We have a landlord that owns several properties and they'd like to sell one at the price that they purchased it for to the sitting tenant. The difference between the market price and the purchase price is £20k. The sale / purchase price is £100k. Is there any issue here? Thanks
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If we’re talking unconnected parties (and no unrated disguised payment), I wouldn’t have thought it was an issue.
The obvious question is why anyone would give away £20,000.
I agree. There is missing information, though. How old is the vendor, and will they survive 7 years, and will they have an estate subject to IHT, and will the balance be considered a gift?
Is the purchaser connected to the vendor for CGT purposes, such that it's a market value transaction regardless.
Is the vendor a company, and does under-market sale contravene the director's duties in accordance with CA (i.e. to do what's best for the company)?
So may questions, and so many unanswered.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14530
Do you think there’s an issue in the OP’s case, on the information given?
Clearly any transfer deliberately/knowingly (and probably also recklessly) at less than market value is by definition not done on an arm's length basis. Otherwise you could argue that all gifts are done on arm's length terms (but there is no such thing as an arm's length gift of course).
Clearly any transfer deliberately/knowingly (and probably also recklessly) at less than market value is by definition not done on an arm's length basis. Otherwise you could argue that all gifts are done on arm's length terms (but there is no such thing as an arm's length gift of course).
Interesting. The guidance you linked says “The transaction is otherwise than by way of a bargain made at arm’s length”. The two parties in the OP’s case are apparently acting at arm’s length but it clearly looks odd for someone to accept a materially sub-market price for no compelling reason.
You think people are going to go around selling their possessions at undervalue in order to pay less tax? Seriously?
If I was wrong this would be the easiest CGT scheme in the world.
And one of the most stupid! Declining more gross proceeds to save 20% or whatever tax wouldn’t be very sensible tax planning!
That is as idiotic as suggesting that the easiest way of avoiding income tax on earnings is to give up your job.
Or, perhaps, that if you and I make gifts to each other - each gift being conditional on the other - that my gift is not consideration for yours (and vice versa).
I said "easiest".
You said “easiest CGT scheme”, my point was it isn’t a CGT scheme in any meaningful sense. Like me saying I’ll save income tax by ceasing generating any income. That’s not an IT scheme as any finance professional would recognise.
I disagree with both you and TD.
There is an enormous difference between:
- no consideration, which is clearly a bargain otherwise than at arm's length, and
- a bad bargain, made in the round, where the agreed consideration is perhaps less than market value, but is accepted by the vendor given the circumstances (having had a good historic deal on the rent).
If two parties contracting at arm's length (which is generally to be assumed if they are unconnected and have no relationship that might bias the bargain, eg employer/employee or company/shareholder), there is nothing that should cause s 17 to apply.
But you are wrong. S17 applies to company distributions in specie of property to its shareholders for example. That must be right, as case law says company distributions are made for no consideration.
You are wrong per para 90 here: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12507/TC...
Perhaps the landlord has heard about the hassle and professional costs when trying to submit, and generally deal with a 30 day CGT return, (half joking), but add to that the cost of Estate Agents fees, and being messed around by time-wasting buyers, and the problem of what the MV ACTUALLY is when the property goes on the market, so decides that she will strike an arms length deal with the tenant. No hassle, quick sale, less costs to pay out.......
Perhaps the value is depressed because of tenants rights under the tenancy agreement?
See CGCG14541 - Consideration for disposal: market value rule: at arm's length
A bargain made at arm’s length is a normal commercial transaction between two or more persons. All of the parties involved will be trying to obtain the best deal for themselves in their particular circumstances.
This does not mean that a bad bargain cannot be a bargain made at arm’s length. For example Mr A may wish to sell his property quickly so that he can go and live in Malta. Mr B knows that Mr A wants to sell his property quickly so he offers him a low price for a quick sale. No-one else makes an offer. Mr A accepts the price Mr B has offered. This may not have been the best possible price which Mr A could have achieved if he had left the property on the market for longer but he was still trying to achieve the best deal possible for himself. It was a bargain made at arm’s length.
This may not have been the best possible price which Mr A could have achieved if he had left the property on the market for longer but he was still trying to achieve the best deal possible for himself. It was a bargain made at arm’s length.
That was my thinking but interesting to see the discussion and the massive “discount” does cause some head scratching!!
But the 'discount' is only 20%. Unfortunately, I've sold a house at open MV where the Estate Agent assured me the open MV was 20% higher when I signed up with him!!!
I'll give you another (real life) situation ...
When he was selling his last home (prior to move into sheltered accommodation), my father accepted an offer of £300k from one of the viewers. A couple of days later he received an offer of £320k from a different viewer - but rejected it ("as I've already given my word to Mr & Mrs xxxx").
He'd never previously met any of these parties, but felt that his honour was worth more (to him) than the extra £20k.
CGT didn't enter into it (as PRR applied), but surely no-one would have claimed that he should use £320k as MV if CGT had been applicable?
MV may well have been £320k [who knows?], but it's irrelevant as (based on the facts you supply) s17 would not have applied in that situation.
In the OP we are told that the vendor is entering into a below market value transaction partly out of friendship and partly because of having had a decent rental yield, both factors that militate against concluding this is an arm's length transaction. Very different from your father.
Perfectly valid point ... for once I wasn't keeping up with all the posts on the page.
OP initially indicated nothing about relationship or reason ... which has since evolved through "The parties are familial unconnected they are friends" ... on to "its an offer from the tenant, quick sale with no costs vs selling with a sitting tenant who's now unhappy and possibly obstructive" ... and now "its a quick known sale to a sitting tenant, you'd expect a discount for the fact that the vendor wont be paying advertising, solicitors fees, remediation costs and the reduced hassle of dealing with multiple viewers and getting the funds faster"!
The most pertinent point in all that IMHO is the status of the buyer as a sitting tenant who is turning unhappy/obstructive. I'm no property expert but surely that ordinarily attracts a discount on the MV of an unencumbered property (and for all I know 16.67% might be seen as typical for that scenario).
In which case there's no issue is there?
I confess I hadn't followed all those developments. .oO This forum could do with a track changes function vis-à-vis facts.
The question - as far as I'm concerned the only question - is whether the transaction is itself negotiated and agreed at arm's length. I agree with Wilson - but I still vote as I voted previously, because not enough has been provided to conclude with certainty that the transaction was so negotiated and agreed. I can see your point, if the facts are how you have interpreted them.
I voted yes because information was lacking to say with any degree of certainty that there wasn't an issue.
I still vote yes.
There are lots of unknowns (as always) - hence the use of 'perhaps' in my answer.
But I would recommend a look at CG14542 by the OP and a discussion with the client.
Someone here seems to be under the (mistaken) impression that a sale at less than market value is necessarily a bargain other than at arm's length. I don't need to repeat the excellent explanations already given that demonstrate the absurdity of that view.
As to the OP's position, I'm not going to offer much of an opinion since, as is so often the case, the OP is in a far better position than anyone else here to understand the exact facts and circumstances. It may have been an arm's length bargain, it might not have been - based on what we have been given so far I'm tending on the side of the former but I'm far from convinced.
See also para 31 here: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12692/TC...
I think that's more than sufficient case law to prove you wrong on what an "arm's length" deal means.