Last week I met with an elderly residential property expert, James. He has spent a lifetime watching property buying trends and the current market conditions were not a surprise to him.
Just before Christmas James had paid a visit to Asia, and a colleague of his is currently in the Middle East. From their meetings they remained convinced that the appetite for residential property in the UK remained strong. The UK is safe, it remained buzzing and is still the place UHNW families wanted to be.
He pointed out that this contention was supported by the unusually strong market for lettings and for commercial property. The only area where the market is weak is the residential agency sector, and this he said was skewing the other sectors. Whereas clients who usually come to London at this time of year would be looking for good residential property for their portfolio, they were now hunting down good commercial property because the stamp duty was 4% not 12%.
Buying a home however is very different from buying a commercial property, he went on. It is more akin to an investment of passion; it can be personalised to the tastes of the family, it can create status and deepen relationships. Inviting a business prospect in to your home is much more personal than meeting in a hotel lobby or restaurant.
The current increase in buyers for residential homes in January he said was due to the announcement of an increase in SDLT for second homes as from 1st April from 12% to 15%. However this blip would soon evaporate after 1st April as the market adjusts to the new rate of tax.
What, I asked, was the cause, not so much for the weakness in the market, but which is due to the hike in stamp duty, but the length of time it is taking before it is absorbed into the price? In his opinion the continued lack of confidence was due to confusion as to how structure the acquisition – if an offshore company provided little or no benefit how should the investment now be structured.
James was clearly plugged in to the mood of the market so I asked him about the market response to ATED. Why were so many homes of non UK residents still owned through offshore companies despite the exponential rise of ATED? The tax costs on homes above £2million are now considerable, even for those rich enough to pay them as I set out below.
Property Value ATED Inheritance Tax (exc nil rate)
£2m-£5m £23,350 £800k-£2m
£5-£10m £54,450 £2m-£4m
£10-£20m £109,050 £4m-£8m
£20m+ £218,200 £8m+
James explained that the reason why the higher residential market is depressed could be in part the same reason why people were slow to de-envelope - a lack of confidence as to how to structure the investment. Confidence would return as soon as buyers and home owners knew what the options were under the new regime.
In my opinion, what is needed is old fashioned tax planning, knowing how the taxes work, what reliefs are available and putting them together well.
Six top planning tips
- Be clear as to the long term intentions with regard to the property you own or are planning to buy
- If you are concerned as to your privacy own the property through a company as a nominee
- Be sure that the right person owns the property - multiple ownerships are not usually a good ide
- Make sure you know who is to inherit the property and plan accordingly
- If the investment is for life – think about CGT
- Plan to avoid inheritance tax – it need not be paid in full if at all, multiple ownership is often NOT the best solution.
James was excited; he wanted me to come to his office and explain my planning tips to his sales team. Once they were clear as to what could be done he was sure confidence would return and buying and restructuring would pick up.
If you would like to know more about my six top planning tips, please contact svetlana@garnhamfos.com for a further discussion.