My procrastination will end up costing my kids £300,000

My procrastination will end up costing my kids £300,000

23:23 PM, 16th November 2021, About 2 years ago 11

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“Learning from other peoples experiences is much less expensive than making your own mistakes”.

I read that on Property118 several years ago and it has always stuck with me. So, to give something back I’m sharing my story so that other Property118 members don’t make the same huge mistake that I did.

The story begins at around the same time as we entered into the first UK lockdown. My wife and I were just about to complete the incorporation of our property rental business though Property118 and Cotswold Barristers. That’s something we now wished we had done a few years earlier but that will have to be another story for another day. I would also like to add that that the service was superb and it was one of the best decisions we ever made!

At the time we incorporated, the gross value of our properties was around £5 million and our mortgages were just under £3 million. This meant we would soon own £2 million of company shares in our property company as opposed to the same amount of net equity in our properties. In addition to that we also own our home and personal savings that will be exposed to inheritance tax when we die. Moving forwards, the value of the shares in our property company will rise and fall with the capital values of the properties within the company. Either way, we already had an inheritance tax problem and it was only set to get bigger in the longer term.

To deal with this, Property118 recommended us to create a Family Investment Company structure “SmartCo” to freeze the value of our rental property company shares and to accrue all future growth to another class of shares held outside our personal estates. The purpose of this was to ensure future capital appreciation in our properties would no longer add to the pot which the Tax Man would take a 40% share of when we die. That way, our legacy would not be diluted but substantially protected to meet our business continuity plans. Best of all, we would retain full control of our company during our lives.

Given that we were in lockdown, I couldn’t envisage that property values would shoot up in the way they have.

That’s where the procrastination kicked in. I thought it would make sense to defer the decision in regards to our inheritance tax planning.

My prediction was that property values would fall, but I was wrong!

Just recently, we revalued our property portfolio for accounting purposes again and the gross value has risen by an average of 15% to £5.75 million.

That’s another £750,000 which our kids will eventually have to pay inheritance tax on.

Our kids will now have to find an extra £300,000 when the last of us passes away, or we will have to insure our lives for that much more to ensure the money is there for them when it is needed.

I realise now it was stupid of me to attempt to predict property values in the short term and my wife was very pleased to remind me recently that my procrastination will eventually cost our kids £300,000.

I have no idea which way property values will go in the short term, but what I do now know is that my wife and I now have ‘peace of mind’ in the knowledge that our inheritance tax problem will not get any bigger – well in terms of the future growth of our property portfolio anyway.

If we believed the ‘scaremongers’ who predict property crashes every year we would would have sold up years ago. Thankfully though, we don’t pay much attention to them, because for as long as records on property prices have existed they have gone up in value in the long term.  Besides, we have always considered property investment to be a marathon as opposed to a sprint. My wife and I have now been in this business for nearly 30 years and several of our properties are worth 20 times what we first paid for them.

So I do get it right sometimes too 🙂

When we first completed our incorporation I was asked to leave a Testimonial comment, but never got around to it. Now that I have, in the form of this article, I would like to think I have done my bit and helped at least a few people learn from my experiences as opposed to the far more costly option of learning from your own mistakes.

Wishing you all the best

Anonymous Author

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david porter

9:45 AM, 17th November 2021, About 2 years ago

The people at 11 Downing street can read this.
At election time it would be a vote winner for them to shut down this scheme.

Mark Alexander - Founder of Property118

11:43 AM, 17th November 2021, About 2 years ago

Reply to the comment left by david porter at 17/11/2021 - 09:45
Family Investment Companies “FIC’s” are not a scheme, but following your logic people had better get it sorted now before legislation is changed.

The Government are well aware of FIC’s from much bigger media sources that Property118.

HMRC created a special task force to look into FIC’s a few years ago and that was well reported by the mainstream media. When HMRC decided to shut that team down this summer after concluding that FIC’s were not aggressive tax avoidance, that was also widely reported by the mainstream media.

Ian Dimarian

15:07 PM, 17th November 2021, About 2 years ago

We are advised that an alternative approach to FIC’s etc & having to continue to work in the business, even after 30 years & still not retire to enjoy the fruits of your labour, is to maybe consider selling a portfolio of BTLs to take advantage of the current market conditions & invest in a Discounted Gift Trust.(DGT)
It’s suggested that some of the Benifits to a DGT include :-
. You retire without having to deal with the likes of LA’s grazing off your back, in the form of excessive & unnecessary landlord licensing & planning fees etc.
. No longer having to deal with lending institutions, punitive interest charges, bank fees & their insistence on personal guarantees, even when the banks hold a legal First Charge on any property assets (possibly including your principle residence) & even though the LTV can be as low as 50%,
. ASB from tenants, rent arrears, damage to properties & expensive remedial works etc.
. Most recently, we even have a Tory Government restricting evictions, resulting in thousands of pounds in lost rental, even for persistent rent arrears & imposing & allowing delays in the County Court for repossessions of upto a year, particularly if Bailiffs are ultimately required. The USA can take a far more positive view on behalf of landlords, with the aid of the police & not necessarily using bailiffs to reduce persistent rent arrears.
All & more of the above costs severely eat into the bottom line of a landlords income stream, that can then be taxed at upto 40%, plus other mandatory contributions such as National Insurance etc.
. Not forgetting the additional minimum 40% IHT charge, ultimately demanded by HMRC (with interest if paid late) plus estate agents costs & legal fees incurred on disposing of any net assets over £325k, that are left in the estate on death ? Assetts including cash, cars, boats, shares & property assets etc can all be taken into account by the HMRC.
. Apparently the investment in a DGT for example, can offer an immediate initial IHT exemption upto the nil rate band of £325k with any excess (possibly upto 675k subject to status) also being tax free after the usual 7 years have lapsed. This can apparently currently be repeated with the same tax advantages after a further 7 years, but any excess over say £1m in any 7 year period Is taxable.
. Our understanding is that the DGT can return tax free, upto 5% of the initial investment, monthly/ annually for 20 years. Which has by then, repaid the initial investment tax free. Should you live longer than 20 years the Trust continues to repay at the same rate, until death but the income received is taxed at your nominal rate.
. Another apparent benefit with this type of Trust is that you can change who the beneficiaries are during your lifetime. Equally the beneficiaries (via your nominate trustees), can delay receiving an income from the Trust particularly if earnings were to be kept to a minimum.
. As the DGT is invested in stocks & shares to suit your personal risk profile there could be substantial monies left over in the trust account on death, for any beneficiaries who in turn would be taxed at their nominal rate when & if, some or all of funds are withdraw & not reinvested.
. There is always a risk in investing in stocks & shares but this is a managed fund that could last over 20 years. With a reputable fund manager with a good track record, compounded profits & indexation over this period, it maybe worth considering a type of Trust, rather than potentially incurring a certain 40% IHT charge on the initial investment if left in the estate on death?
. As the years go by & the desire to achieve even more financially & physically diminishes, together with my eye sight,m. As much as also wanting to minimise imposing any additional responsibly on beneficiaries managing the business, even if they wanted to take over the job or even being capable of the role. This may now be the time for us at least, to look at alternative investments before soldering on in the property game & ultimately achieving more taxable assets?
I would be interesting to receive other suggestions as to a likely way forward at 55+ years of age, in this regard.

Mark Alexander - Founder of Property118

17:34 PM, 17th November 2021, About 2 years ago

Reply to the comment left by Ian Dimarian at 17/11/2021 - 15:07
I hear what you say, but I think there is a very limited market for landlords willing to swap their property portfolio's for a managed share portfolio. In my opinion, those who want to get out want cash. Those who still see a long term future in the rental market and plan to grow their business want a tax efficient structure. There may be a small market for something in between but I suspect the size on that market is considerably less than 1% of the whole market.

Another apparently very similar alternative to the solution you have proposed (which I know very little about by the way so can’t comment further on) is swapping a property portfolio for share in a Real Estate Investment Trust "REIT". We discussed that a few years ago, so if you're interested to learn more about that solution please see the link below ...


19:52 PM, 17th November 2021, About 2 years ago

If that's not an advertisement I'll eat my hat.


19:58 PM, 17th November 2021, About 2 years ago

With your property supposedly now valued at £5.75m, a £300k tax bill is a mere drop in the ocean. I wouldn't worry about it. And with such a large portfolio I am surprised you hadn't incorporated sooner. Need to change your accountant my friend.

Mark Alexander - Founder of Property118

20:44 PM, 17th November 2021, About 2 years ago

Reply to the comment left by SimonP at 17/11/2021 - 19:58
What percentage of landlords do you think are advised by their Accountants to incorporate?

Let’s just work on HMRC’s figures of only 19% being higher rate tax-payers and let’s also be conservative and say that less than 5% of those landlords own 10 or more properties. That’s still circa 38,000 landlords that should have incorporated but I suspect less than 10% of those (ie 3,800) have actually completed the sale of their property rental business into a Limited Company.

If I am right, there are still 34,000 landlords who need to incorporate and seriously consider changing their Accountant. Having said that, are their Accountants really to blame. In my experience over 34 years, most Accountants have a hard enough job collecting the historical P&L date to keep their clients compliant, never mind having the time to work on forward planning with them.

Whilst I’m on my soapbox, I also suggest that less than 10% of accountants maintain a balance sheet for their landlord clients and as a result many of them probably over claim the 20% tax credit on finance cost based on their clients having borrowed more than their acquisition costs!


7:29 AM, 20th November 2021, About 2 years ago

Presumably the cost of incorporating that value portfolio ie CGT and SDLT would have far exceeded the £300k so why bother!

Mark Alexander - Founder of Property118

12:18 PM, 20th November 2021, About 2 years ago

Reply to the comment left by Sjp at 20/11/2021 - 07:29
No CGT and no SDLT in this instance. No need to refinance either. See

Mark Alexander - Founder of Property118

16:35 PM, 20th November 2021, About 2 years ago

Now let’s look at this another way.

Over this period the growth in property value has been very similar to the average over the last 70 years.

If we assume an 18 month procrastination period will cost this guys kids £300,000 that’s £200,000 a year.

If he lives another 30 and hadn’t taken action then his procrastination might cost his kids £6,000,000 in inheritance tax.

On top of dealing with the emotional loss of their parents, the kids would also have the stress of raising £6,000,000 to pay the tax.

Isn’t is a moral obligation of parents to solve this problem?

Or should the kids just be grateful for wherever they get?

The above assumes nothing will change, no more properties will be acquired or sold and no mortgages will be repaid.

Thoughts please!

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