Can a Limited Company defer CGT by reinvesting?

by Readers Question

13:46 PM, 26th October 2015
About 3 years ago

Can a Limited Company defer CGT by reinvesting?

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Can a Limited Company defer CGT by reinvesting?

I would like to ask whether a Limited Company can defer tax by reinvesting a capital gain.defer

To clarify what is meant by “reinvesting a capital gain” let’s consider the following example:

In 2013 ABC Limited purchased a property for say 300k and spent say 100k on renovation. The property is not rented so the company has no revenue and has not made a profit, although it has on its books an asset worth 400k and a liability of 400k being a loan from shareholders.

An opportunity now exists to sell that property for 500k and reinvest in a new property costing 600k. The shareholders are prepared to lend the company an additional 100k to provide the company with the funds to proceed. If it does so the company will then have a liability in respect of loans from shareholders of 500k but will have assets of 600k arising out of the ” sale and reinvestment”.

Let’s assume that in a couple of years the company will sell this 2nd property and not reinvest so that the aggregate capital gain from both investments will then flow through to Corporation tax due to it being profit arising from disposal of assets.

So my question is whether the reinvestment in a 2nd property this year will assist to defer the corporation tax that will ultimately be payable on the capital gains until these are actually realised by divestment ( i.e sale without reinvestment)?

Or alternatively will the company have to pay Corporation tax this year on the capital gain on the 1st property regardless of the fact that this is not realised into cash due to the reinvestment?

Many thanks

Tom



Comments

Joe Bloggs

23:52 PM, 27th October 2015
About 3 years ago

someone has put an incorrect heading; dont think there is CGT on ltd companies?

im not an accountant but would have thought you cannot defer the corp tax on the profit you made from building 1. surely the company is merely reinvesting this profit by buying building 2.

Simon Lever

18:46 PM, 28th October 2015
About 3 years ago

Hi

Your question raises all sorts of issues, many of which I think you did not anticipate.

Firstly, I assume the property is a residential one as you are posting on this site. Some of the matters below will be the same if it is commercial but some will be different.

As the company has disposed of an asset and has realised a gain then there will be tax to pay on the capital gain. Unlike the situation for an individual the gain is taxed at the corporation tax rate of 20%. There is no annual exemption that can be used.

The gain is calculated initially in the same way as for any other gain. However as the gain is made by a company it can claim indexation relief on the cost and improvements since purchase.

Therefore depending when the property was purchased initially and when the improvements were made a substantial part of the gain can be mitigated by the indexation. Tax is payable on the net gain. Indexation cannot be used to create or increase a loss on the disposal.

What you are looking for is rollover relief on the gain into a new property. This is only available if the property disposed of and the new one purchased are occupied and used by the company for its trade. Letting of property is not a qualifying business on which rollover relief is allowed.

And to correct your final point the gain is realised as the property was sold. At some point there would be cash in the bank (the company’s or the solicitor’s) before the new property was purchased.

There are some other issues which your question raises:

• If the shareholders have borrowed money to put into the company then they may be able to get tax relief against their own tax for the interest that they pay.
• The shareholders could pay themselves interest from the company at commercial rates as a way of extracting money from the company without having to use up the new £5,000 dividend limit. The interest would be taxable but the company would have to deduct 20% tax at source and pay this over to HMRC at least quarterly.
• If the new property is over £500,000 make sure that the company does not fall foul of the ATED regime if one of the shareholder’s family live in the property.
• From 5 April 2015 if the company is a non-resident company tax on the gains will now be payable.
• If the property is considered to be furnished holiday lets then rollover relief may be available.

None of the comments here should be taken as advice and any decisions you take should be thoroughly checked out with your own accountants and solicitors.


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