Many deals, especially development ones, are held in a company. There are many tax benefits for holding a property in this manner.
We are looking at a deal where the clients have held a property for about 38 years, they happen to own their business as well as the property in the same limited company. Not ideal. Ideally, things should have been kept cleaner by keeping the business in a separate company. But it is what it is.
By selling the company the owners would benefit from business asset disposal relief, formerly known as entrepreneur’s relief. This means the owners, if they qualify, would only need to pay 10% on their gain.
It is no wonder then the property is not being sold, it is the company which owns the asset which is being sold, a share sale.
In purchasing, there is a benefit in stamp duty, which only comes to half a percent. However, the company will be pregnant with a capital gains liability, if the property was ever sold by the company, the capital gains liability would be massive.
Therefore, you are financially restricted to selling only the company on again, when the time for disposal comes.
There are various creative ways of neutralising a capital gain within the company, but this is not straight forward. The other point of consideration is when you purchase a company you inherit all the potential liabilities. Therefore, a lot of work needs to be done by the lawyers to ensure this is cordoned off properly.
If this transaction goes ahead we would look to be using a firm who specialises in share purchases to ensure we do not inherit any time bombs. Currently, we are in negotiation regarding the price. Unfortunately, as it happens, previously an offer was made, accepted and then they didn’t perform. This has meant, rightly or wrongly, this figure has stuck in the vendors’ heads. Either in time they will come down, or the purchaser will come up to their level. We will keep tracking the deal, and keep nudging the agent. Time will tell.
On another topic, we have a smaller deal which was being purchased by our client. In the last moment, the vendor managed to get repossessed, not by a ghost but by the lender. The property then disappeared from our client clutches, but has now reappeared in the auctions. This scenario is a déjà vu of a similar transaction which we had exchanged on many moons ago. The property consisted of a block of five flats which we purchased from auction for £1.1M and then promptly sold on for £1.3M; without ever having to complete the deal. The salient point here is the property was sold with unknown tenancies. However, we had managed to obtain information that these were all ASTs, hence, we acted and took the decision to purchase.
This flat has a similar concern, the property is being sold with tenancies unknown by the receivers, often the case with repossessions. Therefore, I expect this flat will go for a fraction of what it is worth. We would be looking for at least a 30% discount; rare to obtain at this level.