If the price is in excess of £500,000, for example, the stamp duty payable for commercial assets is an additional 4%.
However, HM Revenue & Customs (HMRC) does take into account the fact that, in the sale of a trading business, an element of the price may not be attributable to the heritable asset.
Potential stamp duty savings have developed as market conditions have changed.
In the past HMRC took the view that, because a business is a trade-related property, it is often incapable of being sold separately from the heritable asset. As such, there was likely to be no free or transient goodwill in such businesses and mitigating stamp duty was difficult.
HMRC’s approach has changed since the Balloon Promotions v Wilson case in 2006 (SPC S24).
Surprisingly, many purchasers are still not taking advantage of potential stamp duty savings which have developed with changing market conditions in recent years.
The matter has been complicated by various commentators’ interpretations of fair value, goodwill, operational entity, etc.
HMRC provides clear guidance on its website at www.hmrc.gov.uk/svd/goodwill-overview.htm.
The guidance states that, for capital gains and stamp duty land tax purposes, “the value of goodwill and any other separately identifiable intangible assets will usually be represented by the difference between the value of the business as a going concern and the value of the tangible assets (the property, fixtures, fittings, chattels, etc.).
The practice note identified on the HMRC website refers to the RICS Red Book Guidance Note 1 for the valuation of an operational entity.
When a trading hotel, public house or restaurant is sold, the purchaser has the benefit of:
• an established trade with financial accounts and records
• an established customer base which may be regular customers returning on a weekly or monthly basis
• established suppliers
• the staff of the business.
However, in the current market, the gap between properties which are sold fully equipped, ready to operate but closed, and, typically today, in administration, and properties which are sold as trading entities, has widened very significantly.
The goodwill apportionment for stamp duty purposes is most easily calculated by assessing the value of the property and business if sold as a trading entity on the open market and the value of the property fully furnished and equipped but sold closed without the benefit of financial information.
The gap between these two values in the current market can be broadly anywhere between 20% and in excess of 50%.
If, for example, a hotel which has a going concern market value of 6.5 times an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation – essentially profit) of £100,000, the market value would be £650,000. However, if the property were sold fully furnished and equipped but closed, the multiplier could typically fall to around 4.0 times potential EBITDA or £400,000.
Therefore, the calculation for stamp duty land tax purposes would not be the sale price of £650,000 but, instead, the value of the asset, excluding goodwill, of £400,000. This makes a very considerable saving, reducing the stamp duty payable from £26,000 down to £12,000, a saving of £14,000.
• Alan Creevy is a director of CDLH.
Images – Alan Creevy said stamp duty can add a considerable cost to property transactions for larger businesses like hotels.