaser intends to carry on with the student lets. The properties have been managed by my client. No agents involved.

I still don't understand. She is selling the properties and realising a gain of "approx £4M". Then "In addition, she has received an offer for the ‘goodwill’ on the recurring rental income of approx £450K."

Why is someone paying nearly half a million pounds over the market value of the property? It doesn't appear to make sense.

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to Accountant A
12th Apr 2019 12:11

We don't know what the market value is - the £4 million is the amount of the gain.

I guess that it depends on what the value has been based on - if reflecting the current use then I'd agree that it doesn't make sense to pay any more (but as seller I wouldn't be challenging it!). If on the other hand the value reflects vacant possession then it would make sense to include an element of goodwill, just as you would with any other business, where consideration may be more than the market value of the underlying assets.

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to Wilson Philips
12th Apr 2019 13:49

Wilson Philips wrote:

If on the other hand the value reflects vacant possession then it would make sense to include an element of goodwill...

As I mentioned previously, the £450k is more than 15 months rent so I am still confused. It's apparently student accommodation which, I understand, is usually let for fixed 12 month terms.

Looking at it simply, the properties are worth what they are worth subject to whatever leases are in place. I'm struggling to see how additional consideration is anything but an adjustment to the purchase price. Could the OP give some insight into how the £450k was calculated?

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to Accountant A
12th Apr 2019 14:54

The student accommodation may be for 12-month terms but presumably it is safe to assume that there is a reliable source of future agreements.

In essence what you might have is a sale of an ongoing property business for, let's say, £10,500,000. The sale agreement might say that the consideration is to be allocated £9,000,000 to the freehold, £450,000 goodwill and £150,000 furnishings.

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to Accountant A
12th Apr 2019 15:21

Thank you. The £450K was an offer from the potential buyer and I am not sure how he arrived at that sum. My client seems to be happy with it though. The student lets are for a fixed term of 12 months. It has been a very successful operation with year 2 students often staying for their 3rd, or in some cases, their 4th year. It does seem that this sum should be taxed as income.

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to steverose
12th Apr 2019 15:49

steverose wrote:

It does seem that this sum should be taxed as income.

Although it was me that suggested that, it was top of head (without research). What section do you think applies?

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to Tax Dragon
12th Apr 2019 15:59

From my client's notes of the meeting she had with the potential buyer, he said that 'he would compensate her for loss of rental income'. I was hoping to find a more tax advantageous structure. Advice provided by all has been very helpful. I will need to research further.

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to steverose
12th Apr 2019 16:27

Surely the more tax advantageous structure is, as has been suggested, simply to increase the consideration for the property. It will of course be subject to SDLT but I imagine that if you were to try and separate it as goodwill HMRC would argue that the goodwill is inherent and therefore subject to SDLT in any event. And of course SDLT is not your client's problem.

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to Wilson Philips
12th Apr 2019 16:21

Thank you. Your comments are appreciated.

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to steverose
12th Apr 2019 16:20

I think that would be wise.

Notwithstanding Wilson's points, I suspect that all that's really happening is that, as AA has hinted, the buyer is hoping to mitigate SDLT.

Edit: I meant Wilson's earlier comments. The latest crossed in the posting with mine.

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11th Apr 2019 17:04

Isn't the 'goodwill' just part of the property price?

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By Matrix
11th Apr 2019 18:16

Why 18% and not 28%?

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to Matrix
11th Apr 2019 18:18

Yes, I agree. The majority of the gain will be taxed at 28% (if not all).

The OP's client is in for a nasty surprise.

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to Matrix
12th Apr 2019 11:25

Yes. A genuine typo on my part (and wishful thinking). My client has been advised that CGT will be 28%.

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12th Apr 2019 11:11

And is the purchaser paying SDLT on the £450,000?

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to Accountant A
12th Apr 2019 11:30

Thank you. A good point. The formal structure of the offer has yet to be presented.

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12th Apr 2019 11:50

Who, not whom.

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to Vile Nortin Naipaan
12th Apr 2019 11:58

Happy now?

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to steverose
12th Apr 2019 12:05

You did ask...

steverose wrote:

I would also be grateful if you could tell me what else is wrong with what i said.

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to Tax Dragon
12th Apr 2019 12:14

Fair point!

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12th Apr 2019 12:15

I think we know enough now to say:

steverose wrote:

Would my client be entitled to entreprenuers' relief on this sum?

No.

At least, not in isolation. ER on all of it, or ER on none of it.

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to Tax Dragon
12th Apr 2019 12:29

Thank you for your comments

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12th Apr 2019 19:31

steverose wrote:

In addition, she has received an offer for the ‘goodwill’ on the recurring rental income of approx £450K.

Is the seller offering anything for the £450,000 apart from the properties? Is there even a 'trading' name to which goodwill might attach? A website? Are the existing lettings definitely transferred (novated?) to the purchaser?

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