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
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
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??
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.
Do not think is is a diminution in value
It is the direct cost of the free gifts to shareholders
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")
Stop there, just stop and take proper, paid for, advice.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.
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.