Property given in lieu in of debt

[aidious]

Hi, I'm wondering if any of you can help me with a tax query I'm struggling to solve.

Our company had an unconnected debt from a company that went into liquidation. As part of the liquidation, we received a property in lieu of the debt (transferred at £450,000 which I believe was market value), so we credited this amount to the P&L. We then sold the property quite quickly, but only for £350,000, so we included an impairment of £100,000 in the accounts, leaving the £250,000 credit taxable in the P&L.

My questions are:

1. As the property was in lieu of a trade debt, is the credit taxable as trade. If so, where in the legislation is this stated - I can't find anything myself.
2. Similarly, assuming it is taxable as trade, is the impairment an allowable trade deduction (like a bad debt write off is). Again, is this in the legislation anywhere?

Any help would be greatly appreciated.

Thanks a lot

CD

[section 44]

Remember that SDLT would be restricted to market value. Is mv really £450k if you sold it for just £350k?

[Incredulum]

And similarly that the chargeable gain calculation is restricted to market value. I find it difficult to believe that the company has accrued such a hefty capital loss. It's not very helpful for the company either - presumably a trading loss would be more helpful.

I don't understand where your 250k credit to the P&L is from, either. Or had you already written off the bad debt?

[aidious]

Hi, thanks for your responses so far. I am primarily wanting to know the treatment for corporation tax purposes.

Sorry, I said 'credit of £250,000' - I meant credit of £350,000 (this being the £450,000 value transferred to us less the £100,000 impairment), which is the amount the company effectively received for it.

The property was transferred to us at £450,000, the value used in the liquidation so presumably the market value. Our company only rec'd £350,000 hence the £100,000 impairment. Perhaps we could only get £350k as wanted to sell the property quickly.

We are thinking that CGT is not in point - the property was payment for a trade debt, so we are assuming it should be treated as a trade credit and not capital. We just need the legislation to back this up.

Thanks for your help so far

[Incredulum]

I don't understand where your 250k credit to the P&L is from. Or had you already written off the bad debt?

[PKIB]

It seems very odd that the liquidator settled a debt with the creditor by transferring an asset which turns out to be worth far less than the liquidator's estimate. Why not get the liquidator to sell the property and take the cash? There may be good reasons for the transaction, which will probably help answer the corporation tax question, but I am finding difficulty seeing what they are.

[aidious]

I'm not sure the motives behind the exact nature of the transactions are relevant to be honest. I've basically just been told to treat the transactions put before me correctly. The questions I'm asking myself are therefore is it a trade receipt, and is the write down of the debt allowable (as the result of the property fetching less than expected market value)

[Incredulum]

Answer: "I don't understand where your 250k credit to the P&L is from. Or had you already written off the bad debt?"

[Generix]

Was th property sold to a director of the company by any chance

[PKIB]

It is still not clear. Why was £350k taken to the P&L account if there had been an impairment against the debt of only £100k? I think this is the same question as incredulum is asking.

Taking a wild guess that the debt was secured on the property and that there were no other assets, the transfer will settle the debt which has been written down anyway, and the tax deduction taken under the loan relationship rules. It can only be mv that is brought into the accounts, whatever the liquidator says, and if there are other assets you should chase the liquidator for repayment which is a side issue from the tax query.