Tax on sale of land - residents association

How is this taxed

Didn't find your answer?

The flats complex where I live is one where each flat owner has a share of the freehold. We have a limited company, Residents Association Ltd, that was used to employ the management company who collect the service charges and pay the expenses. From 2015 though they only file accounts showing the share capital and they say that -

From y/e June 2015 as a result of guidance in technical release 03/11 published by ICAEW, ARMA and RICS, the service charge income, property expenditure and related assets and liabilities are not included in the accounts of the company.

So the management company now prepares separate service charge accounts.

There is a proposal to sell the freehold of a bit of spare land on the site to partly fund replacing our flat roofs, this might sell for say £300,000. The management company said that we would probably have to pay capital gains tax on this. So my question is would that be the case, and if so would it not be offset by the cost of the roof replacement anyway?

Replies (19)

Please login or register to join the discussion.

avatar
By David Ex
11th Feb 2024 11:12

I presume the management company aren’t accountants or tax advisers so you need to take advice to ensure this is dealt with correctly. You’ll be paying a property agent to handle the sale and a solicitor to deal with the legals. Pay an accountant to handle the tax (and accounting).

Thanks (0)
Replying to David Ex:
avatar
By FactChecker
11th Feb 2024 12:02

Agree - but it'd be worth first ascertaining a clear picture of which discrete entities are involved in:
"each flat owner has a share of the freehold. We have a limited company, Residents Association Ltd, that was used to employ the management company who collect the service charges and pay the expenses".

There's a lot of vagueness in those 2 sentences - and which entities are involved in each aspect will have a bearing on who is liable for which tax (if any).

EDIT: I see DJKL was typing along the same lines at the same time!

Thanks (2)
Avatar
By I'msorryIhaven'taclue
11th Feb 2024 11:31

Go back to the property company and question why they think you would probably be liable to CGT. What's their rationale for stating probably and not (say) definitely?

Make them work a little for their fee. What information are they holding, what were the acquisition circumstances and costs, and what advice can they offer based on similar experiences?

Thanks (0)
Replying to I'msorryIhaven'taclue:
avatar
By David Ex
11th Feb 2024 11:56

I'msorryIhaven'taclue wrote:

Go back to the property company and question why they think you would probably be liable to CGT. What's their rationale for stating probably and not (say) definitely?

Make them work a little for their fee. What information are they holding, what were the acquisition circumstances and costs, and what advice can they offer based on similar experiences?

I’m not convinced that’s the right route. My limited experience is that property/flat management businesses are simply an offshoot of residential and commercial property agencies. The terms of their appointment are unlikely to include tax advice and I very much doubt they are qualified and authorised for that in any event. Might be wrong but any opinions they offer aren’t a substitute for tailored advice from an accountant.

Thanks (1)
Replying to David Ex:
Avatar
By I'msorryIhaven'taclue
11th Feb 2024 12:16

well, yes... I agree.

It's just that the management company are sat on the necessary information (and perhaps explanations), which needs prising from them.

Thanks (0)
Replying to I'msorryIhaven'taclue:
avatar
By David Ex
11th Feb 2024 12:27

I'msorryIhaven'taclue wrote:

well, yes... I agree.

It's just that the management company are sat on the necessary information (and perhaps explanations), which needs prising from them.

Absolutely agree the exact legal structures must be established.

Thanks (0)
Replying to David Ex:
avatar
By DKB-Sheffield
11th Feb 2024 12:24

Wholeheartedly agree with DavidEx.

Experience suggests that anything below 2,000 blocks and their tax/ accounting/ legal/ health & safety/ admin 'departments', are a handful of people who know very little more than the basics (collecting SC, paying suppliers, arranging repairs).

I dealt with one the other year who sent a chartered surveyor (c. £2K) out to see if, and report back, on whether a low-rise small block needed painting internally! They then obtained quotes (c. £15K) for a single stairwell, and sent a s20 notice out!

Thanks (0)
Replying to DKB-Sheffield:
Avatar
By I'msorryIhaven'taclue
11th Feb 2024 12:34

Ok, ok... we won't ask the management company for their opinion.

What you've just said about a £15k paint job reminded me that the roof sounds very expensive given that the £300k land proceeds is going towards it.

Thanks (1)
Replying to I'msorryIhaven'taclue:
avatar
By JaneS
11th Feb 2024 17:26

I'msorryIhaven'taclue wrote:

Ok, ok... we won't ask the management company for their opinion.

What you've just said about a £15k paint job reminded me that the roof sounds very expensive given that the £300k land proceeds is going towards it.

It does. The indication we've had is that the cost could be £500k total for 96 flats split over 3 floors (so area of 32 flats). It's total replacement of the flat roof to modern standards (there isn't any insulation at all at the moment). We will, of course, be getting several quotes!

Thanks (0)
paddle steamer
By DJKL
11th Feb 2024 12:01

No idea,as this is likely England, but where rests ownership of the freehold, is this in the company?

Up here the land would go with title to each flat (Joint ownership of solum), so would be a partial disposal for each owner and in some cases out of one's PPR so likely no individual CGT to pay.

Are these Resident Association Companies in England, holding freeholds ,tax transparent or are you potentially penalised, suffering corporation tax on such gains within the company, merely because of your land ownership laws re blocks of flats?

If the latter you really need some land reforms.

Thanks (1)
avatar
By DKB-Sheffield
11th Feb 2024 12:07

A little confusing here...

The ownership of the block is either with the Resident's Association, or it isn't. It could be individually owned (TiC, or Joint) as suggested in your opening pp, but that would be rare - and a bleedin' nightmare every time a property is sold. Or it could be owned by a third party company - which all residents may 'own'. Without definitive knowledge of the setup... any guess at tax treatment is impossible (even with those details - it would always be a guess on a forum).

Assuming, for a moment, the freehold is held by RA Ltd... it would appear that either; the land was transferred at £Nil consideration, or; the accounts are (potentially) incorrect. Either is likely, both are possible IME. Either way, getting the true (full) picture will be required - not just for tax, but for the sale as a whole. This may (should) involve reviewing the original title documents, leases, and possible transfer deeds.

There will almost certainly be tax considerations (in any event) as there will be a disposal. Whether there is a tax charge, and who will be subject to that charge, will be dependent on the facts. I'd go out on a limb and suggest - retaining the gain for offset against roof repairs - will not in itself make the transaction non-taxable (not advice, just opinion and observation).

This is, alas, a legal matter... and will only become a tax matter when the legals are known. A lawyer needs to review - and communicate with the tax adviser - details of the title, any covenants/ restrictions, and the detail set out in the lease agreement(s). The tax adviser - who couldn't/ mustn't advise on legals - will then consider the whether the disposal is taxable, on whom, and the tax liability(ies). The management company - unless suitably qualified in law and tax and specifically engaged - shouldn't be advising at all (IMHO).

Thanks (1)
Replying to DKB-Sheffield:
avatar
By DKB-Sheffield
11th Feb 2024 12:11

Didn't want to edit because a lot to retype when it is held by the censor...

I was slower at typing that DJKL and FactChecker so, I apologise to all for any duplication!

Thanks (0)
Replying to DKB-Sheffield:
paddle steamer
By DJKL
12th Feb 2024 11:43

Well, you must be positively glacial as I am a one finger typist.

Thanks (1)
avatar
By JaneS
11th Feb 2024 12:12

Thanks for the replies. The sale of the land is still a proposal at this stage and the tax treatment would need to be a factor if/when it's put to a vote of the flat owners (the shareholders). I was hoping this might be a common scenario but it seems not, the service charge accounts have been independently examined so I'll contact the accountants who did that.

Thanks (0)
Replying to JaneS:
avatar
By FactChecker
11th Feb 2024 13:24

Your comment was posted almost concurrently with that of DKB-Sheffield above (11th Feb 2024 12:07), so I hope you've now taken those suggestions on board.

Basically .. facts first (entities, ownerships, etc) checked/confirmed by a lawyer, and only then will you be in a position to get useful answers regarding tax impact / options from an accountant.

Thanks (3)
avatar
By Tax Dragon
12th Feb 2024 05:33

I'll pick out just one point from what you have said: that the flat owners are entitled to vote as shareholders.

It is entirely possible that tax on the sale will be corporation tax due from the company in which those shares are held. It is entirely possible that the use of the funds to benefit the shareholders will be taxable as a dividend on those shareholders.

But the good news is that, if it's taxed like that, then I don't see CGT coming into it. It is entirely possible that the management company doesn't have a clue. Why would it? Its job is managing someone else's property.

I've based this on one sentence pulled out of context. I could be very wrong indeed. It's possible that the directors of the company calling the shareholders' meeting ought to get that company to take paid-for advice.

Thanks (0)
avatar
By More unearned luck
12th Feb 2024 12:12

I think that your first port of call should be the land registry to see who is the owner of the freehold. You begin by saying it is the leaseholders but many of the respondents think that it might be the company. The former accounting treatment by the company supports the suggestion that the company is the freeholder.

Once you have established the legal ownership you can then set about discovering if the beneficial ownership is different. You will need legal advice. The current accounting treatment would be correct if the leaseholders are the BOs regardless of legal ownership.

The answer to the tax question is dependent upon the identity of the BO. If the leaseholders then PPR is likely to apply. If the company then CT will be due.

If the company does own the freehold on trust for the leaseholders then TRS registration is required.

How long are your leases? If less than 100 years then I suggest you spend some of the proceeds on lease extensions. If any leases have less than 80 years to run then you might have another tax problem.

Thanks (1)
Replying to More unearned luck:
avatar
By JaneS
13th Feb 2024 16:58

I've checked the land registry entry and yes it is the company (Residents Association Ltd) that owns the freehold. The residents lease their flats from this company, and each flat owner holds one share in it.

Also yes some of the leases do have less than 100 years to run, and some of these will have less than 80 years too.

Thanks (0)
avatar
By Bobbo
13th Feb 2024 18:38

I think the one thing we can be reasonably sure of is that it's very unlikely any gain from selling 'spare land' (to whomever said gain(s) may arise) will be offset by the cost of the roof replacement.

Thanks (1)