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Sale at under value

Can a landlord sell a property to a tenant at below market value

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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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By David Ex
23rd Sep 2021 11:16

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.

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Replying to David Ex:
By SteveHa
23rd Sep 2021 11:15

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.

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Replying to SteveHa:
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By CW2012
23rd Sep 2021 13:27

Vendor is female, 50 years old, in good health as far as I know, so 7 years shouldn't be a problem. Yes from what I can see in time the estate will be in excess of the IHT threshold.

Its not a company, just an individual.

The parties are familial unconnected they are friends.

Hope this puts a bit more flesh on the bones.

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Replying to David Ex:
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By CW2012
23rd Sep 2021 11:15

Thanks David, its a bit of a family friend from what I can gather, they have done ok out of the rent and market value is one thing getting it is another, seems ok on the face of it, there's nothing to be gained as far as I know by the landlord other than a quick hassle free sale but at no gain.

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Replying to Justin Bryant:
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By David Ex
23rd Sep 2021 12:50

Justin Bryant wrote:

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?

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Replying to David Ex:
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By Tax Dragon
23rd Sep 2021 12:56

I vote yes.

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Replying to David Ex:
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By Justin Bryant
23rd Sep 2021 13:19

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).

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Replying to Justin Bryant:
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By David Ex
23rd Sep 2021 13:29

Justin Bryant wrote:

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.

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Replying to David Ex:
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By Justin Bryant
23rd Sep 2021 13:34

If I was wrong this would be the easiest CGT scheme in the world.

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Replying to Justin Bryant:
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By The Dullard
23rd Sep 2021 13:36

You think people are going to go around selling their possessions at undervalue in order to pay less tax? Seriously?

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Replying to The Dullard:
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By Justin Bryant
23rd Sep 2021 14:04

You clearly have not thought this through.

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Replying to Justin Bryant:
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By David Ex
23rd Sep 2021 13:44

Justin Bryant wrote:

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!

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Replying to David Ex:
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By CW2012
23rd Sep 2021 13:57

Thanks, there aren't any other offers so there's nothing declined, its an offer from the tenant, quick sale with no costs vs selling with a sitting tenant who's now unhappy and possibly obstructive.

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Replying to David Ex:
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By Justin Bryant
23rd Sep 2021 14:02

I said "easiest".

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Replying to Justin Bryant:
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By The Dullard
23rd Sep 2021 14:03

Cretin!

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Replying to The Dullard:
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By Justin Bryant
23rd Sep 2021 14:07

You must have lots of friends. Your name is certainly very apt.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
23rd Sep 2021 20:39

That is as idiotic as suggesting that the easiest way of avoiding income tax on earnings is to give up your job.

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2021 21:59

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).

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Replying to Justin Bryant:
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By David Ex
23rd Sep 2021 22:33

Justin Bryant wrote:

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.

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Replying to Justin Bryant:
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By The Dullard
23rd Sep 2021 13:34

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.

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Replying to The Dullard:
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By CW2012
23rd Sep 2021 13:46

Is it a gift?, 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. Feels like a discount is warranted, have we got a conclusion to this. Thanks

"You use the market value of the asset instead of the actual consideration which passed between the parties where:

The transaction is otherwise than by way of a bargain made at arm’s length, in particular:
a gift"

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Replying to The Dullard:
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By Justin Bryant
23rd Sep 2021 14:01

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.

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Replying to Justin Bryant:
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By The Dullard
23rd Sep 2021 14:03

You seem to have not noticed that I have referred, indirectly, to s 17(1)(b).

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By HarryB
23rd Sep 2021 13:40

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.

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Replying to HarryB:
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By The Dullard
23rd Sep 2021 13:48

With all of this I can only concur.

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Replying to HarryB:
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By David Ex
23rd Sep 2021 13:56

HarryB wrote:

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!!

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Replying to David Ex:
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By HarryB
23rd Sep 2021 14:09

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!!!

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Replying to HarryB:
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By Hugo Fair
23rd Sep 2021 13:57

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?

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Replying to Hugo Fair:
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By Tax Dragon
23rd Sep 2021 15:24

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.

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Replying to Tax Dragon:
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By Hugo Fair
23rd Sep 2021 18:00

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?

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Replying to Hugo Fair:
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By Tax Dragon
23rd Sep 2021 19:17

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.

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Replying to HarryB:
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By Justin Bryant
23rd Sep 2021 13:58

None of that is inconsistent with what I said above.

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Replying to Justin Bryant:
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By The Dullard
23rd Sep 2021 14:01

What you have said is entirely inconsistent with it.

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By Tax Dragon
23rd Sep 2021 14:04

I voted yes because information was lacking to say with any degree of certainty that there wasn't an issue.

I still vote yes.

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Replying to Tax Dragon:
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By Justin Bryant
23rd Sep 2021 14:06

Only one TD is wrong here and it ain't you.

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Replying to Justin Bryant:
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By HarryB
23rd Sep 2021 14:12

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.

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Replying to HarryB:
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By CW2012
23rd Sep 2021 14:40

Gratuitous benefit, A transaction is ‘otherwise than by way of a bargain made at arm’s length’ when one of the persons involved in the transaction does not intend to get the best deal for themselves from THAT PARTICULAR TRANSACTION. That person enters into the transaction with the subjective intention of giving some gratuitous benefit to the other person.

Thanks for this HarryB, its all horribly subjective, what is the best deal for themselves??, without them selling on the open market and to their tenant at the same time we'll never know, but I will put this to them, oh and yes the lovely 30 day rule to comply with.

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Replying to Justin Bryant:
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By CW2012
23rd Sep 2021 14:20

It looks to me to come down to a mixture of opinion and interpretation, there's no onus or coercion on the seller to agree to a "bad bargain", they are just happy to pass the property on to the tenant and get back the initial stake, having had a decent rental stream, possibly they could get more but possibly I could win the lottery, do I keep my £1.00 and pay tax on the win I fore went, this seems to be the position being put forward. Any thoughts on this. Thanks

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Psycho
By Wilson Philips
23rd Sep 2021 15:04

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.

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Replying to Wilson Philips:
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By CW2012
23rd Sep 2021 16:12

You now know all that I know, on the face of it the transaction didn't initially look that troublesome but something was troubling me, from the excellent points put forward I think I have broader perspective, sadly I couldn't say definitively whether it is a gratuitous gift or not, if it was to a relative or a connected company for a larger discount I'd be more certain that that was a problem. Thanks

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