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Making Money Is Only Half The Story

We  have  many  clients  who  approach  us  for  investing  into  CentralLondon  properties  and  they  successfully work with  us  and  purchaseeither high yielding properties or ones aimed at capital growth . Whenlooking  at  their  situations,  we  can  help  get  a  solid  return  on  theirmonies. But the biggest issue many of them are facing is not the returnon their money. The biggest single issue is one of Inheritance tax.

The current rates have been frozen at £325,000 per person and theplans are to freeze them until April 2015. Many of the Asians we workwith have worked hard to be  in a position where they are sitting on amortgage free residence in addition to having some property and otherinvestments for the future which will ease their next generation into lifeso they do not have the same financial struggle they did.

However the general reaction to IHT planning is to simply put theirhead into the sand. The chances are by the time many of them die theirresidential properties will soak up all or most of this allowance. Leavingtheir savings and property exposed to 40% tax.

Now we are not Tax experts, nor do we want to be.  Our business isproperty. When servicing clients we advise on the property and the bestway of financing the property ,but it’s a little bit like selling shoes andnot  shoe  laces. The  Tax  aspect  is  something which we  have  a  basicunderstanding of, both income and capital gains .  IHT seems to be thebiggest threat in years to come.

Accordingly we are partnering up with  tax  specialists and compa-nies which  arrange  off  shore  structures where  our  clients  can  go  toensure their position is water tight. This could be off shore or onshoredepending on the comfort level of the client. The main point we look atis whether  the  advice  is  guaranteed,  this normally means  there  is  aninsurance policy in place to cover the cost of any investigations. Thereare many  solutions even onshore  for  those who are uncomfortable  ingoing offshore for example one which involves setting up a trust where-by the donor can exercise some control on the original gift and then giveaway any future growth. This may also be beneficial from a cost pointof view as setting up and maintaining the offshore structure may provetoo expensive.

Many  accountants  shy  away  from  the more  aggressive  tax  savingtechniques,  this  is  I  suspect more  to do with  some of  these  structurebeing outside of their comfort zones than the best way to minimise taxfor clients .

It  seems  this will affect  even modest working  class people  if notaddressed and dealt with early on.

On the capital gains side the recent budget reinstated the prevailingsystem which is that  capital gains will be taxed at the income tax ratethe individual is on, which is 18% for basic and 28% for higher rate lay-ers.

This then begs the question why would a higher earner sell a prop-erty  to  realise  their  gain.  For  example  if  a  property  has  increased  invalue by £100,000, by selling you would incur agents fees of 2.5% + vatplus legal fees lets say £1,000. This comes to £4,000. So you’re left with£96,000.  Take off the tax at 28% and allowing for the annual allowanceof  £10,600 which will  reduce  the  burden  to  £16,280,  this  leaves  youwith £79,720.

You can also remortgage to release your gain at 80% LTV . Then youwill release £80,000 and you pay no capital gains  tax and you benefitfrom holding  the property which hopefully means  further growth andcontinuous  income. The  component  you would  have  paid  to  the  taxman will instead be a piece of the property which is growing for you.

Capital Gains Tax is only liable at point of sale, if you don’t sell youdon’t pay. Contrary to popular belief you don’t ever have to sell proper-ty, it can simply be passed down generation after generation especiallyif the correct structure is in place.

Suresh Vagjiani

MD Sow & Reap

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