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
