It’s a question of asking the right questions
A few months ago I had a client who came to see me regarding a mortgage, simple enough at first glance. He wanted to purchase the property he was renting from his landlord. The property was in a prime location of Mayfair. The first question of course was ‘what rate can I get?’
This is often the first question which a client asks when seeking finance. It’s difficult to answer as it’s dependent on what the client can show in terms of income.
Last weekend we had another meeting, in which I got to understand the full situation. He was purchasing the property for £3.6m from his landlord. The property was on the top floor of a mansion block and consisted of 1650 sq ft. There is a possibility of adding another floor on top as the roof space is allocated to this flat alone, thereby almost doubling the square footage of the current flat.
The client is a diamond trader and is often able to multiply the money he has. He wanted to put as least money into the transaction as possible so he could carry on trading. The property is held in an offshore company in Malta, so he would be buying this company and not the property directly thereby saving a huge amount of stamp duty. The shares would be transferred over into his name. On top of this it transpired all his income is overseas, there is no income coming into the country.
It became clear his main objective was not to get the cheapest rate, the main objective was to reduce the amount he has to put into the deal, the rate is secondary.
In order to do this we needed to find out full information about the client and the transaction, often clients don’t volunteer it as they do not see the relevance or wish to keep certain aspects private. It is very difficult to help someone fully if you do not know their actual situation and the circumstances involved exactly.
The property valuation currently is £4.2m. If the property was to get planning permission for another floor the value would be enhanced to the £5m mark. Given this extra information the deal can be structured to purchase this property without any money whatsoever, except for the expenses associated with it.
As the seller became a friend of the purchaser, he is flexible in his approach on how the deal is done, he has even offered him a loan of £600,000 to help out with the deposit.
The way to do this is for the landlord to sell the property not at £3.6m but at £5m. In other words the contract should be done at the valuation price and not the purchase price. Even with the lack of income coming into the UK we can get a specialist bank to finance this at 60% LTV. This means the bank releases £3m with the other £600k being provided by the seller who takes a second charge on the property. This means the bank takes the first charge when issuing a loan and the seller would get the second charge on the property to secure his funds until they are paid back.
This would mean if things go to plan the buyer does not even have to pay the stamp duty, only a few thousand pounds for expenses.
There would need to be a full trail behind the transaction, £3m would come from the bank and a further £2m would need to come from the purchaser. This would go from his bank to the solicitor’s account, the £5m would then go across the seller’s solicitor’s account.
If the purchaser wanted to ensure his funds get returned he could insist on the seller signing a charge for £2m in favour of the purchaser or a company controlled by the purchaser. This way the money would not touch the seller’s account as the charge would need to be satisfied by the seller’s solicitor before he could release the money to his client.
Naturally the purchaser was amazed at the solution we came up with, and the rate now became secondary to the structure of the transaction.
The transaction would need to work in this way: a price of £5m is agreed upon based on a delayed completion of 6 months or earlier at the discretion of the purchaser. This price is subject to planning, if the planning is not achieved the price remains at £4.2m.
In the interim the purchaser applies and gets planning thereby gaining the enhanced price. If for an unlikely reason it fails to come through he will be buying the property for £4.2m and will need to put in £500,000 into the transaction allowing for the £600k the seller is happy to provide.
If this transaction was done in the ordinary way, the deposit required would be 40% of £3.6m which comes to £1.44m. The way the transaction is going to be done has reduced the deposit required from £1.44m to zero.
The solicitors on both sides would need to be comfortable with this method, it is sometimes easier to work the other way around and find solicitors who are a bit more creative in the way they do deals rather than trying to get old dogs to learn new tricks.
I recently had one solicitor, whom the client had appointed, try to charge the client 5% stamp duty on the purchase of two blocks of flats worth £1.25m. He insisted this was the amount to be paid as the stamp duty has to be applied on the total amount. Not the case! Legislation which came in 2011 says the stamp duty rate to be applied will be the total amount divided by the number of flats, in this case it is seven and so only 1% stamp was payable.
It is always difficult to correct a solicitor; they are upholders of the law and professionals. So when I pointed this out and sent him the link to the HMRC website he very diplomatically thanked me for bringing it to his attention and said he ‘would look into it further’. Inside I think he probably felt like an idiot. If we had gone with his advice the client would have paid £50,000 extra in stamp duty.The Real Deal
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!Tips of the Week
Be strict about what you’re looking for, if you want strong rental yield you may be better off purchasing a property above a grocer’s shop close to a station rather than a property for the same price 15 mins away
Remember you never have to pay Capital Gains tax until you sell a property, and you never have to sell a property, you can still extract the increase in price by way of remortgaging