Share this content
44

What is the definition of cash under TCGA19992

Does a mortgage liability qualify as cash?

Didn't find your answer?

We have a situation where a property business is being transferred from a partnership into a Limited company. Several mortgages exist. The Limited company is raising finance on these properties and has a mortgage in place to cover all the properties. This will replace 50 or so individual mortages from various lenders to the Partnership. If every mortgage is novated to the new Limited company, rollover relief applies. However, if not every indivudal mortgage is novated, and the Partnership still retains the mortgages, which are paid off by Limited, presumably there is a non-share consideration and rollover relief is limited?

 

Thanks in advance

Replies (44)

Please login or register to join the discussion.

avatar
By Anonymous.
19th Jun 2020 11:49

Is this a buy to let business?

FWIW, I don't think a mortgage is within the definition of cash.

Thanks (1)
Replying to Anonymous.:
avatar
By jasonowsky
19th Jun 2020 12:15

Hello

Yes it is

Thanks (0)
Replying to jasonowsky:
avatar
By Anonymous.
19th Jun 2020 12:23

jasonowsky wrote:

Hello

Yes it is

That's interesting. I know there is some dispute as to whether property business qualifies as a “business” for s162. Have you applied for clearance?

Thanks (1)
Replying to Anonymous.:
avatar
By jasonowsky
19th Jun 2020 12:38

Hello, we're not the accountants involved thankfully.

In Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226 (TCC) the Upper Tax Tribunal (UTT) allowed a taxpayer Capital Gains Tax s162 incorporation relief (roll over) on the transfer of her ordinary property letting business (a small appartment block) to a company. It decided that letting was "a business" for s162 relief.

Thanks (0)
Replying to jasonowsky:
Hallerud at Easter
By DJKL
19th Jun 2020 15:04

I think it more decided that "her" letting was a business, based mainly on scale and her arguments re her active role, imho not all letting activities will tick enough boxes to qualify for s162.

I looked at this quite extensively for one of our property businesses which is currently within a partnership and which likely would qualify > £500k rents/80 commercial tenants, full time staff, but we decided to not take the path to incorporation as the rebasing of the assets for CGT will arise anyway when one or other partner dies and if held in partnership it gives a pool of assets that can be used to later finance IHT bills without the cost/expense of extracting from a company; burying within a corporate beast is more likely, imho, to give rise to later liquidity issues re paying IHT.

Thanks (1)
Replying to DJKL:
avatar
By Tax Dragon
19th Jun 2020 15:38

That might be what the OP meant. Or it might not. "That letting" is ambiguous. To me, anyway.

Thanks (1)
Replying to jasonowsky:
Hallerud at Easter
By DJKL
19th Jun 2020 15:04

Duplicate

Thanks (1)
Replying to jasonowsky:
avatar
By Anonymous.
19th Jun 2020 15:34

jasonowsky wrote:

In Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226 (TCC) the Upper Tax Tribunal (UTT) allowed a taxpayer Capital Gains Tax s162 incorporation relief (roll over) on the transfer of her ordinary property letting business (a small appartment block) to a company. It decided that letting was "a business" for s162 relief.

Thanks. I'll have a look. As DJKL suggests, it's obvious fact specific but it will give some clues as to what might tip the balance either way.

Thanks (1)
avatar
By PandoraSleeps
19th Jun 2020 11:59

Yes if the Ltd co raises its own finance and pays off the partnership's debt, rather than assuming the debt, this would count as non-share consideration for incorporation relief.

Thanks (1)
avatar
By Tax Dragon
19th Jun 2020 12:00

A mortgage is traditionally a liability. Cash is traditionally an asset.

Thanks (0)
Replying to Tax Dragon:
avatar
By jasonowsky
19th Jun 2020 12:16

Many thanks. How would an overdraft be treated?

Thanks (0)
Replying to jasonowsky:
avatar
By Tax Dragon
19th Jun 2020 12:28

In what way? It's a debt, a debt is a liability. I'm not sure what you are asking.

Thanks (0)
Replying to Tax Dragon:
avatar
By jasonowsky
19th Jun 2020 12:43

the legislation reads...."together with the whole assets of the business, or together with the whole of those assets other than cash"

I assumed the assets here meant the net assets, so included liabilities. However, are you saying that assets in this definition can exclude liabilities?

Thanks (1)
Replying to jasonowsky:
avatar
By Tax Dragon
19th Jun 2020 12:52

I'm just answering the questions you asked. I'm not sure they are the right questions. However, to answer your latest (to me), I think assets are assets and liabilities are liabilities. So does HMRC, based on CG65745.

Of course, s162 is tax law. You can't transfer something you don't own. You are transferring property. Property law might have something to say about what you are able to transfer. I am not a property lawyer.

Thanks (1)
Replying to Tax Dragon:
avatar
By jasonowsky
19th Jun 2020 13:04

Many thanks. You can transfer a liability as much as you can transfer an asset, which is exactly why it's addressed in CG65745 which you have very helpfully provided reference to and is a huge help.

Thanks (0)
Replying to jasonowsky:
avatar
By Tax Dragon
19th Jun 2020 14:25

My pleasure.

What I meant about property law wasn't about transferring labilities. I meant that, if you have a property subject to an encumbrance (e.g. a mortgage), then you don't own (and therefore cannot transfer) the property unencumbered. (That said, my understanding of property law is famously patchy. And that's being kind to me. I wouldn't be doing what you propose without serious input from serious legal types.)

Thanks (1)
Hallerud at Easter
By DJKL
19th Jun 2020 12:01

Can they not sort the borrowings on properties whilst they are still owned by the partnership?

If there is to be one lender to the company can he not offer the partnership a loan to clear all the existing lenders, properties then pass to Limited with said new loan/ mortgage novated.

Now just to be clear, I have no idea what lenders on property in E & W will/will not do, but new lender might be prepared to play ball.

Thanks (1)
Replying to DJKL:
avatar
By jasonowsky
19th Jun 2020 12:18

Yes, I think it's the new lender playing ball that's the issue with novating a mortgage.

Thanks (0)
Replying to jasonowsky:
Hallerud at Easter
By DJKL
19th Jun 2020 12:47

Well, client does the sums- if getting s162 crucial to getting properties into the company but paying tax is intolerable or cannot afford it then looks like:-

Persuade proposed lender- extra arrangement fee might work, play on the lender's greed.

If does not work find another lender, compare terms/costs to decide if this is a clever idea.

If no dice circle back to why properties going into the company is desirable?

If, as I suspect, it is the mortgage interest question maybe see if there is a way to get an increase in partnership costs to make up for lost relief re interest paid.

With 50 presumably residential units there is the possibility of running a limited which does repairs charged to the partnership, manages said properties etc, which might well increase the costs in partnership sufficiently that , taken with all the bank etc fees saved, moving them is not worthwhile.

And if you are a cynic, as I am, may save a lot of grief if HMG in future decide to somehow restrict relief for interest paid by companies which is related to residential letting, as they decide they do not like all these incorporations thwarting their purpose introducing the restriction of interest relief in the first place.

Given frictional costs not sure I buy the incorporation of residential properties as a sound move, time will tell.

Thanks (1)
Replying to DJKL:
avatar
By jasonowsky
22nd Jun 2020 13:59

That is very sensible and I can only see HMRC restricting relief to companies in the futute. It is going to be a big shake up coming!

Thanks (0)
Replying to DJKL:
avatar
By richard.snape
22nd Jun 2020 13:55

DJKL wrote:

Can they not sort the borrowings on properties whilst they are still owned by the partnership?

If there is to be one lender to the company can he not offer the partnership a loan to clear all the existing lenders, properties then pass to Limited with said new loan/ mortgage novated.

Now just to be clear, I have no idea what lenders on property in E & W will/will not do, but new lender might be prepared to play ball.

Thanks (0)
RLI
By lionofludesch
19th Jun 2020 12:13

I'm tempted to be flippant and suggest that we need to wait another 17.972 years to find out.

Thanks (1)
Replying to lionofludesch:
avatar
By jasonowsky
19th Jun 2020 12:15

good for you

Thanks (0)
Replying to lionofludesch:
avatar
By Dib
19th Jun 2020 14:26

17,972 years! I'm sure i will be retired by then.

Thanks (0)
Psycho
By Wilson Philips
19th Jun 2020 13:36

How/when are the retained liabilities going to be paid off? Simply leaving some of the liability behind does not prevent s162 applying. If the partners continue to finance the retained mortgage, with fuinds transferred from compamnya s and when required, I would argue that is not consideration given for the asset in question.

But I'm guessing that the lender in question requires the loan to be cleared before the property can be transferred over?

Thanks (0)
@enanen
By enanen
22nd Jun 2020 10:28

Is it a business or just the letting of properties with no other services?

Thanks (0)
Replying to enanen:
avatar
By jasonowsky
22nd Jun 2020 15:02

Business with providing a service to the properties, not just letting. Many thanks

Thanks (0)
avatar
By Justin Bryant
22nd Jun 2020 12:02

S162 only requires the transfer of the assets of a business (as a going concern), except cash. So if liabilities are not transferred then that does not negate the relief. If liabilities are transferred, this means that the assumption of the liability (by the company) is not treated as consideration for the shares by HMRC concession (so that no apportionment of share consideration & other non-share consideration is needed thereto re rollover relief).

In practice large liabilities will be refinanced in the company of course and it is not strictly correct to say they are transferred (unless done via a formal novation which would be very unusual).

So leaving some or all the liabilities in the vendor will not cause a problem re s162 (if the vendor pays the liability as the company's nominee per the sale agreement then it will be the company's liability).

Thanks (1)
Replying to Justin Bryant:
Psycho
By Wilson Philips
22nd Jun 2020 12:11

I think it would help if the OP would answer the question as to just how/when the company intends to settle the non-transferred liabilities on behalf of the vendor and/or the accounting entries for the properties concerned.

"I will take this property off your hands and in consideration settle the outstanding mortgage for you" - that, it seems to me, might restrict s.162.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
22nd Jun 2020 12:21

That's incorrect per my above comment and the nominee accounting (if relevant) is fairly trite.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
22nd Jun 2020 13:02

Rather than simply saying that it is incorrect, it would be helpful if you could explain why settlement, in cash, of the transferor's liability would not be seen as cash consideration (ie if the company pays the liability as the vendor's nominee). You might also want to explain what your credit entry would be on the company's balance sheet.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
22nd Jun 2020 13:26

I think you have a fundamental misunderstanding of s162 and suggest you read the legislation. The only relevant cash that could cause a problem is cash of the vendor that is not transferred to the buyer - but that is legislatively excluded as being a problem. The buyer's cash is neither here nor there except to the extent it pays for any assets (in which case a CGT rollover apportionment is needed). Any liability assumed in the deal is already excluded as consideration for the shares by concession (it is not really assumed in the 1st place assuming there's no novation*). I'll end there.

*just like you don't assume a seller's mortgage (by novation) with Barclays even though you (coincidentally) have a mortgage with Barclays too for the exact same amount to buy their house.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
22nd Jun 2020 13:35

I think you'll find that I know exactly how s.162 operates.

"The buyer's cash is neither here nor there except to the extent it pays for any assets (in which case a CGT rollover apportionment is needed)"

That is exactly the point that is being made - if the liability is not being assumed/transferred/novated but the company instead simply agrees to pay off the vendor's liability for him - in cash - in return for transfer of the property what makes you think that cannot be deemed to be non-share consideration for the property?

Why won't you answer the question - what would your credit entry on the balance sheet be?

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
22nd Jun 2020 13:43

Crumbs! Either the buyer is paying cash to discharge its own liability (re its own refinancing or less likely a novation) or it's paying someone else's liability and if it's the vendor's as part of the deal then obviously you simply to a CGT apportionment as I explained above. It is not complicated is it!?

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
22nd Jun 2020 13:50

'"I will take this property off your hands and in consideration settle the outstanding mortgage for you" - that, it seems to me, might restrict s.162.'

Your response was that that statement is incorrect.

You now say that a CGT apportionment would in fact be required. So, make your mind up time. (And sweep up those crumbs.)

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
22nd Jun 2020 14:07

It is incorrect as that never happens in practice for very obvious reasons as that would restrict/negate the s 162 relief (besides the fact that it is a totally pointless and ridiculous arrangement) and what was (very obviously*) meant was a nominee arrangement (but you have failed to grasp that very simple and very obvious point).

*"However, if not every indivudal mortgage is novated, and the Partnership still retains the mortgages, which are paid off by Limited,"

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
22nd Jun 2020 14:40

There was nothing obvious about what was meant - which is why I suggested that the OP might want to explain how/when the liability was to be paid off.

You have at least agreed with me that in theory such a payment would restrict s.162 relief - which is the only point that I was making. To suggest that it is incorrect simply because it might never happen in practice, and/or because it would be a ridiculous arrangement, is just a typical JB nonsequitur.

Thanks (0)
Replying to Justin Bryant:
avatar
By whitevanman
22nd Jun 2020 13:37

Does not S62 refer to assets (etc) being transferred, wholly in exchange for shares?
If the properties are mortgaged, you firstly need the agreement of the mortgagor to any transfer (which seems a non-starter).
If the transfer is made with some agreement that the purchaser will settle the outstanding mortgages, is that not additional consideration? In which case the transfer is not wholly in exchange for shares.

Thanks (1)
Replying to whitevanman:
avatar
By jasonowsky
22nd Jun 2020 14:01

That was our concern about the transfer.

Thanks (0)
Replying to Wilson Philips:
avatar
By jasonowsky
22nd Jun 2020 14:04

Hello, it seems clear that if the mortgage was left in the original partnership, and was paid off by Limited, that is a cash consideration and restricts s162.

Thanks (1)
Replying to jasonowsky:
avatar
By Justin Bryant
22nd Jun 2020 14:19

Not if done as nominee per my above comments (there is no point doing it any other way (if the lender won't refinance) and you would be likely sued for negligence for suggesting otherwise). At worst you'd advise it was a director's loan account & not sale consideration (even that's daft advice - which shows what nonsense it is to treat it as sale consideration when you don't have to).

Thanks (1)
Replying to Justin Bryant:
avatar
By jasonowsky
22nd Jun 2020 15:26

Apologies, you had made that crystal clear and nominee route is certainly something we need to look at

Thanks (0)
avatar
By Justin Bryant
22nd Jun 2020 11:51

.

Thanks (0)
avatar
By jasonowsky
22nd Jun 2020 14:06

Thank you so much everyone for all your help. It is much appreciated, and has been extremely informative. I apologise if it has started any disputes between members; but everyone's input has been brilliant and it is valued and listened to equally.

Thanks (0)
Share this content

Related posts