It’s not what you do, but the way that you do it
16th June 2018
Currently, we are in the process of bidding for a site. Here, the issue is not one exclusively based on price and performance. If it was, it would be easier. Here, we’re being tested for construction knowledge, execution of the project and our past history of development, in particular examining niche issues which this development would entail.
As time goes on, both doing developments and investing in property is becoming more complex. The environment is becoming complicated. To the average person it is becoming a headache to understand how the current taxation environment will impact your investment and to understand which wrapper – if any wrapper at all – is best for your circumstances. And then, once this is done, to see how this will impact lending.
To understand tax, you need to see how the effects of CGT, Income Tax and Inheritance Tax will impact your investment. And then there’s the exercise for those who have an existing portfolio. By portfolio I mean even a few properties. Holding this in a personal name is now becoming a serious issue. Transferring to a Ltd company means there will be CGT and stamp duty payable, this has to be weighed against the potential savings from the other side over a period of time; and to top it all off the lending needs to be taken into account.
It’s no wonder people are getting confused. When they approach an expert they are often given one dimensional advice, which does not consider the whole issue holistically. So, they then approach another expert who gives differing advice. In addition to this, there are caveats in place to say this advice is not fool proof, so the recipient then ends up having very little or no confidence in the advice they have been given.
The structure within which the investment is made is now becoming increasingly important. It’s not just a question of making money, but what shape this money is in.
Recently, we had an investor who wanted to buy a property in W2, it was around the half a million range. Simple enough, so you would think. The trouble is, he’s a high band tax payer. Therefore, it makes sense to purchase it in the wife’s name. However, she does not have an income. The wife cannot get a mortgage, not even as a BTL, as there is no income to show. BTL lenders need a basic rate of about £25k per annum to qualify for a BTL mortgage.
We had to arrange a conference call with an accountant and the mortgage broker to come up with a workable solution. The solution ended up being that the property should be purchased in a SPV (Special Purpose Vehicle), this means a Ltd company which only holds the asset. The shares are held by the high rate tax payer, with the wife becoming an employee of the company. This will also make the transition of ownership from the parents to the next generation smoother, in the future.
It’s vital now to ensure the way property investment is done is looked at from a variety of angles, and it is entered into with a 360 degree vision.