25th November 2017
Last week we had an event in Harrow, in regards to the new tax scheme which is currently being phased in. The event was popular and fully booked. I even had calls from a few people who were hoping to use me to gain entry from the back door to the event. Not surprising, given it was about what everyone is concerned about, which is tax.
Everyone is seeking a way to minimise taxation to save money. The conclusion of the evening was, in a nut shell, there is nowhere to hide. The terrain has changed and who knows, could get worse in time. It’s not as though the funding gap will close anytime soon.
Barrister’s opinion was, if the schemes you’re being introduced to are too good to be true, they probably are.
Whilst this statement is not absolute for all time and places, it is probably correct in this scenario, given the new landscape we are facing.
The seminar lasted for a good few hours, mostly re-emphasising the message of operating within the rules.
However, one point which was not focused on was the Entrepreneurs Relief which is available to property traders.
The Entrepreneurs Tax Relief is available on the gains made by selling the shares of a company. The tax payable is only 10% as long as it is qualifying and is extracted as a personal capital gain by selling the shares in the company rather than the asset itself. The company needs to be held for more than 12 months and the investor needs to be a director in the company. There is also a lifetime limit of £10m. That being the gross amount you are taxed on, not the tax; in other words £10m of gains.
This wraps nicely around land investments.
The value of land increases with a change in its utility. Two pieces of land may look the same, one will have an increased value because you are allowed to build upon it and the other one is only for agricultural purposes.
Changing from one to the other requires a great deal of professional expertise, and a deep understanding of how the planning process works.
When you manage to transform the utility of a piece of land, its value jumps massively, and will probably be the largest gain you can make in property investment, within a relatively short time period. The process is almost alchemical.
Ironically, the tax applied here is the least, at only 10% of the gain.
In general, it is far more efficient to make profits in respect to capital gains rather than income, as capital gains is much lower than extracting income as dividends or employment income. 20% is the capital gains tax when selling shares. So, if you hold the land in a company, and sell the company, you are selling shares and thus are taxed at 20% and not 40%, 45% and more with national insurance. This being said, please do consult a tax expert about your particular circumstances.
The point was made at the end of the seminar that the tail should not wag the dog. This means that the least important part of a situation should not have too much influence over the most important part.
In this context the tax saving should not drive the investment. The point being that if you allow the tax end to lead too much, you may end up going into a deal that makes no money and thus you have no tax to save anyway.
However, in the situation with land deals, the focus is solely on getting the highest gains in the shortest time period.
It just happens, currently, we have a chink of light shining at us though the new wall of tax, which is slowing being built around us.
It’s time to take advantage of this situation, because it’s both lucrative and legal.
Suresh Vagjiani
