How changes in TOGC affect transferring assets for property investors

Chris Street

9th October 2016

Hints on how changes in TOGC affect property investors from Optimise Accountants

As the company founder and one of the property tax specialists at Optimise Accountants I came across an interesting series of news items today, and having reviewed them and considered the implications on our buy-to-let property investment clients, I wanted to share the updates on transferring assets on property.

What is TOGC?

By formal definition, a transfer of a business as a going concern for VAT purposes (TOGC) is the sale of a business including assets which must be treated as a matter of law, as ‘neither a supply of goods nor a supply of services’ by virtue of meeting certain conditions. There has recently been a change in legislation around the Transfer of a Going Concern (TOGC) for properties in the UK, and it could have considerable implications for buy-to-let property investors.

You can transfer a commercial property from one entity to another free of VAT provided that the asset and business within continues under the new owners. An example is whereby Mr A has commercial offices which he rents out to tenants. Provided that Mr B who is buying the property continues to rent the offices to existing or new tenants then there is no VAT to pay. What’s more is that Stamp Duty Land Tax (SDLT) would also be charged on the property price plus VAT. By avoiding VAT you will also reduce SDLT. You could say you have hit two birds with one stone.

The HMRC has changed its interpretation of TOGC. What is important to appreciate is that as far as the HMRC are concerned, TOGC rules are mandatory not optional. So, therefore, it’s critical to establish whether a sale of property is or is not a TOGC.

Crunching the numbers

The HMRC has clearly outlined recent changes, and what property investors need to be aware of – I advise that buy-to-let property investors review these new changes.

The first series of changes from the HMRC can be found here.

Updates and new 2016 HMRC changes should be reviewed here.

Details on the implications on VAT should be reviewed here.

The main points to note are that:

  • HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge).
  • Where more than one property is transferred at one time, this test should be applied on a property-by-property basis rather than for the entire portfolio.
  • If the interest retained by the transferor represents more than 1 per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

Property tax legislation can be complex and confusing, and I appreciate how buy-to-let property investors can at times feel swamped by rules and regulations from HMRC. I’m here to help and advise.

An example of TOGC

Here’s a simple but useful example of TOGC for property investors to consider:

A property investor with a Limited company owns the freehold on a building worth £1 million, which he rents out commercially. He sells that property rental business by granting a 999-year-lease to another property investor, under which he is entitled to receive a ground rent of £100 each year.

The value of that right, with any and all other rights retained by the first property investor, is £2,000. As long as all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2% interest retained as too small to disturb the substance of the transaction.

Reduce property tax

Some of the key areas my team of property tax specialists advise property investors on include:

  • How to minimise property tax
  • How to reduce CGT
  • How to reduce tax on HMOs

To find out more about how my team of expert property tax accountants can advise further on TOGC and allowable costs to offset against property income, please feel free to get in touch here.

How to engage with us

If you want to understand how to successfully navigate around TOGC or to discuss other finance/tax questions, then please book some time with me and my team using the below calendar.

Please use the redeem code “Article 33” to get 33% off your next consultation call.

If you are looking for a new accountant, then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.

Book a call to see how we can help you.