Harris Lamb Blog – 20th Dec
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:
“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 firstname.lastname@example.org
Peter Wood can be contracted on 0121 455 9455 or email email@example.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.