5:17 AM, 19th October 2016, About 5 years ago
Sometimes ignorance is bliss, at other times it is very expensive!
About a year ago I spoke with a very established landlord who, together with her partner, were in the process of selling many of their properties to pay down mortgages.
She was furious with the tax changes introduced by George Osborne and had decided upon a strategy without taking any professional advice whatsoever. From her perspective, she had built a property portfolio of over 200 properties. That’s something very few, if any, tax and legal professionals have ever achieved she said. “No need to give away my Rolex to a Consultant who will then tell me the time!“. I pretty sure she was telling me that she wasn’t prepared to pay somebody to tell her what she already knew. She knew best!
Her strategy was to sell around 170 properties to repay all of her debts.
The alternatives, which I will go on to explain, I now know would have cost around £24,000 plus VAT in professional fees to implement.
Recently I’ve heard that she has sold 50 of her properties. The average CGT she has paid on each disposal is £15,000 (£750,000 in total). However, on each of these properties she was averaging a net profit of £300 a month which equates to £180,000 a year of lost income over 50 properties. Each property was worth around £180,000 so based on an average projected annual 2% capital growth that’s yet another £180,000 a year might lose out on. She has paid off a lot of her debt but she continues to pay tax at 45% of her profits. Maybe somebody would like to work out how much money her ignorance will cost her over say the next 10 years?
If she had taken up my recommendation to seek professional advice she would have re-set her base cost of her property portfolio by utlising section 162 incorporation relief to wash out her capital gains upon incorporation. As a partnership her business would also have been exempt from paying SDLT on the property transfers to a company under schedule 15 (land and buildings) of The Finance act 2003. By spending £24,000 plus VAT she would have saved herself £750,000 of capital gains tax even if she had then continued her own strategy. However, given that moving forwards she would only have been paying 20% corporation tax on retained profits and would continue to be able to offset 100% of her finance costs there would have been very little to be angry about either, and absolutely no reason to sell anything at all.
It’s all very well to be penny wise but beware the cost of ignorance and being pound foolish!Show Book a Tax Planning Consultation
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