Long Lease assignment premium treatment

Tax implications of buying a long leasehold B&B

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Hi,

Someone is looking to buy a B&B which is held on a long lease of 60 years (with 40 years remaining). There was no premium paid when the lease was granted 20 years ago, and as it's within the Landlord and Tenant act, they should be able to get a new 60 year lease on expiry. There is an ongoing ground rent payable of £15k/year. The vendor is asking for c.£300k for the property, furniture and goodwill. I had three questions:

1. The agent has told the buyer the purchase price will be split between lease assignment premium, goodwill and F&F, and the accountant will calculate the splits between these. I get the F&F, based on the figure provided by the current vendors accounts. But how to calculate the PV of the lease and the goodwill portion is not clear to me. Surely the premium is determined by the market aka the sale price? There would be very little if any goodwill associated with the purchase, as although the property is trading, the inherent value is within the property and not the business.

2. The current owner bought the property for £110k per land registry about 5 years ago, and the agent has said there was an additional amount paid for the F&F and goodwill. Unclear as to what this amount was, but I would have thought HMRC wouldn't like any value attributable to goodwill as this would not incur any stamp duty and therefore could be a way to reduce this payment. 

3. Treatment of premium payable for the assignment going forward: Say the premium is £250k, with £50k payable for the F&F. I am unclear on how this should be treated. Basic instinct tells me that the £250k should be amortised over 40 years as it is a short lease and therefore a wasting asset. But as a new lease is likely to be granted at the end for nil premium and the original lease was for 60 years and therefore not classified as a short lease, I can't see why this would be appropriate treatment, as you wouldn't depreciate a long leasehold property held as investment on your balance sheet.

Hopefully I have included most of the information needed, but please let me know if anything is unclear. Thoughts appreciated and thanks for the comments in advance! 

Replies (3)

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By paul.benny
19th Nov 2020 09:42

1. The split of the consideration is essentially a commercial negotiation between buyer and seller driven by the tax considerations on each side. The seller seems to have already pre-determined their position; you need your accountant to understand yours.

2. Not sure what your question here is.

3. This doesn't sound like an investment property as you're operating a business from it. The building should therefore be depreciated. In any case the accounting treatment of buildings is largely irrelevant for tax.

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Replying to paul.benny:
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By leyasg
19th Nov 2020 09:54

paul.benny wrote:

1. The split of the consideration is essentially a commercial negotiation between buyer and seller driven by the tax considerations on each side. The seller seems to have already pre-determined their position; you need your accountant to understand yours.

2. Not sure what your question here is.

3. This doesn't sound like an investment property as you're operating a business from it. The building should therefore be depreciated. In any case the accounting treatment of buildings is largely irrelevant for tax.

Thanks for the reply Paul. I think you are saying the property should have a substantial amount of goodwill attached to it (£140k or so) and so the question disappears.

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Replying to leyasg:
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By paul.benny
19th Nov 2020 11:04

That's not what I'm saying.

Goodwill is the difference between the consideration and the value of the net assets acquired. It doesn't 'attach' to any particular asset.

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