I agree with your points a) and b) but, as I said 6 years ago, the contractual obligation to pay the 5% capital sum is just a simple debt the borrower has incurred to pay to the lender (along with the obligation to repay the loan principal and loan interest).
As such it is exempt from cgt by s251 (1) tcga.
In answer to what an earlier respondent queried, satisfaction of a debt - ie repayment of it - is deemed to be a disposal of the debt by s251(2).
It is true that the right to the 5% is a chose in action but that is simply because debts are a species of chose in action. All debts are choses in action.
But since this right to receive the 5% is a chose in action in the form of a simple debt the repayment of it is exempt from cgt by s251(1) because repayment of a debt is satisfaction of it which is deemed by s251(2) to be a disposal of it.
When I do this sort of transaction I use words such as “the amount repayable on the loan shall be equal to the principal amount advanced plus x% of the gain made on disposal of the asset acquired with the funds advanced”.
That makes it absolutely clear that the x% is part and parcel of the repayment of the debt and therefore the gain to creditor is exempt from cgt by ss251(1).
This is a useful way for parents and grandparents to help younger family members to buy their first house because the gain on the sale of the house is exempt because of the Private Residence exemption while at the same time the gain on the repayment of the loan is exempt by s251.
Yes, but when the mortgage lender finds out about the breach they will surely try to foreclose and enforce sale of the property.
If that is not possible because the trust deed really did legally transfer the beneficial ownership to the mother they will surely sue the son for the money anyway.
Using the online HMRC Capital Gains Tax Worksheet, I have not found any problems in inputting a (deemed) acquisition date that is after the (also input) actual disposal date because of the 30 day rule.
After all, the deemed (post-disposal) acquisition date is the correct acquisition date to use because of s106A(5) TCGA.
If the purpose of the payment to the limited company is just to avoid the individual paying higher rate income tax, it will not work.
This is because, for the individual to get an income tax deduction, the payment must be for a legitimate business expense (which a payment just to reduce tax would not be).
HMRC might well argue that the re-acquisition in the ISA was made "in some other capacity" than the prior disposal outside the ISA (see s106A (3) TCGA) so that the 30 day identification rule would not apply.
Should also have said it will be a part-disposal using the
A/A + B formula in s42 TCGA .
Alternatively, depending on the legal documentation, the £2 million might be for the grant of an option to purchase the land, in which case s144 TCGA might apply to subject it to CGT.
...seems to be that the 5% gain would be capital, not income.
It is certainly not akin to interest, as was suggested by an earlier respondent, because interest necessarily increases the longer a debt is outstanding over time. But, in this case, the amount payable might not increase at all over time if the value of the property did not increase or if it fell.
The suggestion that the 5% is an interest in the subject property is imaginative but unlikely. A sum that is calculated by reference to the increase in the value of an asset is not, ipso facto, an interest in the asset itself.
In any case, creating an interest in real property requires certain legal procedures which seem to be entirely absent here.
The more straightforward view is that the 5% is just a contractual right to a payment that arises if and when the property is sold or the loan is repaid.
A contractual right to payment such as this is a simple debt so, contrary to what the earlier respondent wrote, s251 tcga would apply to exempt the gain from cgt because by s251(2), the satisfaction of a debt is deemed to be a disposal of it.
This... ...looks like capital gainrather than income and because it arises on the repayment of a simple debt is probably exempt from CGT under s251 tcga 1992.
My answers
I agree with your points a) and b) but, as I said 6 years ago, the contractual obligation to pay the 5% capital sum is just a simple debt the borrower has incurred to pay to the lender (along with the obligation to repay the loan principal and loan interest).
As such it is exempt from cgt by s251 (1) tcga.
In answer to what an earlier respondent queried, satisfaction of a debt - ie repayment of it - is deemed to be a disposal of the debt by s251(2).
It is true that the right to the 5% is a chose in action but that is simply because debts are a species of chose in action. All debts are choses in action.
But since this right to receive the 5% is a chose in action in the form of a simple debt the repayment of it is exempt from cgt by s251(1) because repayment of a debt is satisfaction of it which is deemed by s251(2) to be a disposal of it.
When I do this sort of transaction I use words such as “the amount repayable on the loan shall be equal to the principal amount advanced plus x% of the gain made on disposal of the asset acquired with the funds advanced”.
That makes it absolutely clear that the x% is part and parcel of the repayment of the debt and therefore the gain to creditor is exempt from cgt by ss251(1).
This is a useful way for parents and grandparents to help younger family members to buy their first house because the gain on the sale of the house is exempt because of the Private Residence exemption while at the same time the gain on the repayment of the loan is exempt by s251.
Yes, but when the mortgage lender finds out about the breach they will surely try to foreclose and enforce sale of the property.
If that is not possible because the trust deed really did legally transfer the beneficial ownership to the mother they will surely sue the son for the money anyway.
Using the online HMRC Capital Gains Tax Worksheet, I have not found any problems in inputting a (deemed) acquisition date that is after the (also input) actual disposal date because of the 30 day rule.
After all, the deemed (post-disposal) acquisition date is the correct acquisition date to use because of s106A(5) TCGA.
If the purpose of the payment to the limited company is just to avoid the individual paying higher rate income tax, it will not work.
This is because, for the individual to get an income tax deduction, the payment must be for a legitimate business expense (which a payment just to reduce tax would not be).
What management services would the limited company supply?
How could it do this without employees or subcontractors?
HMRC might well argue that the re-acquisition in the ISA was made "in some other capacity" than the prior disposal outside the ISA (see s106A (3) TCGA) so that the 30 day identification rule would not apply.
Should also have said it will be a part-disposal using the
A/A + B formula in s42 TCGA .
Alternatively, depending on the legal documentation, the £2 million might be for the grant of an option to purchase the land, in which case s144 TCGA might apply to subject it to CGT.
CGT would still apply because there would be a deemed disposal as a capital sum has been derived from an asset(the land) so s22 TCGA applies.
The consensus...
...seems to be that the 5% gain would be capital, not income.
It is certainly not akin to interest, as was suggested by an earlier respondent, because interest necessarily increases the longer a debt is outstanding over time. But, in this case, the amount payable might not increase at all over time if the value of the property did not increase or if it fell.
The suggestion that the 5% is an interest in the subject property is imaginative but unlikely. A sum that is calculated by reference to the increase in the value of an asset is not, ipso facto, an interest in the asset itself.
In any case, creating an interest in real property requires certain legal procedures which seem to be entirely absent here.
The more straightforward view is that the 5% is just a contractual right to a payment that arises if and when the property is sold or the loan is repaid.
A contractual right to payment such as this is a simple debt so, contrary to what the earlier respondent wrote, s251 tcga would apply to exempt the gain from cgt because by s251(2), the satisfaction of a debt is deemed to be a disposal of it.
This...
...looks like capital gainrather than income and because it arises on the repayment of a simple debt is probably exempt from CGT under s251 tcga 1992.