Lease extension profit reside ts mgmt co

Lease extension residents management company

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I have two questions

 

 7 leaseholders set up a residents management company and acquired the freehold for £30k to a building containing 10 flats which range in size from studios to a 3 bed flat, plus a ground floor office building with a long lease.

Immediately after acquiring the freehold, the 7 flats were given 999 year lease extensions. The 7 company shares are tied to ownership of each flat and pass on sale to the new flat owners.

 

The residents management company has reported a fixed asset of £30k in their annual accounts since incorporation, based on previous accountants advice.  

 

Q1) Should the fixed asset value have been reduced after the 7 lease extensions happened?

 

I am sure I have read about this somewhere as I remember it gets complicated if lease extensions dont occur at incorporation but cant find links. 

 A studio extended paid £7k to extend their lease last year. The funds have been retained in the company to pay for minimal company running costs.

 

I have written to HMRC to notify the company is no longer dormant due to the lease extension, but the letter seems to have gone missing. I expect the company will receive a notice to file a tax return soon and I have arranged an interim payment. However, it has been difficult to get a consistent view from other accountants I have spoken to on how to work out the profit on the lease extension.

Q2) Are professional lease valuations needed or can I apportion the £30k cost of purchasing the freehold over the 10 flats based on estimate values from lease extension calculators using the values as at acquisition?

 

The freehold was worth more than £30k but the previous freeholder was threatened with fraud charges for inventing service costs for non existent services and offered to sell for that price so there are no formal valuations.

 

I am normally involved in service charges and am out of my depth here but haven't found an accountant to refer on to who has expertise in this area.

 

Replies (6)

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By Paul Crowley
28th Sep 2020 13:21

So many issues
How do the leaseholders justify the cost of lease extension. All bar last man, who clearly paid for it?
How financed, loans or share capital

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Replying to Paul Crowley:
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By new2uk
29th Sep 2020 12:36

The 7 lease/shareholders paid for 1/7th of the freehold costs each, and received a £1 share in the company.

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By Paul Crowley
29th Sep 2020 13:26

Paid whom
The £1 share is the right answer
They should then have loaned the money to company and company buys.
Then sell to the shareholders at correct price
Who made the profit on last man?

There are still 2 more sales of long leases to be made at some point, the cost value of which should be on the balance sheet
True position is that the 7 invested in a property company. With the oportunity to sell 3 leases as well as the original 7
Who gets the ground rent from the other 2
That is taxable income

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By The Dullard
28th Sep 2020 15:12

Was the freehold acquisition made pursuant to a collective enfranchisement provision? If so, which one?

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Replying to The Dullard:
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By new2uk
29th Sep 2020 12:33

The leaseholders had first right of refusal.

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Replying to new2uk:
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By The Dullard
29th Sep 2020 23:35

And, did that right of first refusal arise under Part 1 ofthe Landlord and Tenant Act 1987 by any chance? The bit that refers to a "nominated person" to act "on behalf of" the tenants in acquiring the freehold interest, I mean?

It's just that my understanding (from members of the Association of Leasehold Enfranchisement Practitioners) is that the company is not the beneficial owner in those circumstances; it is the nominee/trustee of the beneficial owners. That's why FA 2003, s 74 is there to provide SDLT relief in such circumstances.

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