Investment in property as a landlord, whether it be residential or commercial, is known by most smart investors as a long term game. The value of property will rise and fall in conjunction with the economic climate, but historically, real estate as an investment has outperformed all other mainstream forms of investment over a 10 year period.
Whilst that long term view is accepted at the outset of an investment project, circumstances can and will often change, forcing the investor to liquidate his or her asset, despite the fact that projections show its value to be on the increase.
There are countless reasons as to why any commercial property investor would need to do this, but this article is not concerned with those reasons. The question being posed is whether or not a commercial property can be sold as a going concern, and the simple answer is yes it can.
Whilst the logistics of doing this can be fairly complex, the biggest issue that any commercial property owner needs to be concerned with if selling their property as a going concern is VAT.
As a commercial landlord, you are running a business, and if your rental income exceeds £85,000 then you will have to register that business for VAT. Under UK trading rules, the sale of a commercial property can be regarded as the Transfer of a Going Concern, and this can prove to be a major benefit to purchasers, both in terms of tax savings and cash flow.
It goes without saying that the transfer of any going concern should come under the scrutiny of your legal advice team, as a poorly executed transfer of a going concern (TOGC) can have some very serious consequences for you as the seller.
The HMRC can actually deem a transfer as a Failed TOGC even after that sale or transfer has been completed. This can mean that the sale of the commercial property could fail to qualify as a TOGC, at which point you, as the seller, will be liable for the payment of any VAT that is due.
This leaves the seller in the rather uncomfortable position of attempting to recover that VAT from their buyer, and all once the deal has already been completed. Many commercial property owners factor this into the terms and conditions of the sale, with both parties agreeing that, in the event of the commercial property’s sale not qualifying as a TOGC, that the buyer will assume responsibility of the payment of any outstanding VAT.
However, even though many companies do recover 100% of the VAT that is due, the HMRC will usually impose penalties at a percentage rate of the VAT in question. In some instances, those penalties can be incredibly high.
Clearly it is important to understand just what qualifies the sale of a commercial property as the transfer of an on going concern. There are certain stipulations in place of which both seller and buyer should be aware:
First, the assets must be sold as a business as an on going concern. This is a very important distinction, as you are not simply selling a commercial property here. Both parties need to be made aware of this at the very outset of negotiations and all documentation must support the nature of the transaction.
It is possible to sell only part of the business as a going concern. As a result, this part must be able to continue to operate independently once the transfer is completed.
HMRC will put up a red flag to any business which is seen to be conducting immediately consecutive transfers of a business. If a series of transfers is identified, suspicions can run high, causing much higher likelihood of a failed TOGC.
Assuming that the seller is a VAT registered business, the buyer must be someone who is subject to UK taxation, and if not, must become so before the transfer can be completed.
Maintain the Business
One of the more obvious ways to ensure that the HMRC see your commercial property sale as a transfer of a going concern rather than a straightforward sale is to sell to buyers who intend to operate an identical, or at least very similar business to your own.
To be clear, it’s not necessary for any trading names or even business assets to be maintained, just as long as the new owners are working in the same kind of business as the seller.
Very often, the new owners will legitimately be taking over the operations of your business. They may recognise it as a profitable investment without the need to make any changes at all. Indeed, how often have we all entered either a store or restaurant to be greeted by a sign advising us that they are Under New Management? Nothing about the business might change, apart from the owners.
Transferring Land or Buildings
This article is about selling commercial property as a going concern, and not about transferring businesses themselves. When property is involved, there are certain regulations to which both buyer and seller must adhere.
The buyer is required to notify the HMRC that he or she has taken the option to tax the land and/or buildings before the transfer date. Furthermore, the buyer must have notified the seller that their option to tax will not be removed before said date.
Saving More Tax
Stamp Duty Land Tax is a mandatory charge on the purchase of all land and buildings. It is calculated on a sliding scale against the final sale price. For commercial property, the first £150,000 falls under the threshold and is therefore not taxed. From £150,001 up to £5m the rate is 1% and thereafter the rate is 2%. Therefore the sale of a commercial property with a value of £750,000 would incur a Stamp Duty Land Tax Charge of £6,000.
In the case of the transfer of a going concern, that Stamp Duty would be charged against a sale price which includes VAT, thus creating a tax on a tax. As a consequence, if all TOGC conditions are satisfactory to the HMRC, then the Stamp Duty on the VAT element can be removed, resulting in a decent saving for the buyer.
So, can a commercial property be sold as a going concern? Well it’s by no means straightforward, and as such you need a good team behind you to help. We at Prideview are experts when it comes to commercial property in London. Let us know how we can best help you by contacting us on 020 8863 8680.