We have just received our architect’s proposals for the Pub we purchased a few weeks ago; the property was purchased freehold for £1.25m.
The sellers were insistent the VAT must be charged on this transaction, to the point where they would rather not do the deal than take off the VAT. It was a large group we were dealing with and like a group they had a herd mentality; blindly following process and procedures without thinking.
We were under a serious time pressure as there was a contract out already at a higher price, and at £1.25m even with the VAT this was an exceptional deal. So in the interest of securing the deal we agreed, and exchanged on the basis the transaction will attract VAT.
VAT is not supposed to be applicable if our intention is to purchase as a going concern. The seller’s solicitors claimed we had a different intention, i.e. we wanted to develop this into flats; they seem to have gotten this information from an agent whom we have never spoken to. The thing with the word intention is it’s something between you and your maker. It’s an intent, which is an intangible will.
This was actually untrue, and irrespective their policy was to charge VAT always. They claimed if it wasn’t due you can always claim it back. But if it was due and wasn’t paid they could be held liable from HMRC.
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VAT is something which can be claimed back and so at its worst involves a lot of time and chasing but it’s still not terrible, meaning at least we do not lose this money totally.
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The stamp duty however is to be paid on the full purchase price including the VAT element, on this basis we would be losing about £2,000 permanently.
After we exchanged however our client’s accountant was a persistent fellow and argued the point and managed to convince them that to be charging VAT on this transaction was illegal as we were purchasing on the basis of a going concern and therefore VAT is not applicable; even though it was in our contract, the contract is not above the law.
We put the other side on notice to say if we ended up paying VAT, which according to us was not payable we would hold them liable for any costs involved in reclaiming this back as well as the lost stamp duty.
Needless to say they looked at this policy more closely and came back and stated they would not indeed be charging us the VAT element. So we won the battle.
The property consists of a pub on the ground and lower ground floors, with two floors of residential above. Our architect came back with proposals to add another floor, which means there will be three flats above the pub. The internal layouts will need to be agreed.
Not that we can change the external structure, but should we do two bed two baths, or three bed and one bath? This needs further research, it would be presumptuous for us to suggest layouts without doing the ground research.
For example when we went to meet the Publican and told him our plans to rejig the property by putting flats above and restricting his lease to the ground and lower ground floors, which involved moving the kitchen from the first floor to the basement, we asked him when he would prefer to do this work and his answer given was very surprising. He stated over Christmas! I would have assumed this would be the worst time to do work, especially in a pub.
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Apparently this area is second home territory and during Christmas everyone goes home to their main homes. Here’s where local knowledge counts, and this is precisely the reason why we would not try and guess what the end buyer or renter would prefer in a flat.
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The pub is not a rowdy place where you are likely to have brawls but a very tasteful and up market bistro pub. This means the fact that the flats are above a pub is not a major issue from a rental or sales point of view.
When we purchased the property we made sure we could exercise the right to kick the tenant out completely if required. At the moment it is not likely we will be exercising this, as he seems very amiable to cooperating with what we wish to do which is to relocate the pub and develop the flats.
One of the questions I asked when I met him was how come he wasn’t interested in purchasing the pub himself given this was clearly a thriving business and he wanted to stay on. He disclosed to me he was interested, and in fact he did try and purchase it for £1.465, however he was unable to raise the funds. If the occupier was willing to pay this much, it means it is worth more and we clearly had a bargain at £1.25m.
We expect the flats above to be valued at £750k a piece which means the total value of the flats will be £2.25m alone. The ground floor pub and basement will be valued at a conservative £750k. This means you have an end value of £3m, conservative. This clearly looks like a good investment, and prices seems to be heading in the right direction – upwards. The flats are in a location a stone throw away from Kensington Olympia Station where there is a property boom going on. It’s very strange how certain pockets in London have boomed in the last year. We were selling 47 Bloemfontein Rd in Shepherds Bush for £650k, which consisted of three flats which we had purchased as part of a portfolio. They didn’t sell in the Allsops Auction, yet 10 months later two have sold for £642k and the other is under offer for £270k giving a combined total of £912k; which is 40% higher than the year before for doing nothing, meaning no work has been done on them during this period.
This in truth has been a learning curve and we have never been involved in purchasing a running pub before, there are licenses and insurances you need to have in place for the pub to carry on running.
Often doing one type of deal attracts more of the same, consequently we have now got another two pubs we are looking at closing, one in W1 and the other in W2. Going through this experience obviously means we have it under our belt and therefore have more confidence in executing these other two deals.
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Doing property doesn’t necessarily mean you need to know everything about every possible transaction, but you must have the right contacts to go to get good, strong and impartial advice; meaning having a solid network in place.
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The two pubs we are looking at acquiring are both off market, and both in very strong locations. They will each be priced in the £2-3m range.
If you like the numbers for the real life example we have described and would like to do a similar investment, even if you don’t have the full amount to invest give us a call.
The Real Deal
Knightsbridge, London, SW7
Purchase Price: £6.2m
- An elegant property arranged over six floors with five reception rooms and six bedrooms
- Freehold property with garden
- Located in the heart of South Kensington arranged around an immaculately maintained garden square
- End value after works expected to be around £12m
- Off market opportunity
Call us now if you would like to have a piece of this pie!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
Always have two exit strategies when doing a property deal, as things may not always go as per your plan.
Beware when purchasing in auctions, these can be used by many traders as a dumping ground. Check who the seller is and do full due diligence prior to bidding.
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