Recently, we were introduced to a client who requires a mortgage for a large transaction in Central London, of £6M. He has a couple of BTL properties in the background, which he accumulated by each time upgrading his residential home. I think they call this the accidental landlord. He runs a venture capital fund which has a large piggy bank with the aim of investing into companies and then through improvements trebling or more their investment.
Our introduction was in order to sort out the mortgage for the proposed purchase. At this sort of level its worth examining a couple of things. One is the stamp duty payable, and the other is the best structure to make the purchase in, as part of the process. There are 49 reliefs for stamp duty which the typical solicitor is ill equipped to understand, let alone implement. Yet most never even ask the question.
What was surprising for me was one would have thought someone who has a high level of financial sophistication would have thought of these questions. It turns out he hadn’t even thought to ask. The question needs to be asked, even if you end up right back in your current position; which was the case in this scenario. However, what was picked up were the BTLs he has accumulated in the background. They are held in personal names and therefore do not benefit from the ability to offset the interest element of the mortgage against the rental income. As both are high value properties this means a high level of taxation applied on the rental.
If one were to ‘transfer’ the property into a company this would involve a stamp duty being charged by the purchasing entity, and a capital gain to be paid by the sellers. These two levies would render the exercise uneconomical. However, there is a solution which is known as incorporation, if certain criteria can be met the properties can be ‘incorporated’ into a corporate structure, bypassing the need for these two taxes. Often people pay more attention to the gross profit of an investment, than they do to the net profit.
It is the net profit you end up actually enjoying. This case is being looked at now in a holistic manner, which involves not just this issue, but is being looked at with a far wider lens, including analysing inheritance tax planning as well.
There seems to be an agenda, as things are being tightened in the economy, to go after property landlords. The general perception is they seem to be hoarding all the nation’s wealth and this needs to be extracted, even if the principles are unreasonable.
The above example is indicative of the general lack of planning which goes into property investing. At least the question should always be asked.