Factoring tax in to your evolving property strategy
By Heather Cunningham, Managing Director, Harold Sharp
In my view, Brexit, Covid and a clear move to greener, sustainable assets have led many to reassess their property strategy.
The immediate and obvious effects of this are seen in market shifts to certain favoured sectors.
Just a handful of the changes in focus I’ve seen are:
- More value placed on lifestyle – such as properties with outdoor amenity near green spaces.
- Higher end community living, again with focus on lifestyle, such as “The Collective”.
- Focus on green credentials alongside increased legislative requirements, at a cost to older rental property stock.
- Net zero as the benchmark for new development.
- Strong interest in homes for key workers.
- New permitted development rights creating interesting opportunities.
- Continued industrial / logistics demand due to strong long-term fundamentals.
- Repurposing of surplus commercial space both particularly in retail sector and high streets generally.
- Redesign of office space to give more collaborative working with lower densities.
- A range of funds raising war chests for multi-sector opportunistic investment.
So how should you be factoring tax into your property strategy?
As accountants, we recognise that tax should not be the main driver in property decision making.
But getting the structuring right, maximising deductions and allowances and managing tax liabilities on exit are all key to building long term wealth.
Against this backdrop, we are confident that in the not-too-distant future we will see changes to capital gains tax rates, changes to inheritance tax including perhaps the ability to gift without lifetime charges and changes to allowances.
Here are five top tips on how you might factor tax into your strategy.
Don’t delay disposals. If you have decided to sell in the shorter term, make sure you crystallise capital gains at today’s maximum rates of 20% (commercial property) and 28% (residential property) before the Chancellor has a chance to increase rates. Much has been said about a possible matching of capital gains tax rates to income tax rates (45%).
Think Trusts. If you consider an asset a longer-term hold but want to pass it on for the benefit of your children and grandchildren, think discretionary trusts. And holdover any gains on transferring the property in to trust. This isn’t a solution for major assets – but could be perfect for individual residential properties.
Take advice on how you structure new acquisitions. Are you borrowing against the asset – so interest deductibility is important? How long will you hold the asset? Will other family members benefit?
Although we know corporation tax rates are set to increase, a corporate structure may work best.
Perhaps even a family investment company is worth consideration.
Restructure existing holdings. Some property investors hold significant property assets in a single group, under the joint ownership of a number of families or siblings. Often people like to have control of their own destiny and have very different investment agendas. We can advise you on options to reach a commercial solution, possibly by way of demerger.
Make sure you are using all your allowances. Capital allowances and in certain scenarios R&D are the two which are most commonly overlooked from a property perspective, but they can be extremely valuable. So don’t lose out.
For more insight and information on these and many more tax planning tips then take a look at our regular blogs on our website.
If any of this has set you thinking, then give me a call on 0161 926 0511. Harold Sharp are specialists in real estate tax planning and have a dedicated Proptech team.