Help Please! on how to structure a property transaction

[dredd29]

Dear Forum,

Please help with this general scenario as outlined below:

1. Mr & Mrs X have a Principle Residence
2. Mr & Mrs X get a planning permission to build two semi-detached houses in the Principle Residence Garden
3. Mr & Mrs X set up a SPV Ltd company with Mr & Mrs X both being Directors to build and sell the houses for a revenue of £800k
4. Mr & Mrs X sell our Principle Residence consented land to the SPV for £400k
5. Mr & Mrs X employ a builder the Development cost is £400k and the SPV makes minimal / zero profit

For the one off payment of SDLT on the £400k land by the SPV will there be any tax liability, i.e. Corp Tax and / or CGT Personally on the Directors.

Is this a viable route to take when considering the following points and any others that you can think of:

• Selling land to yourself / a company that we are Directors of and arms length transaction rules
• Whether it attracts a capital gains for us personally
• Directors loan rules when the company owes you £400k

Thank you forum experts for your help.

[SteLacca]

My first question is how big is the garden (prior to commencement of the building). If more than 1/2 hectare, then HMRC are likely to deny private residence relief since the property is not required for the reasonable enjoyment of the property (if it were, they wouldn't be building on it) and CGT will be chargeable at MV on the disposal to the SPV.

[dredd29]

Hi there

The whole property boundary of the entire residence is about 0.5 Acres (circa 0.2 Hectares) and the building plot land split is about a quarter of this entire area.

Thank you for your assistance.

[SteLacca]

The disposal of the property to the SPV will be free of capital gains tax since, on the basis of what you have said, 100% private residence relief will be available. There shouldn't be any inheritance tax issues either, provided the £400k sale price represents a fair market value.

As you have identified, the SPV will pay SDLT on the purchase (including the extra 3% residential property premium), but then until profits, if any, are made there should be no further tax liability. Obviously, if the company (I assume the SPV is to be an incorporated company) makes a profit then there will be corporation tax to pay.

The debt from the company to the directors does not, of itself, give rise to any tax complications, either personally or for the company.

Any part of the original debt drawn down from the company is done so tax-free. This is simply owed money, and so not income. However, if the company does turn a profit, then withdrawing that profit (after corporation tax) will, of course, give rise to a personal tax liability. The amount will depend on the nature of the withdrawal, and you have options to take salary (tax payable at either 20% or 40%, or maybe even 45%, but offers relief in the company against profits for corporation tax purposes), dividends, taxable at 7.5%, 32.5% or 38.1% on dividends in excess of £5,000. No corporation tax relief available and can only be paid from distributable relief. or capital, subject to CGT at 10% or 20%.

With regards to CGT, if the SPV is involved with the development and sale of property, arguably it is a trading company, which means that provided other conditions are met (12 months ownership, minimum shareholding etc.) withdrawal may qualify for entreprenuers relief and the gain would all be taxable at just 10% (on any excess above the annual exemption).

The risks are that is the project makes a loss, using an SPV will not afford you any opportunity to utilise those losses in order to mitigate tax payable elsewhere. In such a circumstance, you are also unlikely to recover the full value of the loan to the company.