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Killing Two Birds With One Stone

A couple of weeks ago I had a gentleman come to see me about starting to invest in property. He was a retired gentleman aged 85 years. The main reason why he wanted to start investing was to reduce the amount of inheritance tax he will eventually have to pay.

His house is in a beautiful part of Wimbledon and as he had purchased in a premier road it has simply gone up and up in value, regardless of what the rest of the economy was doing. This is the key when purchasing property, if it has been purchased in a desirable road it will tend to buck downward trends occurring in the rest of the UK property market. During times of economic turmoil, house owners simply hold on to their homes and don’t put them onto the market thereby restricting supply. Most households on these types of roads are firmly established and aren’t highly geared hence tend not to struggle financially regardless of the climate.

This property is valued currently at £1.5m. As the threshold for inheritance tax is £325,000 for every individual above this it will attract a rate of 40%. He decided it was high time to do something as otherwise the government would be taking a big chunk of the pie.

He started this process earlier in 2003 by taking an equity release.

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An equity release is different from a mortgage, in that you do not make ANY monthly payments at all. The money is paid after death, the original amount along with the interest rolled up.

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The other main difference between a traditional mortgage and an equity release is the older you are the more money you can borrow, with a normal mortgage there are less and less lenders willing to lend as you get older. With an equity release, as death is coming closer the lenders will realise their money quicker and so the amount they are willing to release gets bigger.

When he first took the equity release, this was a new product in the market, since then it has for obvious reasons attracted a lot of regulation. Currently not every mortgage broker is authorised to sell this type of product.

Despite taking a chunk of £460,000 the property has gone up in value heavily and so our client now feels it is time to dip in again. There are a couple of reasons why he can extract more money now, first his age has increased, and secondly the property has increased in value.

The aim of investing is two fold, firstly it is to reduce inheritance tax liability and secondly it is to ensure the funds are working hard for him.

There is little point in purchasing property in his name as his estate will be growing. The idea is to extract money from his residential house and gift it to his son. If he survives for over 7 years the gift will be fully tax free if not it will be partially tax free.

The funds will be used as seed capital to purchase income yielding properties in his son’s name. His son has little declared income, this means he will not be paying a high rate of tax on the income earned.

It is important to ascertain the amount of income which will be actually coming into your pocket. If you’re a high rate tax payer there is little point in going for high yielding properties as the government will get as much benefit from this as you will. It is far better to go for properties which will grow more aggressively in capital growth than ones which are cash cows.

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One of the main points which resonated with him is what we repeatedly emphasise in our articles like a mantra, which is location.

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He has realised the power of this particular mantra having experienced first hand how much a property can increase, defying the economic climate. This point hit home and prompted him to come and have a meeting with us.

It was great to see this client, he was very astute in matters of tax and property and was doing something about it, hands on at such a ripe age.

But what was more impressive was he has used his money to set up a hospital in Kutch Bhuj for cataract operations. His inspiration was that his father had got cataract and struggled through the later years of his life. He realised for a relatively a small amount of money he could prevent the same hardship for others, this resonated with me as this was the town where I was born. The hospital is tightly managed using his business acumen and is responsible for conducting thousands of cataract operations to date. We are actually privileged to help such a client to sort out his affairs. Naturally we could not charge this client anything for our sourcing services and told him he can further the operations he does instead.

Most asians stick their head in the sand regarding inheritance tax not realising it will wipe off half their estate above a nil rate band.

The government actually has a lot of information on their website. It is important to be familiar with these rules, as this is one event we will all have to face.

The above example is only one method and relies upon the individual to survive for 7 years for the gift to be completely exempt. Interestingly you cannot just gift your home over to your children, if you’re still living in the property, as you will still have an interest in the property.

According to their website, any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as ‘Potentially Exempt Transfers’ (PETs). However if you give an asset away at any time, but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a potentially exempt transfer.

If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as ‘Taper Relief’.

The Real Deal

*Attractively priced flat in Bayswater -£250,000 – OFF MARKET

*Very spacious one bedroom flat in a looked after estate in Bayswater

*Easy to let at £350pw

*Due to high demand for one bedroom flats it is almost impossible to get one at below £250,000

*Similar properties on the market sell for £275,000 onwards

*Only 1% stamp duty

* 5 minute walking distance to Hyde Park, Whiteleys Shopping Centre and Bayswater Station

This is an opportunity not to be missed

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment Company

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!Tips of the Week

Look beyond your doorstep. Investing on your backdoor is often a safe option but poor option. The question you should ask is: where will your money serve you best?

Control your emotions. When it comes to an investment property don’t think how your family will fit into the rooms a few years down the road, keep the two separate.

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