Harris Lamb Blog – 20th Dec



Peter Wood

20th December, 2010.

CGT – One of the Big 3 Property Taxes

By Peter Wood, Investment at Harris Lamb and Gary Rouse, Director BDO.

Capital Gains Tax, alongside Rates and Stamp Duty, is one of the 3 main sources of tax levied across the property industry.  Working alongside colleagues in Agency and Investment, CGT is a major feature for our clients in their formulation and implementation of property investment strategies.   At Harris Lamb we work alongside clients and their advisors regularly and we’ve asked BDO, as one of the significant advisers on tax and consultancy issues, to outline their current thoughts on how CGT can significantly increase property returns.  Gary Rouse, Director at BDO comments:

The route provides 27 miles of privately funded and operated highway from Coleshill in North Warwickshire to Cannock in South Staffordshire.  The road carried an average 47,592 vehicles on weekdays in the summer of 2010  and from my experience of the Toll Road, private cars form the vast majority of the traffic.
The M6 Toll Road was identified as an “M6 Relief Road” to alleviate congestion on the M6, which is something many people feel has not been adequately addressed and, with one way car tolls at peak periods of £5, this is something to be debated elsewhere.
From a property perspective the benefits have probably been more tangible than the traffic improvements.  The southern end of the Toll Road and the ‘T1’ junction close to J4 M6 coincided with some of the latter stage build projects at the Hams Hall National Distribution Park, a 430 acre business park which ranks as one of the best such employment parks in the UK.
Junctions T2 and T3 appear to largely function as commuter gateways for those living to the south and east of Sutton Coldfield from where national motorway access has improved considerably and the effect on house prices has been positive in these areas.
The access to Junctions T4 and T5 at Weeford and Lichfield has given a stimulus to residential and commercial property markets alike with possibly the biggest winner being the 300 acre Fradley Park, where some of the largest distribution buildings in the area have been built with more to come.  We are marketing the new Fradley Prologis Scheme with 70 acres and units to 700,000 sq ft available to be built and which will be on site shortly.
T6 Burntwood, a forgotten part of the West Midlands conurbation 10 years ago for business and for new build residential perhaps, has not quite been “transformed” but certainly “considerably improved”.
T7 & T8 and the Cannock access points to the Toll Road provided the catalyst that has helped to promote the former coal mining town into a first rate employment location.  Significant development of a cross section of employment type accommodation from offices to manufacturing and warehouse operations has bought vitality to Cannock which I think is largely due to the Toll Road passing the town’s doorstep.
For those drivers who still regularly sit stationary on the M6 between junction 8 and 10 bemoaning the state of the traffic and whether the Toll Road has done the job it promised, the tangible benefits are probably in property as much as traffic counts.  The commercial new build and viability of new schemes along the entire length of the Toll Road has been transformed since the road was built.
For the positive effects of the Toll Road you may look little further than the development and opportunity is has created alongside it.

“Capital gains tax (‘CGT’) rates remain low.  Therefore whether you are a trader or investor it will generally pay to try and get yourself within the CGT regime.  For property investments the highest rate of CGT for an individual is 28%.  In a company the highest corporation tax rate is currently 28% and if the net profits are extracted as a dividend there could be further tax of up to an effective rate of 36.11%.  So what does this all mean? 

On £1m capital appreciation the investor could improve their returns by potentially £260,000 if structured tax efficiently.  Clearly this shows that spending time understanding the best structure prior to investing is time and money well spent.  This is particularly the case when the tax on rental income after financing costs becomes material”.

From a property investment perspective this is an important factor for those with sizeable amounts of money to invest in commercial property.  Gary goes on to say:-

“The implications for those involved in property trading / development earlier this year the Coalition Government increased Entrepreneurs’ Relief (‘ER’) on capital gains to £5m.  This means that if an individual meets all of the relevant criteria capital gains of up to £5m can be taxed at an effective rate of 10%.  This has created even more incentive to ensure that trading and development transactions are structured in such a way as to obtain this relief.  Stakeholders in these projects such as shareholders, individual financiers and key directors are now trying to structure transactions so that they can obtain ER on their returns”.

The Entrepreneurs relief has thus given significant advantages for property purchases perhaps as a truly viable alternative to buying property in personal pension schemes especially with the gearing ratios bearing markedly different.  Gary comments:-

“Direct ownership of trading/development projects by an individual is now less attractive for these projects could be taxed in an individual’s hands at up to 50%.  However, in a company the profits would be taxed at up to 28%.  Then on extraction if the company can be wound up only a further 10% tax could be paid, providing an overall effective tax rate of approximately 35%.  On £1m net profit developing/trading property in a corporate and winding it up after sale could improve returns by potentially £148,000”.

The final point that Gary makes is not to let tax strategy outweigh property goals:-

“Don’t get the Tail wagging the dog. Tax is important and can substantially improve returns if it is right.  However, the commercial rationale of the transaction tends to shape the structure with tax following.  Currently banks are requesting structures which can be seen to be straight forward and minimise risk against their security.  However, this may create a tax cost so arriving at a solution which meets all com
mercial objectives, yet is tax efficient, is important.  It is important to recognise that every transaction is different and as such the most appropriate structure should be considered at that time given the specific circumstances”.

We are currently seeing and advising on a great many acquisitions involving Entrepreneurs Relief and other tax efficient purchases.  If you would like advice please feel free to contact me.   

If you would like to speak to Gary he can be contacted on 0121 352 6252 or gary.rouse@bdo.co.uk

Peter Wood can be contracted on 0121 455 9455 or email peter.wood@harrislamb.com.

Disclaimer: The views expressed here (in this article or ‘blog’) are the personal views of the contributors and authors only and do not necessarily reflect the views of any named companies or thier employees.