Question

How does England treat special assessment debt compared to the U.S?

Answer 1

Special Assessment in USA

Special Assessment Accounting ISSUES

Amortization Schedules

When interest is charged on a special assessment and there are varying amounts of the special assessment (depending on ownership percentage, for example), then separate amortization schedules must be maintained for each special assessment.

When unit owners choose to pay more or less than the set monthly fee, their individual amortization schedule must be adjusted accordingly.

No computer software used by Associations is able to process these individual amortization schedules. Thus, this is a separate effort by the accounting department.

When the Special Assessment is tied to a Loan

There can be a timing issue with regards to the beginning of the loan and the beginning of the special assessment. These may not coincide. Or, the loan may be an interest only construction loan until it converts to a regular amortized loan. These timing issues may result in differences of interest rates or differences in the amount of the loan payment versus the special assessment income.

When a unit pays off their portion of the special assessment, their interest stops. Thus, that payoff should be immediately applied to the loan to stop the interest on the loan. There needs to be procedure in place to ensure that these monies are not inadvertently kept in the bank account and used for operating expenses.

When the payoffs of special assessments occur, the amount of special assessment income is now less than the amount of the loan payment. If enough members payoff, this difference can be significant. The loan may need to be re-amortized. Some loan documents only allow a specific number of re-amortizations or after a certain period of time.

Special Assessment in UK

Loans that qualify

To qualify for relief the loan must be to a borrower who:

• is resident in the UK
• uses the money wholly for the purposes of a trade
• uses the money to set up a trade, as long as they start trading

A trade includes a profession or vocation, but doesn’t include money lending. If the loan is made to a company, that company can pass the money to another company in the same group to be used in that other company’s trade.

Loans may include credit balances on a director’s loan account but not ordinary trade debts. Exceptionally, trade debts may qualify for relief if there’s a specific agreement to extend the period of credit beyond what’s customary for the trade concerned. But you can’t claim an allowable loss if you’ve claimed the bad debt as a trading expense.

The loan must not be a security. If the loan is a security but not a QCB the ordinary rules of Capital Gains Tax will allow you to claim an allowable loss if the loan becomes worthless. If the loan is a QCB and was made before 17 March 1998 you may be able to claim a separate relief. Ask HMRC for advice on Self Assessment.

‘Irrecoverable’ and what it means

Relief is only due if the loan has become irrecoverable. This doesn’t mean merely that the borrower can’t repay the loan at the date you make the claim. You have to show that there was no reasonable prospect of the loan ever being repaid. If the borrower continues to trade this test is unlikely to be satisfied.

The loan must have become irrecoverable. Relief won’t be due if the loan was irrecoverable when it was made. If you make a claim shortly after making the loan this may cast doubt on whether the loan was ever recoverable. The loan must not have become irrecoverable as a result of the terms of the loan or some act or omission by the lender.

Note : As the Question is not that clear so the answer given accordingly.