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Gift of Property To Ltd Co- Accounts treatment

How is a gift of a property to a limited company shown in the company's accounts.

A client has gifted a property to a limited company which he controls (he has claimed holdover relief). How is the transaction shown in the company's accounts

 

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22nd Jan 2018 10:37

For Tax purposes it is treated as a purchase at full market price going forward, but on the accounts, that may well be very different.
the real question is why gift it. he could have sold it with a loan from him to the company if it did not have the money to pay him. the tax treatment is likely to have been the exact same, but it would be cleaner in the companies books and he could have extracted the value over time.

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to timothyvogel
22nd Jan 2018 10:46

That's not necessarily correct though, Timothy. Whilst SDLT on market value (assuming it exceeds any actual consideration) cannot be avoided, if it is commercial property used by the company for its trading business, then CGT holdover relief would be available (at the cost of foregoing any entrepreneurs' relief that might be available).

For accounts purposes, the property goes into the accounts at cost, and should probably then be revalued to its market value.

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22nd Jan 2018 11:24

As suggested the reason for a gift is the hold over of CGT plus elimination of the value of the property from the clients estate for IHT purposes. Within the company the asset attracts BPR.

Following on the comment of revaluation I guess the entries are debit fixed assets and credit revaluation reserve.

Thanks for your feedback.

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to Trethi Teg
22nd Jan 2018 12:13

Is the property commercial or residential? If commercial, what was the property used for?

Treated significantly different for tax purposes.

Also, I assume you have assessed the possibility of a chargeable lifetime transfer for IHT purposes?

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to Adam12345
22nd Jan 2018 12:44

I wouldn't have expected a residential property (or, indeed, a commercial property that is not used for the company's trade) to have qualified for holdover relief, and, if the value of the shares in the company have increased correspondingly to the property added to it (and why wouldn't they), there is no transfer of value.

This is not uncommon planning where the shares qualify for BPR. Ordinarily, one would subsequently look to create a group structure, and transfer the property to another group member (away from the risks of the trade).

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to Portia Nina Levin
22nd Jan 2018 13:11

There just isn't enough information to say either way. He may have control but that doesn't necessarily mean he owns 100% of the shares.

I just think in this situation it is unlikely that holder relief would be available but just speculation more than anything else.

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to Adam12345
22nd Jan 2018 13:28

Admittedly, I am just going on the fact that the OP only asked about the accounts position, and has thus far appeared coherent on the tax position.

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to Trethi Teg
22nd Jan 2018 12:46

As I understand it, FRS 102 has done away with revaluation reserves, and the credit entry goes to some new-fangled statement of something or other.

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22nd Jan 2018 16:54

The property in question was commercial - a quarry. The quarry output was provided FOC to a seperate trading limited company in which the client again owned 50% of the shares with his son owning the other 50%.

The client owns 50% of the share capital of the company (into which the property was transferred) with his son owning the other 50%.

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to Trethi Teg
22nd Jan 2018 17:26

I've always struggled with the concept of owning a hole.

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By DJKL
to Portia Nina Levin
22nd Jan 2018 18:09

Also one of these interesting assets where (possibly) the bigger it gets the less it is worth.

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By Dib
to DJKL
23rd Jan 2018 16:56

Possibly not, one can always earn an income from filling it back up again as landfill companies do. So the bigger the hole, the more income it can generate!

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to Trethi Teg
22nd Jan 2018 19:30

So a chargeable lifetime transfer then? subject to 50% BPR possibly?

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23rd Jan 2018 08:52

BPR 100% as shares owned in trading company.

Lifetime transfer - yes. However as client owns 50% of shares in limited company then only half transferred to son.

However, as son now has only now has 50% of the company shares, he does not have control. Therefore what is the value of the transfer?

Thoughts please?

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to Trethi Teg
23rd Jan 2018 11:35

I agree that to the extent that the transfer results in a reduction in the deceased's estate it is a transfer of value.

To the extent that the transfer results in an increase in the son's estate it is a potentially exempt transfer, by virtue of IHTA 1984, s 3A(1A)(c)(i) and s 3A(2)(b).

If the reduction in the dad's estate exceeds the increase in the son's estate though - which could happen, but I don't think happens here - the difference would be a [***], I think.

BPR on the shares is 100%.

What Adam12345 is suggesting is that 50% of the transfer (the reduction in the value of the dad's estate) is a C.L.T., but might qualify for 50% BPR. I agree that the property might qualify for BPR, but do not agree as to the extent of the C.L.T.

EDIT: Moderators! Take C.L.T. (wihout the punctuation) off the fuccking swear filter. It is a recognised tax abbreviation.

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to Trethi Teg
23rd Jan 2018 10:50

The difference between the value of the donor's estate before the gift compared to the value of the donor's estate after the gift.

So in the simplest terms the value of the land less the value of the uplift in value of the donor's shares after the gift. The fact that he has lost control of the land, the 'loss to donor' is likely to be more than just 50% value of the land.

BPR on the gift of the land to the company will only be 50% if all the other conditions have been met that is.

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to Adam12345
23rd Jan 2018 11:34

You're talking b*llocks.

To the extent that the son's estate increases, it is a potentially exempt transfer. Read IHTA 1984, s 3A(1A)(c)(i) and (2)(b).

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to Portia Nina Levin
23rd Jan 2018 12:09

Yes, but I would argue that the estate of the donor has decreased more than the increase in estate of the son.

If you own 100% of the property personally it's value is more than two separate individuals owning 50% of the shares in a company that owns the property due to the loss of control.

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to Adam12345
23rd Jan 2018 12:26

There is that possibility. One obviously needs to value the shares before and after, and compare the aggregate increase with the value of the land before.

As you note, it probably qualifies for 50% BPR, so the excess would need to exceed £650,000 before any tax arises. And it's a hole.

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to Portia Nina Levin
23rd Jan 2018 13:41

the beginning of (2)(b) refers to "person" - the asset is comprised in the company, so not a PET, even though the individual's estate is increased.

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to leeanthonyblackshaw
23rd Jan 2018 17:45

I disagree. (2)(b) applies to THAT VALUE (ie the value transferred) is ATTRIBUTABLE to property which becomes comprised in the estate of another person.

There is a transfer of value. The value of the transferor's estate is being diminished as a result of the transfer of the asset. Where has the value gone? To the extent that the son's estate is increased, THAT VALUE (ie the value transferred) is not ATTRIBUTABLE to property that has become comprised in the estate of another person. It is attributable to the increased value of the son's shares.

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to Portia Nina Levin
23rd Jan 2018 18:45

See HMRC’s view IHTM04060 and a Taxation article https://www.taxation.co.uk/Articles/2017/08/22/336868/iht-planning-busin...

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to leeanthonyblackshaw
24th Jan 2018 12:31

I've seen IHTM04060. It is not uncommon for my and HMRC's views to differ. IMO Malcolm Gunn makes the same mistake of following the property, rather than the value, and whose property the value transferred is attributable to.

The obvious solution though, to avoid the issue, is to transfer a 50% interest to the son, and for them both then to transfer the property to the company. There may then be some net transfer of value to the company from them both.

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23rd Jan 2018 18:45

Agree with (2)(b) so mostly a PET.

You could also argue that there is no BPR on the transfer of land to the company either as the donor only holds 50% of the company. As the other half is all owned by one other person (not loads of small shareholders) - does he have control? Legally he doesn't.

IHT100 to be filed?

Any previous C.L.Ts?

We could go on forever... let just hope the donor lives 7 years to make things a little easier.

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to Adam12345
24th Jan 2018 12:04

Walkers Executors v IRC [2001] SpC 275 may help with the 50:50 split control point for 50% BPR.

Could be important, as a gift to a company is not a PET.

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to leeanthonyblackshaw
24th Jan 2018 12:36

I think you must mean transfer of value, rather than gift. It is not a question of what has been given, but what value has been transferred, and to whom.

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to Portia Nina Levin
24th Jan 2018 12:51

The Taxation article I linked to previously expresses the point better than I do:

“If the gift increases the estate of another individual but is not a gift made directly to that individual, it is required that the value transferred is not attributable to property which becomes comprised in the estate of another person. With the gift to a company, the premises become comprised in the estate of the company, and so the gift cannot be a potentially exempt transfer. The result is that the gift is a chargeable transfer so there will be an immediate inheritance tax liability after the 50% relief.”

also the IHTM04060 example 2 explanation

“The first condition is not satisfied because the cash given does not become directly comprised in the estate of C. The second condition is not satisfied either even though the value of C’s estate is increased by the gift. This is because the value transferred is attributable to property that has become comprised in the estate of another person.”

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to leeanthonyblackshaw
24th Jan 2018 12:52

Reading the legislation word for word I agree mostly a PET - albeit I don't think the legislation was intended to cover these sorts of transfers otherwise anyone could gift anything to a company and someone will have an increased estate as a consequence due to an increase in share value and that's probably why HMRC interpret it in such a way.

So worst case scenario all a [***] and no BPR on transfer.

It may have just been easier to transfer the land in return for shares which would then qualify for 100% BPR, depending on the CGT position.

I'm just glad that they aren't my client...

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By Tosie
29th Jan 2018 14:27

Accountingweb at its best. Professionals discussing technical points. How I miss these discussions.

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