Iain Wallis

Proven Tax Strategies for High Net Worth Individuals

0191 603 0270

Homes Under the Hammer comes to Newcastle part 1

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When I was at university, there were only three channels to watch on TV and none aired during the day. I then found myself a job and when that finished I found stuff to do so it’s fair to say that unless there’s some sport involved you won’t find me watching much television during the daytime.

 Around this time last year we attempted to buy our first house at auction. We’d done all the preparatory work, a lot of which I will share with you in a later blog but we weren’t prepared for the announcement that “Homes Under the Hammer” were in attendance. As assorted people moved to corners of the room where no camera could film, I made a mental note to enquire further about this programme and vowed if I was successful or indeed if I returned, I would tick the no publicity box!

We did not land the house that night as it went for more than we wanted to spend. Property is a business so avoid getting carried away in the chase for a bargain for if it is more than you planned to spend it no longer is a bargain. Simples! Trust me there will be plenty more along the following month.

 We did eventually land three at auction last year and at the last auction in Newcastle, spookily HUTH, as the Luvvies at the BBC call it were once again in attendance. By now I’d done a spot of research and even managed to catch a programme as I waited for the engineers to complete the routine car service. After reading The Journal from cover to cover, a local paper for Newcastle and the North East, wrestling with the sports section of The Times, studying the next auction catalogue, I found myself left watching daytime telly and caught a glimpse of Homes Under the Hammer on the BBC. Very interesting Mr Bond!

 The aforementioned auction catalogue contained what I thought was a little gem. It was on the outskirts of the area we mainly invest in, but there were good comparables, good rentals with the potential to easily surpass our target yield of 8%. A viewing was duly arranged along with several others that day.  It was the last on our schedule that day and the agent pre framed the visit with “It stinks.  I’ll just open the door and let you in!”

 She was not wrong: it did and then some! The previous owner clearly liked his pop but found it easier to pee in situ rather than move to the bathroom. It was dark, dingy and generally pretty unpleasant, with filthy carpets, a pretty foul kitchen and a bathroom that frankly was not fit for human occupancy. I surveyed the ground floor on one breath and retreated for some cold sea air (it was on the coast after all). A second gulp and I had the top floor checked out though chose to complete my viewing schedule outside.

 James Caan in his book The Real Deal, prefaces it with a comment “observe the masses and do the opposite”. It’s a path that has served him and his father before him well and a philosophy that has made Warren Buffet a vast fortune. It’s also one that I’ve carried into our investing, after some due diligence, naturally, and here was a classic case in point.

 Most could smell the appalling house but not the profit. The property had a low guide price and it was worth an educated punt. Now don’t get me wrong, two years ago I’d have joined the masses and walked away but I now had a much better idea on refurb costs, could see through the muck and how it could be restored to a perfect home.

Due diligence completed it was time to attend the auction. Usual preamble, how on the fall of the hammer it was yours, exchange within so many days blah blah blah about the TV Cameras and soon Lot 8 was ready to be auctioned..

 Initially very little interest as the auctioneer searched for a value to start the bidding. Eventually it kicked off and edged towards the guide price. Still 5K short of the guide price the auctioneer prepared to sell. At “selling it twice” I indicated an interest. Good tactic that by the way, never declare an interest too early. After a quick spat it was ours still £2.5K below the guide price. It’s a truism on property but you make your money when you buy and we had just made some money.

 Contracts exchanged and deposit paid I felt very pleased when I was asked if I fancied being on Homes Under the Hammer.

The answer had to be yes! 

 In the next part I will share with you the before filming, the joy of the refurb and the follow up filming and yes the final valuation.

Upcoming Tax Strategy

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There may be a tax strategy coming into play to mitigate tax on income and chargeable gains in the 2011-12 tax year.

The key features are:

  • Shelter income or chargeable gains in the 2011-12 tax year.
  • The entry limit is £100,000. 
  • Fees will vary according  to what income is sheltered but indicative rates would be about 11%   
  • There is no active participation and no ongoing involvement required.
  • There will be a very short window of opportunity for sophisticated high net worth individuals that are interested

If you wish to proceed you will have to act fast !

The closing date for registering interest NOT necessarily proceeding is midnight on 25 February 2012.
 

26 February – Full details of the planning will be made available only to registered individuals. 

 1 March – All application forms and fees to be submitted by 4PM.

If you have any further questions please contact me

Or if you wish to proceed.

Iain@Iainwallis.com

 

How to reduce your exposure to Inheritance Tax

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It’s a common misconception that Inheritance Tax is payable on death. That’s probably because the name of the tax falsely implies that the tax is related to death when the value of the deceased’s estate transfers through the generations.

The word transfers is in bold for a reason. Inheritance Tax is triggered by the transfer of value and a transfer of value occurs whenever you dispose of something and as a result your total net worth is reduced. Whether hard cash or an asset that has value the disposal of it will reduce your net wealth and this create a “transfer of value” which may get HMRC excited. Incidentally I transfer wealth to my landlord most Friday nights but as this is at arms length to an unconnected person it will not be classed as “a transfer of value”.

For most households the largest asset likely to trip the Inheritance Radar will be the main home, usually on death. Equally though holiday homes, investment properties, paintings, memorabilia, collections of coins, stamps, you’ve seen the antiques road show so you catch my drift as to where value could be and it all adds to your net wealth.

It might therefore be prudent to gift some of these possessions so that they no longer form part of your estate or current total worth. Sound idea but for this to work you need to completely remove any enjoyment or benefit from it.

If you retain the remotest interest then unfortunately it will still form part of your estate. You may have a superb railway nameplate from the City of Newcastle (2442 double bogey) worth a small fortune. If you give it to your son but keep it in your study, there has been no transfer of value.

Equally you may be a little reluctant to sign over the holiday cottage to your grand children because you still want to visit the Northumberland coast when you can on your terms. How about granting a long lease on the family home and then gifting it to the children?

All these will fail because of what we tax boffins call “reservation of title”

Well that’s it then, might as well roll over and die and let HMRC trouser 40% of my wealth.

Well it’s not all bad news

There are ways that married couples or those in a civil partnership can substantially reduce their exposure to inheritance tax, and therefore increase the amount inherited by the family, without adversely affecting current standards of living and without having to “give all of the family assets away now”!

This simple strategy is suitable for couples who own any class of investment assets including property, shares, and cash, which are exposed to inheritance tax, currently at 40%.

It enables an individual to transfer the value of an asset out of their estate to the next generation thus reducing the family’s IHT liability without triggering a capital gains tax charge.

Importantly control of the asset and access to any income generated by it will be retained by the couple.

Even better the planning does not require a trust structure and therefore there are no ongoing trustee costs or restrictions.

 How Does it Work?

 Well as that annoying rodent selling insurance says “Simples”

  • One individual transfers the asset at full market value to their spouse.
  • The consideration given by the spouse to the individual for the asset is a specially drafted debt instrument which is effectively an IOU.
  • The IOU is gifted to the next generation.

If having read this, you  think that the best way to take this matter forward would be to arrange a (no obligation) meeting with myself or one of my colleagues either at my offices or at your home, to outline the options available to you, please feel free to contact me to arrange a meeting at  Iain@Iainwallis.com

 

Use your ISA

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Whilst I know that some of you property investors want to keep your cash to fund cheeky offers, as the end of the tax year draws ever closer just a reminder to make sure you have used your full  ISA allowances. As a reminder here are the benefits at a glance:

  • Shelter an investment of up to £10,680 from tax
  • ISA limits increase annually in line with inflation (RPI)
  • You pay no capital gains tax on the returns from your ISA
  • No further income tax to pay
  • You don’t have to mention ISAs on your tax return
  • You don’t need to hold an ISA for a fixed term (although a Stocks and Shares ISA should be regarded as a long-term investment)

Anyone over the age of 18 who is a UK resident can invest in a Stocks and Shares ISA.

As ‘individual’ accounts,  money that is to be invested in an ISA must belong to the person making the application, but a married couple can each have their own ISA and shelter up to £21,360 between them.

5th April approaching fast: how to avoid property tax legally

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As another tax filing deadline, albeit extended due to strike action, passes it’s time to look forward to the end of the tax year.

Whilst those at HMRC will look forward to a new set of coloured pens, elastic bands, treasury tags and acess to the stationary cupboard for the accountants of this world this is the time to help their clients save tax by making use of allowances available or maybe advising them on action to take to reduce income or even create losses.

Here’s a few tax tips to ponder and take action upon before the end of the tax year:

Income Tax

Those property investors who do not trade through a limited company have no choice as to when to make up your accounts. Letting income will always be that arising in each tax year to the 5th April.

In looking to save tax in any business approaching a year end, you would look to defer income and maybe bring forward expenditure.

Now with rental income it’s pretty hard to defer income as I would expect you receive your rental each month so not much planning opportunity there then so what about expendtiture. Well now we’re talking.

If you’ve some major repairs on the horizon, maybe a complete repaint and remember we are talking repairs here not capital expenditure, get in place a contract for the work to be undertaken. If you’ve contracted to have the work done then these costs can be brought into your letting accounts which a) may reduce the level of profit and save tax or b) turn a profit into a loss and again save tax.

Remember that loses can only be offset against other property income or carried forward in perpetuity to offset against profits.  As an aside tax losses are personal and so a) can not be transferred to anyone and b) go with you to the grave.

Capital Gains Tax

You may have in your portfolio a property that is sitting on a nice capital gain. Now may be a chance to offload that at a slightly below market price for a quick sale and a tax free gain. Each individual can currently make capital gains tax free of £10,600. So a property held jointly could show a gain in excess of £21,200 and if sold before 5th April 2012 not create a tax liability.  I say in excess because you pay capital taxes on the net sale proceeds less the cost of acquisition.

Inheritance Tax

As with income tax and capital gains tax there is an exemption for inheritance tax. The annual exemption is currently £3,000 and thus the first £3,000 of any transfer of value will be exempt from Inheritance Tax. If the exemption is not used then this can be carried forward. So assuming no gifts were made last year, Mum and Dad could gift £6,000 to their children completely tax free. As an impoverished trainee accountant it was a relief I often brought to my parents attention, though this simple tax planning strategy always fell on deaf ears!

Further information on this topic can be obtained from Iain@iainwallis.com

Buying Investment Property – What Are the Risks?

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I firmly believe that property investment is a great investment and when you look at the long term trends it’s far from risky, especially when compared with the alternatives.

  • The UK is set to suffer a severe shortage of property and very high demand over the next 20 years
  • There will always be a demand for rental properties
  • Historically property has always delivered great returns over time

The UK has a tradition of home ownership. Between 1971 and 2002 it increased from 49% to 69%.

However, there will always be a need for rental property, due to economic factors, lifestyle and a moveable jobs market. The average age of a first time buyer, who is not given financial help, is now 37.

You can see there will always be a demand  for rental accommodation.

The UK population of 61.4 million today will rise to 71.6 million by 2033. This will put massive pressure on housing stock. The predicted shortage is 750,000 homes by 2025.  Short supply will impact rental values.

With finance much tighter, the banks’ reluctant to lend and house price confidence shaky, it’s never been more important to make your money work when you buy an investment property.

You achieve this by buying Below Market Value (BMV). Get this right and you will have an income producing asset – from a property that historical data from Halifax PLC has shown doubles every 7 – 10 years.

There is no guarantee that such fantastic growth will continue. No one would deny that we have seen an adjustment in the housing market since it overheated in 2007.

But even if the current economic pressures in the UK move this cycle to a longer timeframe, if you have invested wisely you will still benefit from passive income  – which boosts your income.  Plus because you bought BMV you have instant equity in your property.

“But I like my money in the bank. I get a statement each month and I know it’s there.”

Yes that’s very true – but here’s the thing:

  • The best rate paid by a bank to tie up your cash in a two year bond is 4.05%.
  • A simple deposit account pays 3.15%.
  • Inflation is running at a conservative 5.7%  

 So in actual fact you are losing at best 1.7% or at worst 2.6% per cent on your savings. Every year!


Is that a good investment?

Am I Trading or Investing in Properties?

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Many people who start out in property call themselves investors but are they property investors or property traders?

In my experience they can call themselves what they like but it is the facts of the case and how you carry out your business that will determine whether the taxman (HMRC) sees you as an investor or a trader so beware and to make matters worse there is always a muddying of the waters.

A property investor will hold properties as a long term investment. They will be the assets of the business and bought a) to produce rental income and b) over time capital growth. Don’t believe what you read in the papers, it’s a fact that property has historically doubled every 7-10 years despite some wild fluctuations within that period. Rental income is accounted for on an annual basis to 5 April each year and property disposals dealt with as capital gains and with use of the annual exemption (currently £10,100 per person) a jointly held property could show a healthy profit with no capital gains tax payable.

  • Profits are subject to capital gains tax
  • Use of annual capital gains tax exemption
  • Possible use of principal private residence relief (PPR)
  • Totally exempt for non UK residents
  • No National Insurance on profits
  • Not good for abortive expenditure (surveys, finance applications etc)

A property trader will purchase with a view to making a quick short term gain through a refurb and then flipping the property on. It’s unlikely that the property will ever be let out and the profit is made when the property is sold on for a higher price. Here any profit would be subject to Income Tax and National Insurance or Corporation Tax if held within a limited company.

  • Better scope for claiming abortive expenditure
  • No use of annual exemption
  • Greater relief for interest costs
  • Chose any year end
  • Losses used against other income
  • Profits taxed at marginal rates and attract National Insurance if self employed
  • Profits charged to corporation tax if a limited company.

So given the tax treatment it is clear why people call themselves investors not traders though the key question is whether any profit is a capital gain or a trading profit? It’s not clear cut and naturally keeps HMRC on their toes looking for traders not investors as that will typically bring about more tax revenue. Something they are keen to do at the moment.

It is not your choice but in reality is determined by how the business is run and also on your intentions at the start of a project but how do you prove your intentions to HMRC and what if I change my mind?

  1. Start with making a note as to why you bought a property. Drop a line to your accountant or legal advisor. A business plan would demonstrate what your plans were. That’s a great start and if for some reasons plans change then document them as well. There may be a perfectly good reason why a long term investment was sold short term and documentary proof will help you argue your case with HMRC. Your long term investment in a student flat in Cambridge could swiftly move from long term to short term if little Jimmy fluffs his A levels and ends up somewhere less academic!
  2. Beware of the frequency of transactions. If a property is bought and sold every now and then, that would suggest an investor but if you are buying frequently and selling on that would suggest a trader.
  3. HMRC also get quite excited about the number of transactions in a given period. In theory there is nothing to stop you buying a house, improving it and moving on and making full use of the PPR exemption. Do this every six months and HMRC may get excited and would suggest property trading. After all moving is one of the most stressful things you can do so why would you do it every six months?
  4. How are the transactions financed? Mortgages and long term finance are more indicative of investment, though nowadays some see an ERC as part of development costs!
  5. Letting out a property is indicative of an investment not a trade.
  6. How long a property is held for may also influence HMRC, though again there is no hard and fast rule on this one.

So in summary call yourself what you like “Supreme Allied Property Developer”, “Joint Chief of Staff” but remember what your intentions and actions are will determine whether HMRC see you as a property investor or property trader.

Get that right and you will keep a lot of money out of the taxman’s hands.

Happy investing or is that trading!

Further information on this topic can be obtained from Iain@iainwallis.com

Why use a Property Company

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Business HandshakeWhether you use a Property Company depends on a variety of factors and there is no “one size fits all” solution.

Things to bear in mind:

1. The level of your expected business profits

2. Are your business profits are treated as ‘investment income’ or trading income (see earlier blog)

3. What other taxable income do you have

4. How exposed to risk is your property business

5. How long you intend to be in the property business for……..your exit strategy is not the front door!

6. What other property activities are you engaged in

For many investors, using a Property Company can be very tax efficient.

Don’t underestimate the possibilty of paying just 20% Corporation Tax on profits and capital gains, the ability to reinvest these post tax profits, the ability to time when you take income from the company and pay income tax and finally to pass the compnay down through generations.

100% Tax deduction for renovation costs

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I thought I’d share a generous tax break called the Flat Conversion Allowance or FCA.

Rather than invest in semi detached or terraced houses, why not think outside the box and look at disused flats above shops or commercial premises?

They will easily be cheaper, can be quickly renovated to add value and they come with a 100% tax break!

To qualify for this generous tax break there are certain key criteria:

  • It must be built before 1980
  • The ground floor must be used for a business
  • The upper floor must have originally been intended as living accommodation
  • Must have been vacant or used solely for storage for a minimum of a year before the conversion starts
  • Any property can have no more than four storeys above the ground floor

The FCA relief allows the purchaser (you or your company) to claim a tax allowance for the cost of capital expenditure. Qualifying expenditure is capital expenditure incurred on, or in connection, with:

  • the conversion of part of a qualifying building to a qualifying flat or
  • the renovation of a flat in a qualifying building to create a qualifying flat, or
  • repairs incidental to the conversion or renovation of a qualifying flat, or
  • the provision of access to a qualifying flat.

Examples of qualifying expenditure are the costs of dividing a single property to create a number of separate flats, and the costs of building dividing walls or installing a new kitchen or bathroom.

Capital repairs to the property incidental to the conversion or renovation may also qualify.

Expenditure incurred in connection with the conversion or renovation of a flat may include costs outside the direct boundary of the new or renovated flat such as the creation of stairwells within the building or provision of extension, solely to provide access to the new flats. It may also include architect’s and surveyor’s fees.

Examples of associated costs that may qualify are:

  • inserting or removing walls, windows, or doors,
  • installing and upgrading plumbing, gas, electricity or central heating,
  • re-roofing incidental to the conversion/renovation,
  • providing access to the flat(s) separate from the commercial premises, including extensions to the building to contain this access, if required,
  • providing external fire escapes where regulations require.

Some expenditure does not qualify for flat conversion allowance (FCA).
Expenditure does not qualify if it is incurred on or in connection with:

  • the acquisition of land or rights in or over land,
  • an extension to the building (unless it is required to give access to a qualifying flat),
  • the development of land adjoining or adjacent to the building. This includes conversions forming part of a larger scheme of development, and
  • the provision of furnishings or other chattels.

Normally a deduction for this kind of capital expenditure would only be given when you sold the property as a deduction for capital gains tax. Here though, a 50% taxpayer would immediately recover half their renovation costs from HMRC.

It gets better! Should this claim create a loss, it can be used to offset against other income, say a salary, The loss does not have to be carried forward to offset against future profits.

So next time you are out looking for BTL property, keep your eye out for some commercial stuff

To Your Property Success!

Iain

 

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