Share this content

how to reflect diminution in freehold value ?

permanant diminution in value of recently acquired freehold asset due to lease/ground rent changes

Didn't find your answer?

As leaseholders to a block of flats we set up a company to hold the newly acquired freehold title.  As part of the enfranchisement deal we are going through the process of extending the leases and making ground rents peppercorn to avoid the need to do it in decades to come.  The freehold was recorded at its fair value/cost a few months ago but now my guess is the change in lease terms + ground rent gives a permanent diminution in value of the freehold fixed asset to almost nil.

Does the charge go to a revaluation reserve ?

Replies (11)

Please login or register to join the discussion.

avatar
By Paul Crowley
29th Nov 2021 11:15

"avatar
By Paul Crowley
28th Nov 2021 13:43
If mine it would have been done as follows:
Investors get a £1 share
They then lend money to company
Company buys the freehold
Company sells the leases at cost such that the loans equal sales value
Result is that the residual value of property equals the shares

My reading of what has happened so far:
Investors got shares for the money put in
Company bought property
Company gave away the free leases
No investor has paid for the increase in value of their property, nothing to add to cost of buying should they sell the property
Directors get an even worse problem
Benefit in kind of the value of the free lease
Ouch

This sounds like John dealing with enfranchisement

Did anyone at all take accountancy or tax advice?"

From the prior posting

Thanks (3)
Replying to Paul Crowley:
avatar
By NTG
29th Nov 2021 17:05

thanks Paul - im with you and the scenario is as you describe first as we all have £1 shares at £1 each and we were told to do it as close to the freehold purchase date as we can realistically do so values are the same. So basically the P&L is flat (transactions at arms length values) and the fixed asset is lowered and the loan liabilities to shareholders reduced - perfect thanks

Thanks (0)
Replying to NTG:
avatar
By Tax Dragon
29th Nov 2021 17:25

How have you avoided the double SDLT charge doing it like that?

.oO Why are people so against getting tailored, personal advice from professionals who are paid to help them??

Thanks (0)
Replying to Tax Dragon:
avatar
By NTG
29th Nov 2021 18:05

hi Dragon - the purchase of the freehold attracted stamp duty but for the individual lease extensions the enfranchisement solicitor executed without stamp duty to pay (the existing leases are over 100 years remaining; the extension makes them 1000 years - so its not a significant value per flat) ....maybe im over thinking it but my thoughts were by waiving the ground rent payable the freehold asset we have just bought is now worth less - and i had just been thinking of writing the asset value down (but several of the replies suggested its best to look at it as a disposal) but any guidance would be much appreciated

Thanks (0)
Replying to NTG:
avatar
By Leywood
29th Nov 2021 18:09

You really should take what Wanderer says on board, DIY is not a good idea.

Thanks (0)
Replying to Leywood:
avatar
By NTG
29th Nov 2021 19:01

hi Leywood - our enfranchisement solicitor has already done it all for us and its not DIY. - tomorrow I will ask about the basis for not paying the SDLT for the individual leases and will update this forum. Thank you all for your comments / thoughts - its much appreciated

Thanks (0)
avatar
By Paul Crowley
29th Nov 2021 11:19

Negative revaluation reserve would seem odd

Thanks (0)
avatar
By johnt27
29th Nov 2021 11:36

If this is permanent it goes to P&L. Only temporary diminutions which you have a realistic expectation of being reversed can go to a reval reserve.

Thanks (1)
avatar
By Paul Crowley
29th Nov 2021 11:47

Do not think is is a diminution in value
It is the direct cost of the free gifts to shareholders

Thanks (1)
avatar
By Tax Dragon
29th Nov 2021 11:53

Value still exists, but it's been passed out to shareholders. That's a dividend/distribution, not a diminution.

I suggest taking professional advice at this juncture.

(Edit: had I seen Paul's post before adding my own, I could have saved time by simply being "+1")

Thanks (1)
avatar
By Wanderer
29th Nov 2021 12:32

NTG wrote:

As part of the enfranchisement deal we are going through the process of extending the leases and making ground rents peppercorn to avoid the need to do it in decades to come. 

Stop there, just stop and take proper, paid for, advice.
You could easily make some very expensive mistakes. There's MUCH more to think about, in terns of the tax issues, before you start worrying where things are posted to in the accounts.
Thanks (1)
Share this content