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Entrepreneur's relief on the sale of a company

Factoring in the costs of a building

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Hi

I have a client who owns a limited company. The company's activity is that it owns a commercial property in the City Centre and it's sole income is rental income from this property.

My client has an unconnected person who wishes to purchase the property. Property cost was in the region of £550k and my client is looking for about £1 million as a selling price.

If my client were to claim Entrepreneur's Relief then I'd assume he'd pay 10% on the £450k profit on the building? Could anyone let me know if this is correct please? Sorry if it seems a basic question but don't really come across this much and just want to double check things. Thanks in advance.

 

 

 

Replies (26)

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By Accountant A
22nd May 2017 12:19

Might be wrong but I didn't think holding an investment made you an entrepreneur.

https://www.gov.uk/entrepreneurs-relief/eligibility

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Replying to Accountant A:
By mrme89
22nd May 2017 12:28

Although that link should be noted, that isn't the reason ER relief doesn't apply.

ER relief doesn't apply here because we are told that it is just the property is being sold. So CT applies, not CGT.

We are not told what will happen to the company after the property has been sold. It might well use it's cash to acquire more investment properties.

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Replying to mrme89:
By Ruddles
22nd May 2017 12:36

Furthermore, we're told that it is the company, not the client, that is selling the property. So I'm not sure what the client would be claiming ER on.

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By Jakarmi
22nd May 2017 12:39

Sorry. The client would look to sell the company to the interested parties which is effectively the building. I should have been more clear so I do apologise.

Thanks for your responses.

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Replying to Jakarmi:
By Ruddles
22nd May 2017 12:49

Yes, you should have been more clear.

Not that it changes the analysis much. No Entrepreneur's Relief.

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By andrew55
22nd May 2017 14:34

More to the point, it he's selling his share in the company, why do you think he'll pay CGT on the profit on the building? It'll be on £1M less whatever he paid for the shares which may or may not be a similar figure.

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Replying to andrew55:
Maytuna
By DJKL
22nd May 2017 14:46

And of course if it is the building that is worth £1 million and there are no other assets/creditors to consider most buyers will not pay that price for the shares if there is latent CT on the gain within the company (The company paid much less), most will discount their price for the shares to allow for this fact, or certainly ought to consider such an approach.

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By Jakarmi
22nd May 2017 17:33

I'd assumed he would only pay tax on the profit of the property but obviously I seem to be incorrect.

Coming back to the investment point. Isn't the fact he rents the property out show he is trading as a property entrepreneur rather than it being held for investment? If it can be classed as investment then I guess I could get indexation allowance for the property then?

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Replying to Jakarmi:
By Ruddles
22nd May 2017 19:22

Oh for heaven's sake.

Just exactly what is your expertise? Because it sounds as though you should be handing it over to someone competent in the area, rather than try and muddle through with the assistance of anonymous internet forum respondents.

If it's the shares that are being sold, there is no "profit of the property" (except for the point above about recognising the latent gain when agreeing price). Do you not understand the distinction beween a share sale and an asset sale?

A property rental business may be a business, but it is NOT a trade. Do you understand what an investment is?

Do you really believe that an individual selling shares in any type of company will be entitled to indexation allowance?

You appear to be well out of your depth.

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Replying to Ruddles:
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By Jakarmi
22nd May 2017 20:51

Calm down Ruddles. I was under the impression this was a forum where accountants could ask others questions. Not sure why people have to ridicule others questions at times.

As my experience, I have been an accountant for 20 years, qualified 11 years ago and have run my own practice for 9 years. I've never had a limited company client sell a property before and just trying to find the right answer here which I again believe the forum is for.

I never queried Indexation Allowance on shares so I think you have made the error there. We've established ER won't apply so I've questioned whether in calculating the gain on the property for Corporation Tax whether I'd be able to apply indexation allowance to the cost of the property when it was first purchased to lower the company's CT bill.

Of course the property is held as an investment but it is also rented out as the company's principal activity with a view to making a profit. If it is still an investment then that's fine but googling this question on Accounting Web has seen a few discussions raised with differing opinions so it is hardly that stupid a question.

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Replying to Jakarmi:
By Ruddles
22nd May 2017 21:21

You say that you've never had a limited company client sell a property before. You still haven't - because you've told us that it's the company shares that are being sold.

Having told us that it is the company shares that are being sold, do you not think it reasonable to conclude that when you start to talk about indexation you're referring to indexation on the cost of the shares? Why would it be on the cost of the property - you've told us that the property isn't being sold. (Of course indexation would indeed be taken into account in computing the latent tax charge - but that's got nothing to do with the tax charge on the disposal of the shares.)

If you've been an accountant for 20 years, and qualified for 11, it is a little worrying that you do not seem to understand the meaning of investment property. (Or appreciate the different meanings of 'business' and 'trade'.)

You are of course quite correct in saying that this forum is for accountants to help others. But there comes a point when one has to consider whether it would be in the client's best interests to pass the transaction to someone capable of handling it. I'd say that point has been reached in this case.

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Replying to Ruddles:
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By Jakarmi
22nd May 2017 21:46

The client's company owns the rental property and it's rents are it's only activity. The client could sell the company or sell the property on it's own, pay the CT and then wind the company up. All we have is a party interested in the property at present and who we feel is ready to put in an offer.

I agree with other posters that selling the company was a hard sell but I liked to explore both options to tell the client if you sold the company your tax bill would be x and if you just sold the property then your tax bill would be y for example. The client can then negotiate knowing what tax bill he will have if he takes a certain price.

I may not have been clear in earlier posts whether it was selling shares or the property but again at present nothing is agreed. If the company just sells the property then as it's an investment (rather than trading) then I assume I can apply Indexation Allowance when calculating the taxable gain?

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Replying to Jakarmi:
By Ruddles
22nd May 2017 21:55

No, you weren't clear at all. When challenged about the treatment of a property sale, you said that they were looking to sell the shares. At no point did you indicate that both options were being explored. Had you done so I may have been a little less brusque. You need to learn that if you want meaningful help here then you need to set out in unambiguous terms exactly what it is you want advice on.

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Replying to Ruddles:
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By Jakarmi
22nd May 2017 22:06

I did say in the original post that the client had someone interested in purchasing the property in fairness.

You could always ask for more info if the poster is unclear rather than question their ability as an accountant but I guess we're all different.

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Replying to Jakarmi:
By Ruddles
22nd May 2017 22:52

Yes you did start off by saying that the purchaser was interested in buying the property. When this was questioned, you apologised for being unclear and said that the intention was in fact to sell the shares. At that point, there was nothing unclear - until you muddied the waters again by talking about indexation.

All you had to do was state in your opening question that you had a client looking to sell an investment property held by a company and was considering either a sale of the asset or of the shares and would like advice on the tax implications of each. Most qualified accountants would understand the need to be clear in their questions - if you can't be arsed to be, I can't be arsed to either try and work out what it is you are asking or to try and tease the information out of you.

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Replying to Ruddles:
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By Jakarmi
23rd May 2017 10:58

But when I went on to Indexation Allowance yesterday I did mention could we get this for the property rather than the sale of shares. You just jumped on me saying how much of an idiot I am for thinking I could get IA for the sale of shares rather than reading the question.

There's obviously been a misunderstanding and I don't blame other posters for being confused of course. However, my motto in life is treat others how you'd like to be treated yourself and I'm sure you wouldn't be happy in when you ask a question on here next if someone responds telling you that you're out of your depth and that your clients should go elsewhere.

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Replying to Jakarmi:
By Ruddles
23rd May 2017 11:10

If I were to phrase a question and/or follow up comments in such a way as to suggest that I didn't have a clue what I was talking about I'd accept all the flak that came my way.

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Replying to Ruddles:
7om
By Tom 7000
16th Mar 2020 11:13

Its only easy if you know the answer... are you coming down with something mon ami?

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Replying to Tom 7000:
Lone Wolf
By Lone_Wolf
16th Mar 2020 11:20

Are you?

Why the need to open up an almost 3 year old question?

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By mrme89
22nd May 2017 21:08

If I'm honest, I can understand the frustration shown by Ruddles.

You can ignore the property. You can ignore it because the property is going nowhere; you tell us a company is being sold that just so happens to hold an investment property.

So you are left with a shareholder that is disposing of shares. That disposal is subject to Capital Gains Tax, and ER relief is not available.

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Replying to mrme89:
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By Jakarmi
22nd May 2017 22:02

As I've commented to Ruddles above. The property is being sold and my client has two options I guess of trying to sell it as the company or just selling the property and winding the company up.

If he sells the property then the property is going somewhere and indexation allowance is possibly available. It's pretty silly to ridicule people for asking questions when this is what the forum is for and if you need more clarity you could always ask for more info.

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By mrme89
22nd May 2017 22:31

Help us to help you then, Jakarmi.

You've been informed of the differing tax treatment. So you now need to do some calculations. Those calculations will be driven by the client.

For example, if they sell the property, do they need the cash now, or can they distribute the reserves over a period of time?

You can present the calculations to your client that can then make an informed decision. But ultimately, it's going to come down to negotiation between the buyer and seller.

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Replying to mrme89:
Maytuna
By DJKL
22nd May 2017 22:49

In addition less deals are being done buying the company holding the asset these days, it always runs the risk re the buyer inheriting all the sins of the seller and despite warranties etc it really has to be worthwhile to temp a buyer down this route.

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Replying to mrme89:
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By Jakarmi
23rd May 2017 10:51

The client is looking to sell the property and obviously pay the lowest tax charge and even defer the tax payment if he can. If that meant selling the company then it's something he could have tried to negotiate.

Selling the company is a tough sell but I wanted to factor in ER if applicable for possible negotiations but as ER can't be claimed then the best bet seems to be to sell the property on it's own.

I think Indexation Allowance can be added on from what I read if it is an investment business rather than a trading one which posters have mentioned. Again, I was a little unsure that it would be held as an investment business with this particular company making a £50k net profit on it's rents each year. In addition, the client has three other companies with a total of 10 other properties in these so it didn't look a simple decision that it was an investment business looking at the rules but I am more than happy to go down that road if we can claim the IA.

The client doesn't need the money now. There is a mortgage in the company for £0.5m which would be paid off with the sale and any tax charge arising would be also paid. The client would likely reduce his mortgages in his other companies by transferring the monies left over as inter company loans I would imagine.

As stated the client would defer the tax and reinvest in another building instead if this was possible but reinvestment relief is only available for a CGT computation rather than CT which this is and I can't see another available relief to defer.

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Replying to Jakarmi:
By Ruddles
23rd May 2017 11:03

Some basics for you:

Indexation allowance has nothing to do with the asset being an investment asset or not. Whether the property is held as an investment or for the purposes of the company's trade (if it had one) it would be a chargeable asset for capital gains purposes (on which companies pay corporation tax, but which are computed under capital gains tax legislation).

You should stop talking about 'investment business' - it is obviously confusing you. A company holding property for rental has a property rental business (it is a business, profits of which are calculated under trade principles, but it is NOT a trade).

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Replying to Ruddles:
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By Tax Dragon
23rd May 2017 14:25

Might be worth checking (if the OP prepares the accounts) that there are accounts for each company. It may just be the way the questions are presented, but it sounds as if there's a perception that the client has a single investment business with 10 (or 11) properties, rather than being a shareholder of some companies each of which has a letting business.

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