The Schmidt Tax Report Tax, Money & Property

November 2016

Be wary of strong drink. It can make you shoot at tax collectors...and miss. - Robert A. Heinlein 10 The Offshore Column A roundup of offshore news, tips and information The Schmidt – plus is Hungary the perfect offshore centre? Tax Tax Report Money 12 Alternative Investment: Private equity Tax, Money & Property What sort of returns are available from investing in private companies? How do you Tax find the opportunities? What are the risks? An in-depth sector report. 3 News The month’s roundup of tax-related news stories. 16 Brazilian Adventure The funds that invest in distressed debt (such 4 Editor’s Notes as junk bonds) can achieve extraordinary How to use a strategic start-up to reduce your returns. Is Brazil the next place to look? tax burden to 10%, plus tips on not being an employee, saving VAT and tax-free investment. 17 Inflation Report Inflation has just doubled to 1%. Is this the 5 Ask the Experts beginning of an inflationary period and – if it Our panel answers questions about business is – how can we plan for it? property relief for trading businesses and claiming VAT on company cars. All articles this month by Jonathan Self

5 Feature: Pension Protection Property An update. 18 Property Tax Tips 6 Feature: Employed or Self-Employed? Using companies to save extra tax, making A clever way for limited-liability partnerships money from your garden and avoiding IHT. potential effect on other HMRC services, instructed to draft a directive authorising to save stamp duty land tax. News and approved a motion calling for urgent an EU financial transaction tax that would 19 Property Companies action to compensate people who have had apply to 10 of the EU’s 28 member states. The gap is closing 8 Feature: Do-It-Yourself EIS Companies Avoid the 7.5% surcharge! tax credits withdrawn incorrectly. HMRC The new tax would initially be introduced chief executive Jon Thompson said the in Austria, Belgium, France, Germany, We look at Enterprise Investment Scheme The UK tax gap – the gap between tax department “will not be going back to the Greece, Italy, Portugal, Slovakia, Slovenia companies, how much tax they can save you 21 Property News A range of news stories covering everything collected and what the government market” for support in order to deal with and Spain. The EU taxation and customs and which companies qualify (a surprisingly believes it would be collecting were it not tax credit claims. commissioner, Pierre Moscovici, welcomed high number). from buying property in commuter areas to the latest mortgage rates. for the black economy and criminal evasion the decision and explained that the tax – is closing. Newly released figures suggest Making tax digital would be imposed on a “broad base, at 8 The Business Column 23 Saving VAT on Property Investment that in 2014/15 it fell to its lowest ever level very low rates” (still to be defined) to How to have your cake and eat it when of 6.5%. To put this into perspective, some How to save money when building, Plans by HMRC to “make tax digital” have preserve the competitiveness of European diversifying a limited company. 10 years earlier it was running at 8.3%. The been severely criticised by small-business financial products against those of the UK. purchasing or converting property. figures show record revenues of £518bn experts. Witnesses called to give evidence to It is planned to levy it on equities, bonds, being collected from 2014 to 2015. MPs on the Commons Treasury Committee derivatives and possibly share trading. 24 Property Opportunities said the proposals would impose significant Investing in HMOs, self-storage, serviced Parliament put HMRC under additional tax compliance costs on small Tax-efficient investment up apartments (especially something new called pressure businesses for little or no medium-term renting to rent) and the East Midlands. benefit. The proposed project will impose A record £1.8bn was invested in tax-efficient The Public Accounts Committee has been quarterly digital tax reporting upon SMEs. Enterprise Investment Scheme (EIS) funds last year with the highest percentage going putting HMRC under severe pressure over While free software has been promised for Login details for our new site to companies based in the north of England. its contract with Concentrix, the company the smallest businesses, others could expect The region secured 50% more funding in Please note that back copies of The Schmidt responsible for managing tax credit a cost of £20–£30 a month. the year to April 2015 than the previous Tax Report are now available online in PDF checks. MPs called on the government to year. Technology and business services form via our website: www.schmidtreport.co.uk conduct a “comprehensive” investigation EU transaction tax update companies dominated the fundraising. into Concentrix’s performance under the The password is all lower case: str Venture capital trust (VCT) investments contract, to include consideration of the The European Commission has been did less well overall, attracting just £435m 4 - Tax Tax - 5

now might be a good time to review the business”. This is not the case where the entrepreneurs’ relief on the actual land. To inflows in 2015/16. Seed EIS (SEIS) to crack down on US companies using Irish vulture fund tax crisis is proving a small but growing sector – inversion deals to reduce their American tax situation and take professional advice. business use continues but the business quote one expert: “Unfortunately, where increasing to £175m in the year to April bills, as they feel it may result in collateral In 1997, the Irish government introduced tax has deregistered. There is, therefore, no commercial woodland is sold the capital 2015, up from about £155m a year earlier. damage to other businesses. The US rules designed to attract the global investment Unexpected VAT savings possibility of a clawback once the input tax gain arising on that disposal is calculated Treasury secretary, Jack Lew, has stated that fund industry to establish itself in Dublin. has been claimed, if input tax recovery is due in the normal way, but the part of the You aren’t registered for VAT but you on general principles. This is a complicated disposal proceeds which relates to the trees Capital gains tax takeup he will be modifying the proposed rules Today, that sector has €1.8tn of assets based in the country. However, the same rules are are about to incur some property-related area but recent correspondence in Tolley’s growing on the woodland is ignored.” Is because they had heard from businesses Thanks to soaring property values and a sell- now being used by foreign investors – mainly expenditure below the capital goods scheme Taxation suggests that a good VAT adviser there any way around this? The answer is that they “could unduly constrain ordinary off by buy-to-let investors HMRC’s annual US hedge funds and private equity groups threshold that will be VAT-able. Could you can achieve wonders in this particular that where the woodland is part of a larger, business practices”. The IRS had intended take from CGT grew by 25% to £6.9bn in – to avoid all tax on their profits. This has get away with registering for VAT, claiming situation. agricultural enterprise, it is. Imagine a to limit the way companies lend money caused political uproar and the government the year 2014/15. This represents the highest the input tax and then deregistering? The farmer with 1,000 acres. Of this land 700 between their subsidiaries (‘earning is being pressured to close what is seen as answer is – very possibly. The fear is that Sorting the woodlands from the acres is turned over to sheep and 300 acres yield since 2007/08, the year of the credit an unacceptable tax loophole. There is a lot stripping’) in order to substantially reduce any VAT you have had repaid to you by trees is turned over to the growing of timber. In crunch. of money at stake. The foreign investors – US tax liabilities. Non-inverted businesses technically referred to as non-bank entities HMRC will be clawed back. However, these circumstances a sale ought to result Good news for US multinationals pointed out that the proposed crackdown but called ‘vulture funds’ locally – now the mechanism to claw back input tax on There are fantastic tax breaks to be had in entrepreneurs’ relief being applied to would severely inhibit their ability to make own 5% of the €100bn of outstanding Irish services only applies where services are from investing in woodland, but ironically the whole. There are other tax reasons to The US government is reviewing its plans ordinary intra-company loans. mortgages. purchased for the purposes of the business when you sell the forest even if there is still consider an investment in farmland – not but are then put to “private use” or “for timber to be cut and you can show that it is least the inheritance tax (IHT) benefits. Editor’s Notes a purpose other than a purpose of the an active business it is very difficult to claim Moreover, the price is currently falling. The strategic start-up Rodney’s home to begin with and later in How not to be employed separate offices – and he was able to work for Ask The Experts Nowadays, our tax legislation is so written the existing business and build up the new Sometimes, it makes much better tax sense Q. In the October issue you deal on page 21 the same ownership as the business: the taxable supplies, but the examples provide that if someone decided to give up smoking business at the same time. Indeed, after two not to be an employee. Employees pay with property tax, touching on IHT on land, sons own the business but you own the cases where there is private use and the VAT not for health reasons but in order to reduce years his new business was really flourishing PAYE, National Insurance and benefits in mentioning “the ideal position is to trigger land. So the land is not being used by you is still claimable. his or her personal tax bill it is possible and this year his employers offered to buy it kind. There are all sorts of work-related BPR”. In the same issue you kindly answered and your husband in a business. it would be deemed unacceptable tax for £600,000. It was agreed that the money expenses that employees can’t claim. There a question telling me I was trading on my My question therefore is can I still claim avoidance. So, in all tax planning, one has to would be paid to him over three years. So, for are all sorts of extra tax costs that employers land by growing Christmas trees, also my Q. I recently took the plunge and followed the VAT back on the capital purchase over sons’ warehouse goods for their shops in a your advice and purchased (hire-purchase) £2,000 where the purchase will be used for be extremely careful. Not to put a tooth in it, the next three years Rodney will be receiving have to pay. So, it isn’t surprising that, when large barn on site but no rent is charged, only a plug-in hybrid vehicle as a company car non-business use as well as some business from the moment you start discussing any £200,000 a year in the form of a capital gain. the situation isn’t entirely black and white, maintenance charges. Self and husband live for my wife to use for non-business related use. If I can then I assume for this the sort of tax plan with a third party – which He will pay just 10% tax on this money, HMRC is inclined to argue for employee in the farmhouse attached. My husband is journeys. amount I can reclaim is the full VAT paid. could include a colleague or employee or a thanks to entrepreneurs’ relief. status. In general, tax specialists advise their quite ill, and I therefore would like to know specialist tax adviser – choose your words clients that the best way to prove they are not what impact both of these trades will have I am now in the process of completing For information I am an IT Consultant carefully and make sure that everything is Rodney’s business venture succeeds – from employees is to demonstrate that they are on the IHT treatment of the site. We have my VAT return and was on the verge of running a personal service company of not just within the letter of the law but can a tax perspective – because he was not a clearly self-employed. While this can help, it other assets, but they are just below £650k as re-claiming 50% of the VAT back as per which my wife is Company Secretary and be justified on commercial grounds. A good shareholder in the purchasing business and misses the real point. All the law demands is long as the farm is excluded. normal rules relating to the private use of Director. example of a commercial activity that will because he was not a connected person that the individual concerned doesn’t fulfil capital purchases, when I decided to check produce accidental, but doubtless welcome, (i.e. none of the owners of the purchasing the ‘pre-requisites of employment’. These business were immediate family members). J. W., via email the rules as I am signed up to the Flat Rate P. W., via email tax benefits is what I would call a strategic are: the obligation to provide a personal Scheme for VAT. start-up. I will explain the concept with a One may suspect that Rodney was able service, the obligation to be controlled in to make such a success of his business by A. The value of assets used in a trading A. It is a good job you checked, because real-life example. relation to the manner of the task to such an business qualify for business property Under VAT Notice 733 (FRS) Section 15 there is a general prohibition on claiming taking advantage of knowledge, suppliers extent that the worker becomes a servant relief. So that part of the land used in the seems to state that I can reclaim the VAT, back the VAT on company cars. The only and facilities supplied by his main employer. Rodney is the director of a construction and that there is mutuality of obligations. Christmas tree business would qualify for but I am unclear on the statement in Section businesses which are allowed to reclaim One may even suspect that Rodney gained business that specialises in installing If just one of these factors is missing the business property relief (BPR). But that 15.8 relating to Private Use. The statement are ones like driving schools or car hire other advantages from his main employer – commercial lavatories and bathrooms. The worker will not be an employee. Of course, part of the land used by your sons is not in says it “assumes” the purchase is wholly for companies. company mostly supplies pubs, restaurants an informal, off-books loan, for example, or it can help to show that someone has their and hotels. Rodney has no equity in the an informal credit arrangement. One may own business, but it isn’t necessary. business, and until two years ago was on suspect. But providing the evidence says Pension Protection a salary of £250,000 a year. In 2013, he otherwise, one’s suspicions must remain just Incidentally, while I am on the subject, a When ‘pensions simplification’ came into • whose pension benefits at 5th April 2006 protection, regardless of the value of that: suspicions. sought permission from his employers to quick reminder to readers that HMRC effect in April 2006 there were two main exceeded the new LTA for 2006/07 of £1.5 their funds, as long as they did so by the set up a business of his own selling domestic recently published a Consultation on Salary protection measures put in place to ensure million; or deadline of 5th April 2009. bathrooms – a market his employer had This, then, is what I mean by the strategic Sacrifice for the Provision of Benefits in Kind. that individuals who had already built up • who believed that they might exceed it in never penetrated that was wholly separate start-up. It is the starting of a strategic In a nutshell, it is yet another attempt to the future and who were prepared to cease Enhanced protection had the effect of substantial pension rights would not be to its existing trade – and it was agreed business that has the welcome side effect make salary sacrifice even less attractive to all future defined contributions to registered eliminating any LTA charge, so effectively an that he would be given three days’ unpaid of being eligible – should it ever be sold both employers and employees. The latest penalised by the introduction of the new pension schemes and/or limit future accrual individual could take an unlimited amount leave a week to launch and build this new – of allowing its owner/directors to take proposals are likely to be included in the lifetime allowance (LTA). within defined benefit schemes to a limit from their pension arrangements after April venture. So he took a substantial pay cut welcome advantage of entrepreneurs’ next Budget. If you are remunerating your known as ‘relevant benefit accrual’. 2006 and, provided that the protection had to £100,000 a year. The new venture was a relief. It requires careful thought, but it employees using salary sacrifice (or if you The first of these was ‘enhanced not been lost or revoked, no test against the complete standalone operation – starting in can be done. are benefiting from the current legislation) protection’, which was aimed at those: Anyone could apply for enhanced LTA needed to occur and there would never 6 - Tax Tax - 7 be an LTA charge payable. point to 25% of the LTA (i.e. £375,000). government did not foresee the LTA being Class 4) and have no equivalent of the the person he’s working for is really one of appear to contradict each other, or even However, for those whose accrued benefits reduced again, which it was – from £1.25m employer’s contribution, or payroll tax. employee and employer: if you disregard do contradict each other. From the point The second form of protection was ‘primary already exceeded the LTA, a higher level of to £1m on 6th April 2016. As a result, this So one could sum up by saying that a self- the existence of the intermediary entity. So of view of evidence, it’s a very good idea, protection’. This was aimed at those who: tax-free cash could also be protected. wording no longer applies as intended and employed relationship gives rise to 15 or this is actually exactly the same test, in effect, if you feel you may be somewhere in the needs to be reworded. 16% less in the way of NI contributions as the test applied to the subcontractor on grey area between employment and self- • wanted to continue in pensionable At the time, not everyone who applied than an employee relationship does. the building site or the computer software employment, to have a written contract, employment or accrue benefits in a for enhanced and/or primary protection HMRC is aware of this issue, and it is engineer working directly for a large and if you want to show that you are self- registered pension scheme after 5th April applied for protection of the tax-free hoped that the appropriate wording will be The front line organisation. employed (or the person you are paying 2006; and lump sum as well and consequently the included in the 2017 Finance Bill. However, is self-employed) this contract should • were already over the LTA and likely to be maximum PCLS they are able to take has there is no guarantee this will happen. In most cases, the distinction is clear-cut in Who cares? obviously say as many of the right things as so when they took their benefits. been restricted to 25% of the LTA. practice. If you are a small cog in the wheel possible – and the contract should be what Anyone who is currently thinking about of a large company or organisation, and you Is this just the payer’s problem or is it just actually happens in practice as well. Under this form of protection, the individual When the LTA was reduced from £1.5m to vesting their pension benefits (in full or in go to work every day from 9 to 5, there’s no the payee’s problem? With IR35, it is just a LTA was based on how much the member’s £1.25m on 6th April 2014, the government part), who holds enhanced and/or primary real scope for arguing that you could be dealt problem for the worker, because the PAYE Here’s a checklist, then, from the point of benefits at 5th April 2006 exceeded the chose to include within the legislation protection without any lump sum protection with under the self-employed NI code. On obligation is slapped on to his company, and view of the payer and payee who want to value of the 2006/07 standard LTA. This protection for those who had enhanced and whose total PCLS would be greater the other hand, an accountant or a solicitor the payer, unless it’s a government-funded establish that this is a self-employment individual LTA was intended to increase at or primary protection (but no lump sum than £375,000 when the benefits are vested in public practice, with his own office, is body, will get off scot-free even if IR35 is situation: the same rate as the standard LTA. protection) and would therefore have been should therefore seek professional advice very unlikely to be anything other than self- found to apply, perhaps some years after the entitled to a PCLS of 25% of the higher before taking any action. employed vis-à-vis clients. event. • The payee should have discretion as to how Those who applied for enhanced protection amount, £1.5m having been the LTA at A he does his work. could also apply for primary protection, and Day. The actual wording used was: It may be best to consider deferring Shareholders/directors of private companies The boot goes on the other foot where a • The payee should have discretion as to where this applied the primary protection benefits until the issue has been resolved. are a special case, and in the past it’s been person is being paid directly, that is not where he does his work. would remain dormant and would not apply Individuals with existing A Day primary or quite popular, whether deservedly so or not, through an intermediary. Here the problem • The payee should have discretion as to unless and until the enhanced protection enhanced protection but who do not have Carolyn Gowen is a Chartered Wealth for directors to send invoices to their own very definitely rests with the payer, because when he does his work. was lost or revoked. lump sum protection will retain a right to Manager and Certified Financial companies for payment of their services the obligation to deduct PAYE and NI • The payee should be paid by results rather a tax-free lump sum of up to 25 per cent of Planner at award-winning City-based rather than allowing that payment to go contributions rests with the employer. than by the hour. In addition to protecting the value of the £1.5 million when the standard allowance wealth management firm Bloomsbury. through the payroll. We have to say we think • The payee, where appropriate, should use pension fund from the LTA charge, the is reduced to £1.25 million. This change She has been advising successful this is a very dangerous game to play, and As we’ve already said, the big difference tax-free lump sum (renamed the pension ensures that individuals in this position do individuals and their families on wealth his own assets or equipment, e.g. cars or indeed always has been. A director’s pay as between the two statuses is the absence computer equipment, rather than that of commencement lump sum, or PCLS) not have a reduced tax-free lump sum when management strategies for over 25 years. such, for acting as director, is specifically of employer’s NI with a self-employed could also be protected. The introduction the lifetime allowance is reduced. Carolyn can be contacted on email at the payer. within the employed tax and NI code. To relationship. This is an obligation of the • The payee should explicitly have no sick of the LTA on ‘A Day’ (6th April 2006) [email protected] or pay gross on the argument that the director payer, so would it be right to assume that limited the maximum tax-free cash at that The issue here is that, at the time, the by calling 020 7965 4480. pay, maternity/paternity pay or holiday is not supplying his services as director but the payer is most concerned in situations entitlements. is effectively an independent contractor to where he is not protected by the existence • The payee should not be ‘part and parcel’ Employed Or Self-Employed? his own company is asking for trouble, in of an intermediary company, which will of the payer’s organisation. the form of arguments from the next visiting take all of the flak if the relationship turns Fred gets up in the morning, puts on or, rather, the National Insurance (NI) – goodness knows why, and the government • The payer should be able to send a HMRC inspector. So, as advisers, we’re out to be an employment relationship? his working clothes and goes to work at point of view. probably has long forgotten. If you are an substitute to do the job, preferably at his never happy to see clients of ours taking this Sid’s office/factory/building site. Is he an employee, your pay suffers two separate sole discretion. risk, and most, if not all, heed our advice. Superficially, the answer to this would seem employee of Sid’s or is he self-employed? Because it’s in the arena of NI that the and distinct NI contributions: the • While the look of the situation is much less to be yes. However, looking beneath the difference makes the most impact. From employer’s contribution and the employee’s important than the above, the payee should No, those in the front line on this question surface, somebody who is looking to pay This question is as old as the hills in legal the tax point of view, a self-employment contribution. The so-called employer’s preferably have his own logo, letterhead, of the distinction between employment and for a service has a breaking point beyond and tax terms, but it’s just as important now relationship doesn’t really have any, or contribution (because it doesn’t actually trading name etc., and should obviously self-employment are individuals who tend which he will not pay a greater amount for as it has ever been. Why is it so important? much, effect on the amount of income tax give rise to any state benefits) is 13.8% on be registered with HMRC, both for self- to provide little or nothing other than their that service. If he must find employer’s NI the individual pays. It’s merely a question of the gross above a fairly low threshold, and assessment and for VAT, if his income goes own services, and whose time is very much from somewhere, that inevitably means he’s Well, for starters, it’s important from the mechanics, with employees being subject with no upper limit. This is no more and over the threshold and is within the standard taken up with a small number of clients, going to be able to pay less to the individual point of view of what rights Fred has against to the pay-as-you-earn scheme, and self- no less than a payroll tax. The employee’s rate of that tax. Sid legally. If he’s an employee, he’s protected employed people having the privilege of contribution is 12% between thresholds or even with only one client. Those who concerned. So being self-employed is by a massive corpus of employment being paid gross, and settling up in two roughly equivalent to the personal allowance provide their services through a company potentially of major advantage to the payee are also in the front line because of IR35. as well, even in the direct-payment situation. Clearly, it’s not going to be possible, in legislation – overprotected, some would say. six-monthly instalments every year. It’s true and the higher (40%) income tax bands, and many cases, to tick all of the above boxes. He immediately gets entitlement to things that a self-employed person has different, 2% above that. No doubt it will soon occur Where some indications point towards like workplace pensions and the right not and in most ways more favourable, rules to some spendthrift and grasping Chancellor This dreaded acronym is very well known How to be self-employed employment and some towards self- to be simply given his marching orders. The relating to the deduction of expenses: but of the Exchequer that he can soak the rich by to those in the industries concerned, employment, the cases tend to be decided self-employed have no such protection. in a typical scenario where someone is abolishing this upper limit, and charge 12% including in particular the computer Having answered the question “Why be on the basis of adding up the factors supplying not much more than their own (or more) on the whole of an employee’s software industry. The rule basically says that self-employed?” we now come on to the But this is a magazine about tax first and personal services, this isn’t, in fact, a very earnings. But that’s the way things are at the if you are providing your services through question of “How?” Typically of our law in pointing in each direction and seeing foremost: so what we’re going to talk important difference in practice. moment. an intermediary (normally a company) this country, there’s no easily understood which prevails. Some of these factors are, about here is the importance of being that intermediary has to account for full set of rules written down in one place. of course, more important than others, self-employed, or paying self-employed But the NI regime is completely different Self-employed individuals, on the other pay-as-you earn and NI deductions if the Instead, you have to piece together the and really the first three capture the individuals, from the tax point of view – between employment and self-employment hand, pay a lower rate of NI (called relationship between the individual and effects of myriad cases, some of which essence of the distinction, if any do. 8 - Tax Tax - 9

but it’s necessary to look separately at My message here is: think about it. Don’t structuring decision which needs to be made Do-It-Yourself EIS Companies each case. Some businesses can be set up just go down the default route. early on, before A Limited has acquired any without incurring any significant initial significant value. To de-group later is much Despite its fairly amazing tax benefits, roll over any kind of capital gain you have the fact that only companies carrying on expenditure, and therefore they won’t, or Freestanding or group? more difficult. there’s nothing particularly magic about made in the previous three years into shares qualifying trades need apply. A qualifying at least it is to be hoped, be incurring any an EIS company, that is a company which newly issued to you in the EIS company. trade is basically any trade which doesn’t start-up ‘losses’. These losses can derive Moving on completely from the losses Where all the companies in your group qualifies for relief under the Enterprise include the following activities: not from unprofitable trading so much as point, which is most likely to apply in the are trading, there is, it’s true, a relief known Investment Scheme. Anyone can set one So, for example, if you have made a gain of from initial expenditure, which is available early years of a new business, we move on as ‘demerger relief’ under which you can up and, where applicable, tap into these £100,000 on selling an investment property, • dealing in land commodities futures for a tax deduction before the business has to planning for ultimate sale. split up the ABC group into three separate benefits. The main restriction is the type which is nothing to do with any trade, shares, etc. really taken off. limited companies, A Limited, B Limited of business the company is allowed to but at any time in the next three years you • dealing in goods otherwise than in Here, again, business situations tend to be and C Limited (or whatever). But demerger carry on to qualify for the EIS, and we’ll subscribe £100,000 into an EIS company – an ordinary trade of wholesale or retail The worst way you can structure things different: and to different questions you relief will be almost certainly refused by – you couldn’t think of anything less tax obviously are likely to get different answers. HMRC where it is taking place in immediate come on to this in just a minute. However, which can be your solely owned company distribution contemplation of a sale. here’s a summary of the benefits you get – the gain can be offset and no tax will be • banking insurance or other financial efficient – is to set up a freestanding limited But let’s put this tax-planning problem in a company alongside your existing company, from investing in an EIS company: payable, or any tax paid will be refunded. EIS activities nutshell. and fund this start-up expenditure with What do I do? is, in fact, almost the only automatic get-out- • leasing or letting or receiving royalties or loans from the existing company. It’s not Fast-forwarding to the end of a business’s • If you’re not connected with the company of-jail-free card for all kinds of CGT. licence fees You’ll remember that I started off, when the loans that are the problem: it’s the fact life, at least as far as its current owner is (i.e. if you and your family have no more • providing legal or accountancy services considering the opening loss position, by that these start-up losses have ‘nowhere concerned, let’s suppose that the ABC commenting that a freestanding company than 30% of the company, you can claim an If things go wrong, as unfortunately they • property development to go’ in the newly formed company. All Group is looking to sell one of its trading immediate 30% income tax reduction; in sometimes do, EIS status is also a way of • farming or market gardening that you can do with them is carry them is the worst possible structure to diversify subsidiaries, A Limited. Following the sale into, from the point of view of loss relief. the case of the Seed Enterprise Investment easily making sure you get relief against your • woodlands or forestry forward and use them against the profits of A, B and C will continue to trade. And now, you will say, here am I advocating Scheme, or SEIS, this is a 50% reduction.) other income for the loss you have sustained • ship building that you hope will arise in the future. the freestanding company as the best on your share subscription. • coal or steel At first glance, this sale seems to be structure, because of its CGT effects. • If you qualify for this income tax relief, • hotels and similar establishments An improvement on this is to put the new extraordinarily well served by the tax system, you’re also completely exempt from As we’ve said, an EIS company can be • nursing homes and care homes trade into another group company, or even because the gain which the group company I plead wholly guilty to the mixed message capital gains tax (CGT) when you sell any company. It just has to tick a few • generating electricity, heat or any other to go back to the default position of setting makes on selling A Limited is exempt from here: the two tax considerations do indeed your shareholding, so long as this is after boxes, including that it is an unquoted form of energy it up in the existing company itself. At least tax. This is due to the so-called Substantial fight against each other. But remember at least three years. trading company, not a subsidiary of • producing gas or fuel in this way initial losses are automatically Shareholdings Exemption, a politically two things: first, in some circumstances another company, and so on. But the most • other subsidised energy-related businesses relievable against the profits being made motivated set of rules designed to make the the ultimate sale situation is more • Even if you own more than 30% of the important catch to what otherwise looks • providing services or facilities for any from the existing trade – assuming they are. UK attractive as a place to have your holding important than using start-up losses, and company – even if you own 100% – you can like an unbelievably generous tax relief is businesses in the above. company in an international group. vice versa and, second, with care it may But in my view you should always consider well be possible to have your cake and another option as well, which is setting up But while this is all very well in the context eat it by restructuring after the benefit of The Business Column the new trade outside the limited company of a quoted group, in an owner-managed the start-up losses has been enjoyed. You envelope altogether. Yes, I am talking about group the situation is a bit different. What do need to tread very carefully indeed our readers stifling yawns or skipping whole What is the default position with regard to The joys and perils of LLPs (limited-liability partnerships), but if the shareholders, that is the real people here, because there are specific rules to articles. setting up this new, and rather different, line diversification the same effect can also be enjoyed, as discourage arrangements that milk a start- of business? In practice, without thinking who own the group, want to actually get far as tax is concerned, with an ordinary some benefit from these sale proceeds? up or other company of its losses, and No, what I’m looking to concentrate on here about it people such as Stephen tend to Fashions come and go in the world of partnership or even a sole tradership. As A Limited was a member of a group, it then move on to another arrangement. business, as in other worlds. In the 1960s, is one or two specific practical points where, start the new sort of business in the existing But if, at the very least, this article has got company. If there’s a significant reason, isn’t possible for them simply to take the diversification was the name of the game, in my experience, business people usually the point across that structuring a new perhaps owing to the specific regulatory or The point is that losses which arise in proceeds and spend those proceeds on and companies such as Lonrho went fully get it wrong. And I’m going to start from one diversified business is all important from commercial requirements of a particular these vehicles, subject to certain caps and their own personal lifestyle. To do so would in for this. Even today, supermarkets tend to big assumption: the business concerned is the tax-planning point of view then I will type of trade, for that to be set up in its own restrictions, are available for offset not be effectively to take a dividend out of the diversify more and more, selling fresh fruit currently in a limited company. have achieved what I set out to. separate limited company, this will be so just against current profits elsewhere in holding company, chargeable, no doubt, at and veg and banking services from the same set up: and the company may either be a the limited company envelope but also very high rates of tax because the proceeds premises. The default position against all the income of the individuals would come out in a single lump. It’s at this Alan Pink FCA ATII is a freestanding company owned by the same specialist tax consultant concerned. And losses which you are point, perhaps, that the family who own Stephen Spender has just inherited from his shareholders or a subsidiary of the original who operates a bespoke But I’m not here to talk about big business company. The one thing people almost never using to offset against income being ABC Holdings Limited look back on their and plc’s. If the managing director of Tesco, father the controlling shareholding in the tax practice, Alan Pink think about when diversifying in this way is taxable at 40 or 45% are clearly much earlier structuring decisions and regret Tax, from offices situated or a modern-day Tiny Rowland, is reading family company, which has manufactured tax. But the way you set up a new business more lucrative than those merely reducing them. If A Limited, instead of being owned in Tunbridge Wells. Alan this, he won’t find any advice relating to these toothpicks successfully for more than a structurally can have a huge impact on the tax your 20% corporation tax charge, which by a holding company, and hence being century. He decides that money is to be made advises on a wide range areas, because tax planning for large quoted liabilities you face, and this impact can make is the best you can get if they are incurred part of the group, had been a freestanding of tax issues and regularly from providing motor insurance, that is he is companies is a completely different ball game itself felt in particular at both the beginning within the limited company envelope. company whose shares were held directly writes for the professional press. Alan has looking to diversify the company. In answer from the planning appropriate to owner- and the end of the business’s life span. I’m by the individuals, the sale, it’s true, would experience in both major international managed businesses. to his critics, he says that the big requirement thinking here about relief for start-up losses in In the first four years of a new business, not have been tax exempt: assuming CGT plcs and small local businesses and is for an insurance company, which operates in the early stages – and tax payable on ultimate it’s even possible to carry back losses three entrepreneurs’ relief applied, there would recognised for his proactive approach to I’m not even, you’ll be glad to know, a heavily regulated industry, is that it should sale of the business at the other extreme. years, so that income tax you thought was have been 10% tax to pay. But the money, taxation and solving tax problems. Alan can planning a comprehensive treatise on how have a lot of money. Toothpicks Limited sunk and permanently made over to the post 10% tax, would have been freely be contacted on (01892) 539000 or email: to structure a diversified business: anything passes this test, because his predecessors in Start-up losses government to pour into the black hole of available for the individuals to spend on [email protected]. His book, The lengthy like this is likely to command the family have been very prudent, and have its finances can be recovered by the simple whatever they liked. Entrepreneur’s Tax Guide, is on sale from comparatively little attention, and we at this neither spent the company’s money nor paid This is where it’s difficult to make any expedient of making sure these are personal Head of Zeus for £20 and from all good august organisation have no wish to have it out to themselves as fat, juicy dividends. general rule, applying across all businesses, losses and not company losses. And the important point is that this is a bookshops. 10 - Tax Tax - 11

same subject from other sources, such as Is there any way to hold shares in UK which it jumps to 19%. The Offshore Column banks, so it is important to be 100% accurate companies that would allow you to escape and to verify sources. The whole purpose both the fourth money-laundering directive There is also a favourable intellectual America welcomes entrepreneurs institution. If you are such a customer or clear of the claim of being a jurisdiction client, you must be sent the notification of convenience, and we must look at our of the PSC register is to ensure that there and the new register rules? The answer is property (IP) box regime. A Hungarian is total transparency regarding the way UK maybe. At the moment, there are a number company can be used in order to ensure The US government has announced before 31st August 2017. openness to transparency as defined by businesses are owned and structured. A of discrepancies that could allow individuals a 0% tax rate. This is particularly useful that it is keen to attract international the OECD and others. We must redefine person of significant control is an individual to avoid being registered. For example, the as Hungary IP rights include trademarks, entrepreneurs. In order to facilitate this, it Double Dutch problems our value proposition based on clarity, who meets one or more of the following whole emphasis of the register is on control. patents, copyrights and software. In fact, is proposing to grant suitable candidates transparency and compliance today with conditions: So, if the equity in the business were divided you can apply intellectual property rights temporary residence while they start or The Swiss Supreme Court has ruled full anticipation of the next OECD moves.” between voting and non-voting shares to almost anything. grow a US-based business. The objective information about Dutch holders of Swiss Bahamian banks are believed to hold deposits worth £172bn. It is expected that • direct or indirect possession of more than and the individual concerned had only is to attract entrepreneurs whose presence bank accounts should be sent to the Dutch HMRC will start analysing the stolen data as 25% of the company’s shares; non-voting equity (in other words purely What about trusts? Well, interestingly, in America would bring about “significant government. The Dutch tax authorities are seeking details about any Dutch soon as it has the resources available. • direct or indirect possession of more than an economic interest) then it is possible Hungary introduced something very public benefit through the substantial and national who has more than €1,500 in a 25% of the company’s voting rights; that they could escape having to be listed. akin to that of the English trust into law demonstrated potential for rapid business Swiss account and has not provided their Denmark buys taxpayer data • direct or indirect possession of the right By the same token, certain sorts of trusts about two years ago. However, there is growth and job creation”. Entrepreneurs bank with evidence of tax compliance. to dismiss or appoint the majority of the may be exempt and so if an individual an important difference. The Hungarian who wish to apply must have a minimum The request has been made as part of the The Danish tax authorities have announced directors; is a beneficiary of an offshore trust (in courts do not believe in dual ownership. of 15% equity in any qualifying start-up 2010 double-tax treaty between the two that they have purchased a vast cache of data • the right to or actual exercise of significant particular a discretionary trust) and the In other words, there is no difference and be central to its operations. The start- countries. The French tax authorities have relating to Danish citizens who hold offshore influence or control; and trust is managed in an appropriate way it is, between the legal owner and beneficial or up must have been established within the also asked Switzerland to hand over client bank accounts, offshore companies and • the right to or actual exercise of significant also, possible that they could escape being equity owner. This makes Hungarian trusts past three years and it must show potential information for some 45,000 bank account other offshore vehicles. They paid $900,000 influence or control over the activities of a included in the register. a contractual relationship. Once a settlor for major expansion. It is intended that holders. The assets concerned are believed to an anonymous seller for the information. trust or firm, such as a limited partnership, signs a trust deed, there is a contract. Under the entrepreneurs should be able to stay to total more than $11 billion. The material is supposed to have come from that is not a legal entity but would satisfy Ultimately, the news is probably bad for the contract, the settlor must transfer the for at least two years with the potential those who wish to keep their personal affairs the same source as the Panama papers. any of the first four conditions if it were an assets to the trustee. In doing so, he also to extend it for up to three further years. confidential. The very wealthy may be able Israel court upholds FATCA individual. transfers the ownership. This makes the If the planned concession goes ahead, it to argue with their advisers that their names New Cyprus citizen scheme owner the trustee. Providing a professional should be in place by the end of 2016. need to be kept secret for reasons of security. The Israeli Supreme Court has rejected Crucially, where a UK company has non-UK trustee is used, there is no need to Interested parties are advised to contact So, too, may those whose businesses are an attempt by a group of US/Israeli dual The Cypriot government has revised shareholders, including a non-UK company, register or notify the government or tax their local US embassy in the new year. considered to put them at substantial nationals to stop Israel from implementing its citizenship-by-investments scheme, the directors need to pursue the directors or authorities. This is because the trustee itself risk (e.g. those involved in Life Science the US Foreign Account Tax Compliance making it easier for entrepreneurs and trustees of the offshore vehicle in order to is registered as a financial institution. The Information must be given to enterprises). In general, however, individuals Act (FATCA). The Israeli tax authority investors to reside in Cyprus and obtain ensure that they have correctly ascertained transfer of assets into the trust is not taxed offshore customers are going to have to look for more subtle must now start sending information on Cypriot citizenship. The new scheme who controls such vehicle or vehicles. In but the trust itself pays tax at the corporate ways to maintain their confidentiality. all accounts with a balance of $50,000 or means that those wishing to apply for a plain English, someone who controls a UK tax rate of 10%. Of course, it only pays this The International Tax Compliance (Client above controlled by US persons to the IRS Cypriot passport must make an individual business through a foreign company or trust on profits. Before I say anything else, I must Notification) Regulations have been A final note, as the rules currently stand most immediately. Legal action was filed by the investment of €2 million and purchase a is also caught by the rules. Note, too, that a re-stress that because of the way the law brought into force in the UK. These apply property holding companies are excluded. Republicans Overseas Israel, an organisation residence worth at least €500,000. The PSC is an individual who meets just one of works in Hungary there is no need for trust to financial institutions and advisers – However, it is likely that such companies of expatriate Republican Party supporters applicant’s parents may now apply for the conditions. accounts to be published and no need for such as accountants, IFAs and solicitors. will have to register in some other way in the who hold dual US/Israeli citizenship. citizenship through the same application. any other information to be provided to the The new regulations mean that customers near future. The new scheme costs substantially less than The whole situation is made more tax authority. This offers complete privacy and clients must be told what information Bahamian leak the previous scheme, which required fixed complicated by the fourth money- to beneficiaries. What about distribution? HMRC will be receiving automatically bank deposits worth at least €5 million. Offshore centre: Hungary laundering directive. The aim of this Well, the trustees must distribute from from 2017 under the OECD Common The International Consortium of directive is to identify who the individuals taxed profit. Rather, it must distribute from Reporting Standard (CRS). Professional Investigative Journalists (ICIJ) has published Do you have significant control? VAT is 27%, which is the highest rate in are behind corporate structures and taxed profit first. Depending on where advisers must notify individuals who they 1.3 million files leaked from the Bahamas the EU and probably the world. Certain hold them accountable for what is the beneficiary of the trust is located, provided with either general personal Corporate Registry. The stolen data relates A reminder to readers that since the industries also suffer extra taxes, including happening within those structures. The distributions could be completely tax-free. tax advice or specific offshore tax advice. to 175,000 Bahamian companies, trusts beginning of this tax year all UK limited banking, financial services and advertising. fourth money-laundering directive has They must also notify clients where they and foundations registered between 1990 companies and LLPs have been required, However, in all other respects the Hungarian not yet been fully implemented in the Confidentiality. A low tax rate. EU have made referrals to connected overseas and early 2016. The information – which by law, to keep and maintain a people of tax system favours the taxpayer. To begin UK or, indeed, elsewhere in the EU. membership and lots of dual tax agreements. advisers. Banks and other financial includes the names of directors, trustees significant control (PSC) register. Moreover, with, personal income tax is a flat tax of 15%. What’s interesting is that there are some Fantastic flexibility. Hungary has a great deal institutions must notify individual and shareholders – is now available, free of since 30th June the information being Moreover, inheritance and gift tax are 0% discrepancies between what is required to offer the international entrepreneur or account holders who were UK resident charge, on an online searchable database. held must also be disclosed to Companies between direct-line relatives and spouses. under the directive and what is required business. Locating there is a bit like hiding for the tax years 2015/16 or 2016/17 and The Bahamian Shadow Finance Minister House as part of the annual confirmation What about corporation tax? For the first €2 million or so of profit the rate is 10%, after something in full sight. held an account with the institution on Peter Turnquest told the Nassau Guardian: statement. Directors should be aware that under the new PSC register rules. 30th September 2016, which was either “We must now reconsider our tax structure failure to comply with the PSC register worth more than $1 million or held in as it relates to international financial centre rules is considered a criminal offence. Also, a participating overseas jurisdiction, clients as well as domestically. We must look directors should be aware that Companies including referrals by another financial at our immigration policy to ensure we steer House will be receiving information on the 12 - Tax Money - 13

them. That strategy, which embodies a investment. Because a large percentage of Bear in mind, too, that if the business takes combination of business and investment- angel investments are lost completely when off it may be as disastrous as if it fails. A portfolio management, is at the core of early-stage companies fail, professional well-known angel investor joke refers to the Money private equity’s success. angel investors seek investments that have telegram reputedly despatched (this is in the the potential to return at least 10 or more days of telegrams) by someone in Monte In other words, how well they perform times their original investment within five Carlo to his bank: “System working. Send depends on skill: skill at choosing years, through a defined exit strategy, such more money.” Growing businesses tend to investments, skill at managing and as plans for an initial public offering or an suck up cash! improving those investments and skill at acquisition. Current best practices suggest finding appropriate exit strategies. that angels could do better setting their You don’t necessarily have to be sights even higher, looking for companies entrepreneurial to be a successful angel One way to get into private equity is to that will have at least the potential to but you certainly have to be able to assess invest in a private equity firm. Another is to provide a 20 or 30 times return over a five- the entrepreneurial capabilities of others. replicate their approach on a smaller scale to seven-year holding period. A Harvard by becoming a business angel. Report by William R. Kerr, Josh Learner and My favourite source of investment Antoinette Schoar provides evidence that: research Be an angel Angel funded start-up companies have Everyone has their own way of finding Investors who buy into unlisted companies historically been less likely to fail than investment opportunities. One of the are usually referred to as ‘angels’. They are, companies that rely on other forms of most popular is angel investment clubs for the most part, affluent individuals who initial financing. and platforms, which I will come on to in a provide capital in exchange for convertible minute. For those who are serious there are debt or ownership equity. A small but This is due to the fact that before any angel various research organisations that track the increasing number of angel investors invest puts their money into a business they do private equity market and sell data. Typical online through equity crowdfunding or their research. of this, in the UK, is a company called organise themselves into angel groups Beauhurst, which offers a platform that lets or angel networks to share research and The importance of research you access rich information on UK high- pool their investment capital, as well as to growth companies. In a nutshell, a Beauhurst provide advice to their portfolio companies. If there is one characteristic that all subscription allows you to search through Angels are often retired entrepreneurs or Alternative Investment: Private Equity successful angel investors share (apart from companies, funds and transactions instantly. executives who may be interested in angel luck!) it is an enthusiasm for research. It falls You can filter by hundreds of variables and “Be fearful when others are greedy,” The plain-English description of private for generating substantial profits for their investing for reasons that go beyond pure into three main categories, being: conditions to find what you need in seconds. said Warren Buffett, “and greedy when equity is shares in unlisted (i.e. private) own investors. How? An article in the monetary return. These include wanting to Having found companies you are interested others are fearful.” It is a good investment companies but the technical definition Harvard Review suggests: keep abreast of current developments in a • finding suitable companies to invest in; you can create deep company profiles. This philosophy and one that I believe will is: “The asset classes consisting of equity particular business arena, mentoring another • market research, to understand the allows you to view an interactive time line of shortly become relevant to the private securities and debt in operating companies Private equity firms’ reputation for generation of entrepreneurs and making sector the company is operating in; notable events, giving immediate access to equity market. Investment in start- that are not publicly traded on any stock dramatically increasing the value of their use of their experience and networks on a • competitor research, to understand what verified investment amounts, valuations, key up and growing businesses has fallen exchange.” Private equity investment would investments has helped fuel this growth. part-time basis. Thus, in addition to funds, the company is up against. contacts and financial history. You can then dramatically – despite the recent craze for generally be made by a private equity firm, Their ability to achieve high returns is angel investors can often provide valuable a venture capital firm or an angel investor. typically attributed to a number of factors: management advice and important contacts. go on to monitor companies (or sectors) equity crowdfunding platforms – and this It is also important to really study the Each of these categories of investor has its high-powered incentives both for private Because there are no public exchanges listing you are interested in to see how they are could result in some very interesting and company’s business plan, its financials and its own set of goals, preferences and investment equity portfolio managers and for the their securities, private companies meet progressing. lucrative profit opportunities. management. The CEO of Burger King once strategies; however, all provide working operating managers of businesses in the angel investors in several ways, including capital to a target company to nurture portfolio; the aggressive use of debt, which said: “When you finish writing a business To give you an example, in late October it What is private equity? referrals from the investors’ trusted sources expansion, new product development or the provides financing and tax advantages; a and other business contacts, at investor plan you know that it describes the one was announced that Time Out had acquired restructuring of the company’s operations, determined focus on cash flow and margin conferences and symposia and at meetings scenario that is never, ever going to happen.” the event app YPlan for just £1.6 million Private equity is the least alternative of management or ownership. improvement; and freedom from restrictive organised by groups of angels where The business plan should give you a feel for despite the company’s previous valuation of the alternative investment options that I public company regulations. companies pitch directly to investors in face- how the management team will deal with just over £40 million. The deal meant that normally write about, primarily because Private equity/venture capital to-face meetings. what actually happens when the business YPlan exited for a fraction of its promised it doesn’t involve purchasing a tangible firms But the fundamental reason behind private starts. Will they, for example, be able to value. Four previous funding rounds saw it asset. On the other hand, it has many equity’s growth and high rates of return is High risk, high returns come up with a viable Plan B (C, D, E, F raise £24.3 million from a string of ventures features in common with other alternative There are now thousands of private equity/ something that has received little attention, etc.) if things do not go well? Three areas to including Octopus Ventures, Nokia Growth investments, including illiquidity, lack of venture capital firms – companies that perhaps because it’s so obvious: the firms’ Private equity investments bear extremely look at hard are (1) the founders’ previous Partners and Qualcomm Ventures. Indeed, correlation to traditional markets (such specialise in identifying and investing in standard practice of buying businesses and high risks and are usually subject to experience (check Companies House) and its last fundraising (in an unannounced deal) as bonds), the need for expert knowledge private limited companies – in the world. then, after steering them through a transition dilution from future investment rounds. personalities (check social media), (2) the valued the company at a whopping £41.6 before investing and so forth. They have earned themselves a reputation of rapid performance improvement, selling As such, they require a very high return on marketing plan and (3) cash flow forecasts. million. 14 - Money Money - 15

The exit was clearly not a sign of success. investors across the UK and has done much Below is a list of the top-ten European UK government. It is still early days, of course, but to date will sink or swim, although failures usually The business had struggled with its value to raise awareness and promote the asset equity crowdfunding platforms. there have been remarkably few successes in happen earlier than successes. There are proposition, structure and financials, laying class as well as to promote good practice 5. LendInvest is not involved with raising terms of profitable exits. One commentator, three main ways you may see a return on off about a third of its staff at one point and and establish standards. 1. Crowdcube is an award-winning, private equity but is the UK’s first peer- Rob Murray Brown, points out that: your investment: pivoting from direct sales to a self-service investment crowdfunding platform, and to-peer lending platform specifically for model – where event organisers managed Equity crowdfunding one of the longest-established UK sites. It residential and commercial mortgages. A To date investors in all the UK equity • Dividends: the company sometimes their own listings. Anyone who invested in provides a variety of firms – from motor very unique debt crowdfunding company, crowdfunding platforms have lost in excess pays a percentage of its yearly profits to the Beauhurst platform would have been The single-most-popular way to search for companies to pizza delivery firms – the LendInvest allows investors to find and of £5 million. Without fail pitches on a shareholders. able to watch what was happening at YPlan private equity investment opportunities opportunity to pitch for funding. Many invest in new loans. platform like Crowdcube promise returns • A trade sale: the company is sold to from day one. Moreover, they would have is through one of the new equity of the businesses seeking finance through in three or four years, so we really should be another company for a lump sum, which benefited from an analysis of the other crowdfunding sites. Equity crowdfunding is Crowdcube are already established and 6. Companisto, a Berlin-based equity seeing some by now. There is absolutely no is divided proportionally between unsung event apps currently being launched the process whereby people (i.e. the crowd) seek investment to expand their footprint crowdfunding platform, offers investment evidence that we will. My research, based shareholders. in the UK. Indeed, they highlighted a invest in an early-stage unlisted company in in a particular market. Investors can view opportunities of anything from €5 to on Crowdcube and a few pitches from • Public offering: the company is so company called Velocity – a restaurant and exchange for shares in that company. The a business plan and a video, which details €500,000. It has funded companies and other sites since 2011, show that 99.9% successful that it is listed on a stock exchange venue recommendation app that also allows shareholder has partial ownership of the why the company is seeking funding and start-ups from various industries such as of the companies that have raised money and shareholders can sell their shares at a users to make bookings. It also mentioned company and stands to profit should the the potential rewards on offer. Crowdcube real estate, food, toys and digitech. this way have missed their projections for price determined by public demand. a destination curation app called Dojo, a company do well. Equity crowdfunding offers the opportunity for anyone to invest all years since. These are the projections venture stage live music ticketing app called has helped democratise investment into alongside professional investors in start-up, 7. FundedByMe, a Swedish early entrant promoted by the platforms that persuaded Incidentally, many private equity Dice and many others. early-stage companies by opening the early-stage and growth businesses through crowdfunding platform, offers a combination the punters to decide to invest. Under the investment opportunities in the UK offer door to a larger pool of potential investors, equity, debt and investment fund options. of reward- and equity-based crowdfunding current regulations this is all totally legal. tax reliefs through either the Enterprise Beauhurst is not a cheap platform to buy more specifically to individuals that the for intelligent growth, allowing you to invest Given the illiquid nature of these shares and Investment Scheme (EIS) or the Seed into but if you are serious about investing Financial Conduct Authority (FCA) 2. Seedrs is more focused on start-ups. in products and services that you love or are the poor performance of these businesses, Enterprise Investment Scheme (SEIS). The terms sophisticated investors and/or in potentially fast-growth businesses it is Angel investors and venture capitalists passionate about. the chances of realising any return look very government has designed these schemes high-net-worth individuals. In the UK a invest alongside friends, family and tribes probably a must. If you can’t afford direct remote, as they are locked in for eternity to provide tax relief covering from 30 to sophisticated investor must be at least one of supporters. Their model offers support access yourself, you may be able to find 8. Invesdor, a Helsinki-based equity or until closure. Throw into this mix the over 75% of an investment into an eligible of the following: before, during and after fundraising. With someone else who will let you access it crowdfunding platform, is the first to operate dilution offered by B shareholders, when company. Regarding eligibility, investors a global community, Seedrs has connected should check that a company has received through their subscription. and provide financial alternative investment the inevitable unscheduled second and • A member of a network or syndicate of with active investors and entrepreneurs an advance assurance from HMRC to services in northern Europe. It serves third raises occur, and you have a gloomy business angels and must have been one from 48 countries. offer SEIS or EIS relief as this indicates the Joining other angels as a matchmaker between investors and picture. Moreover the reporting systems for at least six months. company meets HMRC’s criteria to do so. businesses. for businesses with a turnover of less than • Someone who has made more than one 3. SyndicateRoom is a newer entrant to the Prior to the launch of equity crowdfunding £6m only require them to file a very sparse investment in an unlisted company in the crowdfunding space. Pitched as the UK’s What is happening to the private (see below), many angels joined together 9. Seedmatch is Germany’s leading balance sheet for their annual accounts. past two years. only investor-led equity crowdfunding equity market? into groups in order to find and assess crowdfunding platform for start-ups. It • Someone who is working, or has worked, platform, a different model is offered. opportunities. These groups would often offers investments from as little as €250. Mr Murray Brown believes that many in the past two years in a professional Listed are companies already backed by At the beginning of this article I mention pool research, circulate prospectuses and To date it has funded 82 projects to the private companies are seeing equity capacity in the private equity sector, or professional business angels, who invest that private equity investment volumes even offer times when companies looking tune of more than €24 million. crowdfunding as an easy source of cash and in the provision of finance for small and their own money and take an active role in have fallen all year. I don’t think it is an for finance could come and meet/present as a result are overtrading – with the usual medium-sized enterprises. evaluating the strength of the deal. Members exaggeration to say that 2016 has been to them. Interestingly, despite the growth • Someone who has been in the last two who are not business angels are offered 10. Symbid (aka the Funding Network) is dire consequences. A more responsible dominated by political and economic of equity crowdfunding, many angels still years, or is currently, a director of a company the same economic terms if they decide to a Netherlands-based equity crowdfunding approach, in his opinion, to promotions upheaval. Brexit, the economic woes belong to such groups – so clearly they with an annual turnover of at least £1 invest alongside the professionals. Syndicate platform that allows both traditional and and to due diligence with the financials of countries like Brazil and China, the have a very real value. The largest group million. Room’s vision follows a transparent new ways of providing finance to small would help alleviate these problems. possible break-up of the EU, the American in the UK is the UK Angel Investment approach allowing its members access to and growing companies. The minimum presidential election, the war in Syria, Network (www.angelinvestmentnetwork. In the UK, a high-net-worth individual must a more sophisticated set of investment investment is €20, and to date they have Making money from private equity global warming, Russian aggression and co.uk), which now has 30 branches and have one of the following: opportunities. raised over €417 million for a wide range many other factors have contributed to a 689,413 registered members of which of businesses. The platform has 35,515 A report by Nesta (the National Endowment general feeling of market uncertainty. Nor 126,099 are investors and 563,314 are • An annual income to the value of 4. Funding Circle UK, based in London, registered private investors. for Science Technology and the Arts) does anyone expect a sudden turnaround. entrepreneurs. It actually claims to be the £100,000 or more. is a leading marketplace for business showed that business angels who invested Whether some of these issues are resolved largest angel investment community in the • Net assets to the value of £250,000. loans in the UK, US, Germany, Spain The disadvantages of in businesses and industries they knew soon or not, the general mood of the market world and there is no reason to doubt this. and the Netherlands. Its model allows crowdfunding something about, and created a portfolio of is that we are in for a long period of turmoil. Another organisation to consider joining The top-ten crowdfunding people and organisations to lend directly investments (not putting all their eggs in one It is, therefore, unsurprising that there is a is the UK Business Angels Association platforms to small businesses. With almost 50,000 It would be wrong to view all equity basket, so to speak), were more likely to see a notable decline in investment in high-risk (ukbusinessangelsassociation.org.uk), people having invested in over 15,000 crowdfunding platforms as being equal. The positive return from their investments. (and potentially high-growth) businesses which is the national trade association The best way to understand crowdfunding small businesses via Funding Circle, it is best allow investors to find a wide range of across the UK. representing angel and early-stage is to visit a few of the many sites that have supported by the British Business Bank, a suitable opportunities and make the actual It generally takes between three and seven investment. It represents some 18,000 been set up both in the UK and overseas. development bank wholly owned by the investment process easy and straightforward. years for a company to find out whether it Beauhurst (see above) tracks all the equity 16 - Money Money - 17 funding secured by UK private companies deal numbers falling by 28% – a steeper fall founded by two postgraduates from Imperial debt. Distressed securities are securities considered to be below investment grade. of default. Distressed opportunities can and compiles it into a quarterly report. As than in the UK as a whole. Interestingly, a College in 2014. In May 2015, they received of companies or government entities that This usually limits the number of potential be found across the credit cycle whether the authors of the most recent edition point few clusters outside London have defied £1.25 million in funding, valuing the young are experiencing financial or operational investors to large institutional investors – driven by macro developments, secular out: “The picture is somewhat bleak for the national trend. Cambridge, Manchester business at just shy of £2.5 million. In April distress, default or under bankruptcy. such as hedge funds, private equity firms downturns or idiosyncratic credit events. equity investment in the UK’s high growth and Oxford all saw growth compared to 2016, another investment was made of just Purchasing or holding such distressed and investment banks or specialist firms. In JPMorgan’s view, the opportunity cost businesses.” Overall, the number of deals the previous year. Their modest growth, over £3 million with a valuation of £16.7 debt creates significant risk because of the of committing capital too early in the has fallen by 10% and the amount being however, is not enough to counteract the million. In June 2016, just three months possibility that bankruptcy may render In plain English, some investors have distressed debt cycle is less than the cost invested has fallen by 29% when compared impact of the decline in deals. later, Twitter acquired the company for £102 such securities worthless – a term that deliberately used distressed debt as of being late. Spreads tend to tighten much to 2015. The amount of money being raised million. Another example of a company that the industry ominously refers to as ‘zero alternative investment, where they buy the faster in a recovery, thus providing a limited by crowdfunding has also dropped – by 17% But the news is not all bad was snapped up by a US multinational is recovery’. A Harvard Report article on the debt at a deep discount and aim to realise period for capturing peak returns. – and the average amount involved in each Two Big Ears, an Edinburgh-based virtual sector said: a high return if the company or country deal is down, too. Interestingly, every sector There have been some spectacular exceptions reality company. Two Big Ears was bought does not go bankrupt or experience Interestingly, JPMorgan says that since 2004 saw a fall in deal numbers. The biggest loser this year, most notable of which is probably The deliberate investment in distressed defaults. The major buyers of distressed they have managed to produce a return of by percentage was retail, falling by 43%. But by Facebook last summer in a multi-million- Magic Pony Technology. Magic Pony is in securities as a strategy while potentially securities are, typically, large institutional between 14 and 18% a year. in terms of pure numbers it is technology pound deal. Clearly, some companies are the business of enhancing images. It has lucrative has significant levels of risk as the investors who have access to sophisticated companies that suffered the biggest decline. managing to buck the overall trend. securities may become worthless. To do risk management resources. Firms that My guess is that Brazil is about to become Within technology – which still makes up created an app and software that can take the majority of the high-growth companies an existing photograph or video and make Back to Buffett so requires significant levels of resources specialise in investing in distressed debt the distressed debt capital of the world tracked by Beauhurst – software companies it look much, much better. Being able to and expertise to analyse each instrument are often referred to as ‘vulture funds’. (possibly followed by the UK and Europe). have experienced the starkest fall, with a enhance image quality is something that has Which brings us back to Warren Buffett’s and assess its position in an issuer’s capital As someone who is interested in high returns 20% drop. become incredibly popular amongst the users investment philosophy. There is a feeling structure along with the likelihood of JPMorgan points out that history shows and willing to take relatively high risks, I’m of social media and it is considered something that investors are becoming fearful. It could ultimate recovery. Distressed securities the most attractive returns in distressed starting to look round for opportunities, Examining the geographical data, that every social media platform must be be, therefore, an extremely good time to tend to trade at substantial discounts to debt are generally earned during the period basically funds, that will allow me to invest investment has plummeted in London, with able to offer its visitors. The company was become greedy. their intrinsic or par value and are therefore of spread tightening around peak levels this way. Brazilian Adventure Inflation Report At the end of September, the Office for in interest rates. As reported elsewhere alongside consumer prices. In 1933, Peter Fleming, brother of the FT’s correspondent in São Paulo, Samantha and China) club, Brazil’s fall from grace National Statistics (ONS) announced in this issue of The Schmidt Tax Report, better-known Ian Fleming, wrote a book Pierson, reported that: has been astounding. Last year, it shrank that inflation had risen to an annualised it is expected that August’s cut in interest If certain shares and alternative assets make called Brazilian Adventure about his search by nearly 4% and it is expected to contract rate of 1% – the highest it has been in two rates to 0.25% is likely to be followed by a good sense in a period of inflation, bonds for the lost Colonel Percy Fawcett in the From apartments and cars to coffins, more or less by the same amount this year. In years. The analysis of the figures indicates further cut before the end of the year. This do not. Because their coupons are fixed, any Brazilian jungle. Fawcett, along with his son liposuction and toilet roll, there are few September 2015, the country’s credit rating that the three biggest causes of inflation is because it is the Bank of England’s only inflation erodes income. Cash, of course, is and another companion, had disappeared things that cannot be bought in instalments was downgraded by Standard & Poor’s to were the increased cost of fuel, clothing real way of stimulating the UK economy. one of the worst ways to hold one’s wealth. while searching for the lost city of Z in 1925. in Brazil – a legacy, in part, of the country’s junk status. “Without a sustained economic and hotel stays. When Bloomberg asked What is worrying is that Britain will return If inflation runs at between 2 and 3% and Fleming was working as the literary editor past struggle with hyperinflation. While recovery and a turn round in political a panel of leading economists to predict to the sort of economy that we suffered in interests don’t rise, £100 cash could be for The Times when he answered a small ad Brazilian shoppers have made the most of conditions, access to credit should prove what would happen to inflation in the the 1970s – a toxic combination of high worth as little as £86 in five years’ time. asking for volunteers to join an expedition this credit culture to pile up on debt over difficult for Brazilian companies,” wrote future, all anticipated that it would rise inflation and a stagnating economy. Economists, incidentally, do not believe to find out what had happened to Fawcett. the past decade, the country’s companies analysts at Fitch Ratings in a recent report. steadily over the coming months until it that price inflation is likely to lead to wage Despite a great deal of fanfare, the expedition have also borrowed heavily, encouraged by “In Brazil, the lowest-rated companies are reached around 2.2% by the summer of What will happen to the stock market? inflation. The Bank of England predicts next year. Most believed it would peak at Russ Mould, investment director at retail seems to have been very poorly organized public banks and state development lender expected to encounter the highest hurdles to unemployment will rise as a result of the between 3 and 4% in 2018. stockbroker AJ Bell, pointed out that: “A and Fleming and his companions do not BNDES. As Brazil sinks into its deepest and refinance with suitable terms, if at all.” Brexit vote, which may well dent employees’ little inflation is good, but lots of inflation seem to have done much preparation, not longest recession on record, the country’s ability to demand higher pay. Moreover, the The two predominant underlying causes is bad – at least if history is any guide.” He even bothering to learn Portuguese. The credit bonanza has come to a spectacular However, as Brazil’s new interim national living wage is due to increase from were believed to be sterling’s weakness suggests that investors should consider expedition, commanded by an eccentric end, prompting a wave of bankruptcies but government begins efforts to push through £7.20 to £8.60 an hour by 2020. Of course, against the dollar and the euro and the rising buying shares of companies that have the American, Major George Lewy Pingle, also creating some of the best opportunities long-awaited labour and pension reforms, this may change if Britain leaves Europe. price of oil. It is believed that the weakness most power over their prices. Also, possibly, eventually made its way to the Araguaya yet for distressed debt investors. there are signs that the country’s crisis may of the pound is not yet showing up fully in businesses involved in luxury goods and River and proceeded down it, blasting away be easing. According to Bloomberg data, the And, of course, with rising prices in the inflation figures as retailers and supermarket services as these do not generally follow the at any creatures that moved. Most recently, the telecoms operator Oi cost to insure against losses in Brazil’s bonds offing, now could be the time to replace chains are still selling stocks of imported usual laws of supply and demand. any big ticket items such as cars or to buy filed for bankruptcy protection – Brazil’s with credit-default swaps has fallen by nearly goods from their warehouses. Once these anything else that has to be imported The book, which was a firm favourite of largest on record. It is believed that Oi will a third over the past six months – the largest stocks have run out, they will have to pay Interestingly, Bank of America Merrill (such as fixtures and fittings for your mine when I was younger, came to mind manage to recover but many of its suppliers decline among the world’s major economies. new, higher prices to import goods from Lynch believes that now is the time to start house). It may also be a good time to opt when I was reading a Financial Times report are now expected to go into liquidation. overseas. buying alternative assets such as property, for a fixed-rate mortgage. While bank rates about the state of the Brazilian economy. I mention all of this because I have commodities and collectibles. This is are going down, it is possible that the Bank Under the headline “Brazilian bankruptcies Once an emerging-market darling and part become extremely interested in investing Although prices are rising, most experts do because tangible assets generally rise in of England will try to control inflation by create opportunities for debt investors” the of the famous BRIC (Brazil, Russia, India in distressed securities, aka distressed not believe it will be reflected in an increase line with inflation, with prices going up raising interest rates. 18 - Money Property - 19

will be considered on its own merits. Gardening leave you can settle IHT on property over a ten- year period providing your estate has other Once you have managed to convince your tax Last month, we discussed the fact that meaningful assets. Otherwise, the cost will adviser that you are in fact running a business, if a house has been your main residence be 40% of anything worth over £325,000. Property the next thing he or she needs to deal with is throughout your period of ownership then any potential liability to SDLT. For a landlord no CGT liability will arise on the disposal That’s the bad news. who is not in partnership, the charge to SDLT of part of the garden. The assumption we on a transfer to a connected company will made was that the garden and house were The good news is that for IHT purposes be based on the market value, irrespective owned on a single title. In fact, of course, in there are certain situations where it is of consideration. Where a partnership possible to avoid some or all IHT. In many cases gardens are held under separate incorporates, the transfer of a property from particular, business property relief (BPR) can title. It must be stressed that this is not a partnership to a limited company should be available at 50 or 100%. The crucial types automatically a barrier to the necessary not suffer SDLT. Do remember, incidentally, of business property for property businesses relief. The law does not require a single title. that HMRC is particularly suspicious at are an interest in a trading business or shares An HMRC interpretation states that: “in the moment of any partnership that is in an unlisted trading company. Regrettably, formed shortly before a property portfolio general the revenue accepts that the land a business that substantially includes is transferred to a company. It is especially surrounding the residence and in the same investments (including investments in rental important not to set up a partner with a pre- ownership is the grounds of the residence, properties) or dealing in land does not agreed decision that you will be incorporating unless it is used for some other purpose.” qualify for BPR. The types of business that at a later date. This will be viewed as tax may qualify for BPR are: avoidance. Incidentally, in most cases it is not advantageous for the owner of a home with • property development The benefits of holding property through a a garden to develop part of the garden into • furnished holiday accommodation limited company are the lower tax rates on housing themselves. This is because the • agricultural farmland and associated rental profits and capital gains. Both will be development value of the land will be taxed, buildings. subject to 20% corporation tax (to be reduced as will any profit on the development. to 17%) as opposed to 45% income tax on If you don’t need the income being rental income and 28% on capital gains. Of Don’t forget IHT generated from your property and if you course, these rates are slightly illusory as trust the person that you wish to benefit income paid out of the company as a dividend If you are in the process of reorganising your you could also consider giving him or her or on liquidation of the company will be taxed property investments or if you are about to your property outright now. Such gifts are again in the hands of the shareholder. It is start investing in property and haven’t yet considered potentially exempt transfers more a delaying tactic and, of course, it may made any irrevocable decisions, don’t forget (PETs) and, providing you survive for Property Tax Tips also be of assistance for other tax planning to consider the punitive effect IHT will have seven years, will be eligible for 100% IHT (such as inheritance tax, or IHT) purposes. on any property held in your estate. True, relief. Keeping good company purposes of carrying on a business and a them to repay their debts this will constitute general partnership is defined as the relation additional consideration – causing certain Property Companies: Avoid The 7.5% Surcharge! According to the latest statistics published which subsists between two or more persons gains to be liable to CGT. by Companies House, a growing number of carrying on a business in common with a We don’t know what your view on politicians well-being of all of its people, depends. accepted that in most cases the dividend route private property investors are incorporating view to profit. Do not believe, however, that What sort of other problems could you is, but personally we think the adjective is going to be the most tax-efficient way of a property management companies. We simply describing yourself as a partner to encounter? The first, and largest, hurdle to ‘sneaky’ describes many present-day examples Dividends or remuneration? shareholder/director taking his income from have discussed the tax advantages of doing HMRC will turn joint ownership of assets overcome is whether the letting of property of the species. Here’s a classic example in the the company. Why? this in recent issues of The Schmidt Tax into a partnership. Moreover, it isn’t just is tantamount to a business or just a passive field of taxation: did we, or did we not, receive Let’s put the subject in context. Most owner- Report, so we won’t cover the same ground capital gains tax (CGT) that you need to be investment. In Moyne Ramsay the court a solemn promise, enshrined in legislation managed businesses of any size are run If you take your income from the company by again. Suffice to say that while substantial mindful of. For stamp duty land tax (SDLT) decided that the definition of a business was: even, that the government elected in 2015 through limited companies, and the owners way of remuneration, you’ve got both income tax savings are possible incorporating in purposes, it is possible to transfer properties “an occupation or function actively pursued would not increase the rates of income tax? (shareholders) of those companies tend to be tax at your marginal rate to pay and national the wrong circumstances could result in a from a partnership to a company without with reasonable or recognisable continuity, the same as the directors, that is the people insurance (NI), which comes in two different very substantial tax loss. Again, although any charge, but planning is required to do so. whether the activity has a certain amount of OK, now our second question: what was one who are working in and running the business varieties: employer’s NI and employee’s NI. we have covered this subject before, we feel One has to be careful because various anti- substance in terms of turnover, whether the of the first things Chancellor George Osborne from day to day. So, one of the most basic avoidance provisions mean that the transfer activity was conducted in a regular manner it is vital to re-emphasise the core point. did after being elected? Answer: he placed a pieces of tax planning comprises the question As we have said many times in the from original owners to a limited company and on sound and recognised business If you wish to transfer your privately held whacking 7.5% surcharge on the income tax of whether these shareholders/directors past, employer’s NI is nothing more can result in an SDLT charge. principles, and whether those activities were properties into a limited company it is vital paid by individuals who received dividends should take their personal income out of the than a swingeing ‘payroll tax’: a strong of a kind which, subject to the differences that you can show HMRC you are running from companies! The sneakiness in this resides company in the form of remuneration on the disincentive to employing staff at all. the properties as a business and not as an All advisers point out that there is no point of detail, are commonly made by those who particularly in the fact that a £5,000 tax-free one hand or dividends on the other. (There are Because a director of a company is treated investment. This is because, following the in reducing your tax bill if you end up with seek to profit by them.” band was introduced, meaning that all the small other minority methods of profit extraction, as if he were an employee for tax purposes, decision in Elizabeth Moyne Ramsay versus higher finance charges. If your properties voters on whom the government relies to give but we won’t discuss these for the moment.) payment of remuneration involves the HMRC (2013), a property business can are encumbered with debt, you may find In that particular case the taxpayer spent 20 qualify for incorporation relief under TGA that your lender is not prepared to simply hours a week tending to the property rental it its electoral mandate would not actually be allied payment of 13.8% of the gross salary 1992, s 162, if it amounts to a business. One let your company assume the existing loans. and while this by no means set a precedent affected by this barefaced example of a broken In the ever-shifting sands of company and as a so-called employer’s contribution of the easiest ways to prove that what you Another thing to watch out for is that if the for the threshold it gives an idea at what electoral promise. That only leaves the small, personal taxation, the profit extraction to the bottomless pit which is the are transferring is a business is to form a company needs to raise its own debts on the point HMRC and the courts will agree that and statistically unimportant, section of society strategy of a shareholder/director has had government finances. On top of this, there partnership or a limited-liability partnership properties and uses these to pay the existing the act of renting property could become known as people in business – on whom the to change a number of times over the last is an employee contribution, deducted (LLP). An LLP can only be formed for the proprietors for the business in order for a business. Remember, however, each case whole of the UK economy, and therefore the few years. Currently, however, it is generally from gross pay, of 12% up to a certain 20 - Property Property - 21 figure, roughly comparable to the higher- applying to companies, including property no one’s actually got any cash proceeds to to his company for the purposes of taxation. by their parents but by their grandparents. course, there will be exceptions to this rule, rate income tax band, and 2% above that. investment companies, had reached a flat pay the tax out of. So, in most cases, we’ll So we can’t see any means HMRC has of Introducing these children, or a trust for depending on the level of appreciation and 20%, which is equivalent to the basic rate have to just forget that idea. counteracting this planning, even if it were them, as LLP members (partners) seems the plans for use of the money; however, if The new dividend surcharge of income tax for individuals. So, to take But that’s where the idea at the heart of this minded to. like an easy and flexible way of allocating there were a way of taking future profits out a simple example, if you had a property article comes in. income to cover the school fee liabilities. of the corporate ‘net’ and putting them into Dividends, by contrast, until 5th April of this investment company with three basic-rate The interesting bit So the grandparents don’t have to pay the hands of the individual shareholders/ year (2016), involved payment of income taxpaying shareholders that received net The property investment LLP higher-rate tax first, and then pay over what’s directors, this would obviously be excellent. tax only, at broadly equivalent rates to those rental income each year of £120,000, the Fine, so we found a way of reducing Mr A’s left to the school for the benefit of their applying to remuneration, and absolutely no tax would be pretty much the same as the Let’s illustrate this structure by way of a tax charge from 26 or so to 20%. But the grandchildren: instead, the income is that As it happens, there is! This is acquiring new NI. So it was a bit of a no-brainer, really. tax that would have been paid if the three very simple example. Mr A owns A Limited, advantages of the property holding LLP of the grandchildren under the division of properties, perhaps bought out of retained individuals had owned the same property which owns a property portfolio. He forms don’t end there: this is hardly more than a LLP profits. So each child, for example, could rental income from the portfolio, in the LLP, on What has changed with effect from the portfolio themselves directly. That’s an LLP of which he and the company are beginning, in fact. receive up to about £10,000 of the rental such terms that future gains on those properties current tax year is that dividends are now because, after the 20% tax, a dividend of the members, and the company introduces its income tax-free, because of the availability will accrue to the individual members of the subject to an extra 7.5% tax charge, which remaining amount would not give rise to any property portfolio into the LLP as equity Let’s look, first of all, at the potential this of income tax personal allowances. In an LLP rather than to the company member. has been (thinly) disguised as a mere tax liability in the hands of the shareholders. capital. structure has for spreading income round the extreme case, the whole income of the ‘removal of the tax credit’ on dividends. Result: an overall 20% tax rate between the family. Taking our straightforward situation of portfolio, held within the LLP, could be free Remember, in this context, every individual has We won’t go into detail about this mythical company and the shareholders. When the first year’s accounts for the LLP Mr A and his property portfolio, what about of income tax if it can be allocated amongst a CGT annual exemption (which is something tax credit, which effectively had ceased are done, let’s say there is a rental ‘profit’ introducing Mrs A to membership of the enough members who have no other income that limited companies don’t have). So if you to be such in 1997 when Gordon Brown Things are rather different now! Using the from the portfolio of £100,000. Mr A, LLP? Although it looked, a few years ago now, to bring about the result that the whole share the future gains out amongst enough undertook his famous raid on pension funds same example, and effectively making the who has no other income, allocates (using as though HMRC was intent on attacking the income is covered by personal allowances. people, you could have a number of annual and charities. But the effect is that a basic- same assumptions, the individuals would suitably flexibly worded LLP agreement sharing of income between husband and wife, exemptions to offset against any future gain, CGT planning rate taxpayer, who before 6th April 2016 now be paying 7.5% income tax on top terms) £42,000 of the rental profit to it’s been all quiet on the western front as far as which may even completely eliminate the gains paid no tax at all on dividends (because the of the 20% corporation tax paid by the himself, and the balance of £58,000 goes this is concerned since 2008. So we think that, tax. The choice, and the flexibility, is yours. company had already paid 20% corporation companies. On a broad-brush basis, because to the company. If we assume that this in practice, if a share of the rental income were The property investment LLP, funded tax) now pays 7.5% tax. A higher-rate the 7.5% applies to the net of corporation tax is broadly equivalent to what he would allocated to Mrs A, perhaps in order to use up initially by the company, also provides a Lastly… taxpayer, who previously paid 25% on amount, this equates to an overall tax charge have done under the old regime, with the her approximately £42,000 basic rate income possible escape route from the capital gains dividends, now pays 32.5%. And a person of 26%. Comparing this with the situation rental profit going to the company initially tax band, this isn’t something that would be ‘prison’ which property holding companies Remember that we’re talking, here, about in the top rate of income tax (i.e. receiving where a property portfolio is held direct, and then the equivalent of a gross figure counteracted by HMRC. But the potential so often represent. a property investment LLP with a limited gross income over £150,000) is on 38.1%. we have an at least 6% penalty for using a of £42,000 being paid out to Mr A as of the LLP for income ‘spreading’ certainly property investment company. dividends, then you’ll see that there is an doesn’t stop there. We’ve already touched on the ‘double tax company as one of its members. An additional flexibility that you have is that the We don’t think we’re being unduly cynical immediate advantage here to the extent of charge’ that afflicts investment holding company can be allocated the residue of net in assuming that this 7.5% or thereabouts Get rid of the company? the 7.5% that Mr A is not paying, this way, Perhaps Mr A has been in the habit of companies. If one of the individuals behind rental profits, that you aren’t allocating to additional tax has been very carefully set, on the income he is receiving. Rather than helping out the younger generations of his the company wants to enjoy the benefit of the at a rate where individual shareholders/ A naive observer may then say: “OK, why passing the income through the company, family as well: perhaps his adult children and proceeds from selling an investment asset, the basic-rate taxpaying individual members, but directors will still want to take dividends don’t we just get rid of the company then? and in so doing attracting an unwelcome grandchildren. Well, why not introduce them first stage is for the company to sell the asset, the actual cash resulting from the company’s rather than remuneration, because 7.5% Let’s wind it up and pass the ownership of 7.5% tax charge on the way through, he as members of the LLP as well? A profit share which is likely to give rise to the first level of rents can be drawn down by the individuals extra tax is still better than the employer’s the property portfolio out to the individuals, is taking the income ‘direct’ from the allocated to any other family member, other tax, which is CGT within the company itself. – with no further tax charge. This applies if and employee’s NI that they would be where they won’t be paying this 6% portfolio, in which he now has a kind of than a minor child of the person making the The net proceeds, within the company, have the individuals have credit balances on their paying on remuneration. All it is, in effect, surcharge any more!” interest as partner. arrangements, will, we think, be effective in then to be distributed to the shareholder so capital accounts with the LLP, which can be is the government helping themselves to transferring the entitlement to that income that he can enjoy them personally. This gives drawn down as such (i.e. capital drawdown) a little bit more of the owner-managed Of course, it’s not as simple as that. Unless Surely, though, you’ll say, it can’t be as easy for tax purposes, meaning that you can utilise rise to a second level of tax, which could be as and therefore do not give rise to an income business sector’s income. the company was formed very recently as that? Isn’t the company effectively paying personal allowances and lower income high as 38% if he is a top-rate income taxpayer tax charge in the hands of the individuals. indeed, or has made disastrous investments some kind of dividend or other distribution tax bands across a wide range of people, and the distribution takes place other than in Property investment companies in property, there will be a capital gain to of its assets to Mr A, and doesn’t this potentially, if these people exist. the complete winding-up of the company. We could go on at great length, here, about deal with, or rather a capital gain to deal with dividend/distribution trigger income tax how the individuals acquire these credit Having set the scene, let’s now focus on twice. If the properties are worth more than in the same way as the old dividend idea One example of this is the very frequent Overall, then, it seems to us that limited balances for tax-free drawdown, but that the target audience for the tax-planning they cost, there will be corporation tax to would do? situation you find where children who are companies are generally a very bad idea for would be both complex and, potentially, idea which is at the heart of this article: pay on the ‘gains’ that the company would at private schools have their fees paid not holding appreciating assets of this kind. Of provocative! the privately owned property investment be treated as making on disposal of the We don’t think so. First, the company isn’t, of company. Many of these have existed for a properties, in liquidation, to its shareholders. course, distributing anything to Mr A simply Property News great many years. Indeed, many were formed There would also be a gain, based broadly by introducing the portfolio into the LLP. It before the current major tax drawbacks of on the same increase, in the hands of the retains all future capital profit sharing rights Farmland prices fall 8% funds and insurers, who bought in search prices coming down? One of the reasons holding a property investment portfolio individuals, who would be receiving more (or probably does – but that’s another story) of safe, income-producing assets. It was must, Knight Frank points out, be the through a company were introduced in a for their shares in the company, again in and is credited anyway, in the LLP’s books, According to estate agent Knight Frank, also considered a safe haven asset after impact of Brexit. However, it attributes previous swathe of tax changes. Leaving liquidation, than they paid for those shares. with the full value of what it is putting in. the average value of UK farmland has the last financial crisis. This is why over the real reason as being falling agricultural aside these disadvantages, which relate So the company is just as wealthy after the fallen by 8%. The average value of British the last ten years the value of farmland commodity prices. Of course, there is a largely to the tax penalty of selling properties So there could easily be a thumping great introduction of the portfolio as it was before farmland in 1966 was £161 per acre. has risen by 145%, beating both the FTSE great deal of variation in performance and spending the proceeds, under the tax liability to meet when you add these two – hence there’s no distribution out of the 100 and prime central London property. between the most efficient and the least immediately prior tax regime a property layers of tax together. And, since all you’ve company on which HMRC could claim tax It reached a high of £8,300 per acre in investment company didn’t really compare done is change the name of the owner of from the shareholder. What’s more, there’s September 2015 but since then it has been Interestingly, very little land comes on to efficient farms. For example, in the area too unfavourably with owning the property the properties on the land registry from the also no tax legislation acting to treat income slipping. Long-term growth was caused the market every year – normally between of arable farms the top 25% earn around portfolio direct, as individuals. The tax rate company to the names of the shareholders, on which an individual is paying income tax by institutional investors, such as pension 100,000 and 150,000 acres. Why are £301 per hectare versus a loss of £223 per 22 - Property Property - 23 hectare for the poorer performing farms. Under the new legislation, sites which since March 2009, when it was reduced have been identified for housing in Local from 1%. The reduction brings to an Black property Development Plans and Neighbourhood end the longest period of no change in Saving VAT On Property Investment Plans, plus suitable brownfield sites, rates since the Second World War. Many Question: VAT is meant to be a tax on input VAT to be clawed back. Even though out of the water. Even though this VAT can TheFinancial Times recently reported that could essentially have automatic planning experts believe that the Bank of England the final consumer, or so you would have it is charging exempt rent to the tenants, this no doubt be reclaimable in due course, the over the last few years: “The exterior of permission subject to agreement of the will reduce the rate even further to 0.1% thought. So why is it so often such a major isn’t a problem so long as it has no input VAT actual refund by HMRC could be many hundreds of period houses in Hackney technical details. Developers will be able before the end of the year. The Council of problem for people in the business of itself. months away. So the moral is: pin down the and Shoreditch, home to London’s silicon to pursue projects and invest money in Mortgage Lenders director general, Paul property investment? vendor’s advisers right at the outset on the Which of the above alternatives is better point as to whether VAT will be charged, roundabout, have undergone a dramatic plans with greater confidence knowing Smee, said: “Since the last change in the Answer: Because VAT isn’t just a tax on the depends on all kinds of other factors, and get them to put it in writing. Then at Goth makeover.” The newspaper is that permission is virtually in the bag. official rate in March 2009, the average referring to a trend whereby more and Moreover, local authorities are now final consumer! Amongst other things, it can including direct tax, so we’ll move swiftly on. least you can plan for the actual amount mortgage rate has already fallen from 3.8 be a tax on the ill advised, and there is almost of cash you are going to have to come up more houses are being painted black. required to create a register of suitable to 2.9%. This confirms that the bank rate no area in the whole of taxation where such If you are building a commercial unit for with. There is a way, which works in most Why? Apparently it helps properties brownfield or previously developed sites is not the only influence on mortgage large unforeseen liabilities can suddenly letting, the situation is arguably more circumstances, of avoiding this being stand out on social media (the modern – which means that developers can now pricing; we feel that the mortgage market pop up, scuppering deals and even ruining straightforward. You can ‘opt to tax’ the rents charged, but more of that a little later on. equivalent of the estate agent’s window) access a readymade directory of sites that is at present well capitalised, resilient investors. received from the tenant when he moves in, and can “definitely boost value” according already have planning permission for and open for business. Housing market and as a result all of your input VAT will be First of all, the important question arises as to Edward Taylor, who manages Foxton’s development. fundamentals are sound. So we see the cut So here’s your ‘cut out and keep’ guide to reclaimable. The only drawback to this is if to whether you are going to be able to get the Hackney branch. “Some of the more as a wider reaction to the economic effects avoiding the nasty surprises, and making your tenant or ultimate purchaser is not VAT VAT back that the vendor is charging. If you expensive properties that we have sold in Short-haul commuting of recent political uncertainty.” your property investments anything up to registered. This will then make the property are a property investor, rather than buying the Hackney tend to be painted dark on the 20% cheaper. more expensive for them. However, property to carry out the VATable business outside,” he said. “There is a very finite Are there profits to be made by investing New-build crisis in London normally speaking there is no alternative, in yourself, the normal rule is that the rents you window of attention from buyers before in property within low-cost air travel Saving 20% on self-build practical terms, to entering into the option to charge to your tenants will be VAT exempt. tax. If it’s any comfort, an option to tax can But that’s precisely where the option to tax they swipe on to the next property and distance of London? Could investors sell Research recently published by the London it does immediately grab your attention.” such property to London buyers with a We’ll start off with the trials and tribulations be revoked after 20 years! comes in. Similarly to the situation where Central Portfolio (LCP) has revealed a Black is, apparently, the new black. year’s worth of airfares thrown in? The – and opportunities – of those who build you’ve incurred VAT on the building costs worsening new-build crisis in London. The However, owners are warned that if black online estate agent eMoov has published property which they then go on to hold as Property purchasers as the self-build investor, the VAT you incur number of new developments approved ceases to be so popular it is a very difficult an interesting survey into the cost of an investment. This is quite common in on the purchase price when you are buying a for construction has surged again this colour to remove. buying property in eight different UK building firms who establish a reasonably Moving on from the particular problems property from someone else can be reclaimed year, with a 20% increase in the planning cities, taking into account (1) the cost of sized rental portfolio over the years by these facing those who build their own investment if you opt to tax the rents, preferably before pipeline since 2013, representing 106,208 means. property portfolio, we will now consider the you start receiving any exempt rent from a Planning permission in principle a weekly return airfare to London, (2) new units. This pipeline is largely made planning issues where you are purchasing tenant. So, providing you’ve the cash flow, four night’s accommodation in London up of projects in the mega cluster areas Our first ‘trap’ comes with the situation of second-hand buildings. as we say, to shell out this extra 20% on A reminder that the Housing and Planning and (3) all the property costs of the around Tower Hamlets and south of the the builder of houses and flats. There’s a purchase, you need have no fear: it won’t be a Act 2016 includes a fundamental change main home. It compares this to the cost river in the Battersea/Nine Elms area, common view out there that new houses The first thing to say is that the residential permanent cost but will be refunded. to the planning regime. In particular, of a comparable property in the Greater and blocks of flats are VAT zero-rated and property purchaser need not read this it introduces a new route for obtaining London area. The researchers assumed where there is already a proliferation of new developments. Despite the increased therefore you don’t need to worry. In fact, particular section of the article. If you are But we talked just now about avoiding planning permission for housing-led that the commuter would be able to book if you are building new dwellings to rent buying residential property it is either having the 20% extra charged on top of the number of new developments, statistics development: permission in principle, or both flights and accommodation six out you have every need to worry! zero-rated if it is new or exempt if it is old. In purchase price in the first place. If you are have shown that the attraction of these PIP. Created by the government to hasten months in advance. They also calculated neither case do you, as the purchaser, have any a pure property investor, and intend to let housing delivery and provide greater the average mortgage cost after deposit new properties, where prices now average The VAT you incur on materials, VAT to pay and therefore you have no worries the property out with an option to tax, you certainty of the development potential and the annual payment for both London £914,532, is waning. Interestingly, property subcontractors etc. building a new dwelling about trying to reclaim it. The seller cannot can actually avoid the imposition of the of residential sites (including for small- and the other locations. What they found prices in the two most expensive London is only reclaimable if you are going to sell effectively opt to tax a residential property. tax on the transaction if you opt prior to scale builders), the objective is to boost was that seven cities outside of London boroughs (Kensington and Chelsea and the freehold or a long leasehold of the exchange of contracts. That is, you opt to investor confidence in the development of offer an annual mortgage saving when the City of Westminster) have been falling completed units. If you are going to let For the purchaser of non-residential property, tax a property you don’t actually own yet. land by separating decision making on ‘in commuting by plane. The city offering faster than anywhere else in London. them out, the VATman can come along on the other hand, there’s every need to There’s nothing in the rules against this, and principle’ matters (e.g. land use, location the biggest annual mortgage saving was Meanwhile, Rightmove reported that and claw all of the VAT back. The solution have the VAT planning principles at your the effect of such a precocious option is and amount of development) from Glasgow. With an average house price of average asking prices in England fell by to this problem is to crystallise a disposal fingertips. The first problem is a practical one. that the transaction becomes the transfer of technical details. just £155,195 the annual mortgage saving 1.2% during August and that London of the property from the building entity to a business as a going concern. VAT doesn’t compared to the capital is £21,275. The property prices were down by 2.6% in a connected person. That sale will then be To this day, very few professionals involved apply to such transfers, and therefore the zero-rated (rather than VAT exempt) and in getting property transactions over the vendor mustn’t add the 20% tax charge to The thinking behind the new legislation cost of a weekly round trip into London September. According to LCP’s analysis all of the input VAT perversely that you line consider VAT until the last moment. the purchase price. is to give developers confidence that is just £53 via Ryanair for an 80-minute of the government land registry data, only incurred on building the units is reclaimable. A very typical scenario, in our experience it is worth pursuing detailed planning flight with accommodation, bringing the 1,491 new units have been sold so far this as advisers, is where the solicitor acting for Incidentally, this very useful device can year, a substantial 43% decrease on the permission. After all, many developers total to just £205 a week. Alternatively, you could make the building the buyer is told, the day before exchange even be adapted to situations where you find that they have spent a considerable same time last year. This compares with contractor and the owner separate entities, no of contracts, that VAT is going to be added aren’t a ‘pure’ property investor but are amount of time and money investigating Bank of England cuts base rate older properties in central London where doubt both under your control. That way, the to the agreed purchase price. If cash flow is actually planning to occupy the property a site, preparing proposals and lining up transactions have remained static, 13,194 building company can zero-rate its services, tight for the buyer (and it normally is) this for the purposes of your own business finance only to discover that planning The Bank of England has cut the base rate in 2016 compared with the same number including the goods that are incorporated in sudden requirement to find an extra 20% activities. If you own a trading company, permission will never be granted. from 0.5 to 0.25%. This is the first cut over the same period last year. the buildings, and the investing entity has no on top of the agreed price can blow the deal for example, which is going to buy the 24 - Property Property - 25 property, the purchase can’t be treated as First of all, there’s a special relief from The other available relief works completely There are also lots of immigrants who are Incidentally, once you have set up your shops will always repay the investment. the transfer of a going concern (TOGC), this otherwise rather harsh rule for those differently. Rather than you being charged looking for affordable rooms so that they are HMO and have an income stream coming free of VAT, because what is being who convert non-residential property to the full 20% VAT on materials and services in a position to save/send back money to in, it is usually possible to make a substantial • Personally, I resent the 10–15% one has to acquired is not a property investment residential. All over the country, oast houses, (possibly) and then looking to reclaim it as their home countries. Students, of course, capital gain. There are other tax advantages to give to a management company and prefer business, which was what the vendor was barns, pubs and former office and warehouse being attributable to an onward zero-rated also like the social aspect of sharing with doing this since investing in and developing to collect the rents myself. Nowadays, thanks carrying on. buildings are being turned into houses sale of the property, those who convert their friends and areas in close proximity properties in this way can count as a business to online banking, this is much easier than it and flats, on the back of the much better properties so that they are a different to academic institutions are popular with activity rather than a pure investment. The was 10 or 15 years ago. But you can turn it into the acquisition of values that apply in the residential property number of dwellings within the same multi-lets. gains, therefore, if run through the vehicle • Don’t stint on insurance. a property investment business by having market as compared to the commercial. property from what there were before are of a limited company, should be taxed at two entities, one ‘a landlord entity’ that you But, for whatever reason, a few years ago the eligible for the reduced 5% rate of VAT to be I’m going to come back to the figures in a corporation tax rather than CGT rates. • Remember, in general, all the utilities will control and one the trading entity which government decided it wanted to add some charged to them on the services of a builder moment. But to put this into some sort of be included in the rent you charge. One acts as your landlord entity’s tenant. By encouragement to this process through the and the associated supplies of goods. perspective, take a three-bedroom house let If you are considering moving into this area, thing to watch for is metered water. There splitting things in this way, you are ensuring tax system. to a family under one tenancy agreement here are a few tips: are areas where water meters aren’t necessary that both the purchaser (your landlord There are two planning points here, one or assured shorthold tenancy (AST) in and charges are based on the average usage entity) and the vendor are carrying on the Hence we have the zero-rating relief for technical and one practical. • Invest in a high-quality renovation and for a particular sized house. An efficient same sort of business, which is one of the properties converted from commercial to the north of England. You may achieve £500 per month in rent. Instead, rent those high-quality fixtures and fittings. Not only heating system will also save you money. conditions for TOGC treatment to apply. residential use. (It actually also applies to The technical planning point is to ensure three bedrooms on an individual basis in will you be able to charge a higher rent and So you can claim to have the VAT excluded formerly residential properties which have that your conversion of the property, if at an HMO at £250 per month each and you attract better tenants but the extra you spend • Allow for council tax payments. In some from the purchase price in this situation not been used as dwellings for a certain all possible and commercially viable, fits have achieved £750 per month or a 50% on making the property fit for purpose areas, council tax valuation officers enforce provided you opt to tax prior to exchange. period.) within the criteria for a ‘changed number of increase. Convert one of the reception will substantially reduce your ongoing Band A council tax ratings on individual dwellings conversion’. (There are other types Conversion/improvement work But the form of the relief is a little odd. rooms into another bedroom and your maintenance bills. Five or six adults using rooms within an HMO. If each bedroom of conversion eligible for the reduced rate as bathrooms, kitchens, floor coverings, doors, is classed as an individual dwelling, for the What it does is to zero-rate (rather than well which are less common in practice.) We rent goes up to £1,000 per month. That’s After you’ve bought the property, it may be exempt) the sale of a property that has been appliances and so forth on a very regular basis purposes of council tax, it will dramatically can envisage a lot of plans being drawn up by double the rent you would have otherwise that you plan to spend significant amounts converted from commercial to residential. means that everything is likely to wear out increase your costs. This is worth discussing investor and architects precisely with a view received. Another financial benefit of of money on it, converting or otherwise So a person who converts a property to more quickly than in ordinary circumstances. with your council before you make an to ensuring that there are a different number renting property in this way, incidentally, is improving it. residential and then lets the resultant investment as it can add hundreds of pounds of dwellings after the conversion from what that if one of your tenants is late or fails to house or flats still faces an un-reclaimable • Invest in very regular cleaning. Having a per month to your costs. there were before. pay the rent it has less effect on your total If you are a commercial property investor, input VAT charge on all of his costs of the yield. Rent a property to a single tenant and cleaner in to look after not just the common again, this is no problem. If you have an conversion, because the rents are exempt. areas but each tenant’s room is also cost • Don’t forget to get a TV licence for the The practical planning point is to make sure if they don’t pay you are completely out of option to tax the rents in place, all the VAT effective. To begin with, it ensures that the house. In theory, every room of an HMO you get the relief. In practice, it seems to be pocket. Obviously, with HMOs you have on the improvement work can be reclaimed. One solution is therefore similar to the property maintains its capital value. It allows should have its own licence if they have their Once again, you have the issue of making person who is building new residential ‘default’ for builders providing services to fewer and shorter voids, too. charge VAT at 20%, and not a lot of them you to stay on top of maintenance issues. own TV. In practice I think it is acceptable to the property more expensive to non-VAT- property: trigger a supply of the freehold And, if you brief your cleaner properly, have one licence for the communal TV that will willingly volunteer the reduced 5% rate. For my own part, I prefer not to rent to people registered tenants or purchasers, but that’s or long lease to a connected entity, and this you will get an early-warning system about you provide and then to advise tenants that You can see their point of view: they are the on social welfare or to asylum tenants but it something that just has to be lived with. supply can be zero-rated, with resultant tenants who may be difficult. they will need their own TV licence if they ones in the firing line if they get it wrong has to be said that both local councils and reclaimable VAT. have a TV in their own room as well. and it turns out that your conversion doesn’t the government incentivise landlords to let The real fun begins where one is talking about • Don’t be afraid to go for a property that residential property investors who incur Incidentally, it may be wondered how it is meet the criteria, so that they should have to local housing authority (LHA) or asylum needs a lot of work. In a way it is a lot easier • I would allow 10% of all the rent you improvement expenditure. that HMRC let property owners get away charged you 20%. But this does mean you tenants by offering a guaranteed fixed rental to take a house back to the brick and start collect for ongoing maintenance and voids. with this fairly straightforward bit of tax need to be fairly insistent on your 5% rate, yield through the various benefit schemes. again than it is to try and put right work This should give you a sufficient buffer in In the case of these unlucky investors, there’s avoidance. At the moment it appears that and if necessary back it up by letters from This does encourage landlords to take in more professional advisers. that wasn’t done correctly in the first place. case something goes wrong. no option to tax available. You just can’t tax the Revenue does accept that this sort of vulnerable tenants with the security that the residential property rents and that’s that. planning works, but it’s important we keep rent will be paid directly to them. So VAT incurred on the expenses can’t our ears to the ground to see whether there This is an updated version of an article • If you can afford it, go for a property • Don’t forget the cost of garden maintenance. which originally appeared in October that would allow you to have at least five normally be reclaimed. But that’s by no is any sign of a hardening of the Revenue’s Of course, there are catches. To begin with, means the end of the story. attitude here. 2009. bedrooms and two bathrooms. It is much Back to the figures. My ideal property is a there is obviously considerably higher running more cost effective. four- or five-bedroom house that I can turn costs, owing to increased management and into a six- or seven-bedroom HMO. I prefer Property Opportunities maintenance work. You may also have to get • Don’t stint on other facilities such as Wi- the house to be in a truly awful condition. special planning permission and, if there five HMOs by Jonathan Brooks out individually with a shared kitchen, students, young professionals, social benefit Fi (pretty much essential) to having two Here are a couple of examples of properties bathroom and living areas. Typically, the tenants and asylum seekers. The long- or more tenants, over three or more floors, you washing machines, two dishwashers and so I own: will have to apply for a mandatory licence with What is the least expensive, easiest and yield from such properties for the last five standing economic principle of supply and forth. The better the facilities the happier the most lucrative way to become a UK or six years has varied between 9 and (at demand is the key to this sector. There is your local council. There are, also, health and tenants, the fewer voids and the higher rents. • A seven-bedroom house in Dagenham, property investor? Buy a two-, three- or its peak) 12%. Although, recently, yields limited access for younger people to get on safety issues such as fire doors, smoke alarms Essex. I bought the original four-bedroom, four-bedroom property and turn it into seem to have dropped slightly, HMOs still the property ladder, owing to restrictive and so forth. My experience is that, unless • For my own part, I prefer hard floors (either semi-detached house for £240,000 at bedsits. Only, nowadays, the technical term produce a considerably higher return than borrowing from the banks. Couple this you are well established as a property investor, wood or lino) and rugs since these are much auction last year. I spent £120,000 extending is a house of multiple occupancy (HMO) traditional buy-to-let. with rising rents, bills and expense to lenders are more reluctant to lend to HMO easier to clean. and renovating it. So, my total investment or multi-let. These come in many different furnish whole properties and it makes sole buyers than to traditional buy-to-let landlords. was £360,000. I receive an average of £420 forms but generally each bedroom is rented There is huge demand for HMOs from occupancy simply unaffordable for many. Why this should be, I have no idea. • A good location close to transport and pcm including bills from each tenant so my 26 - Property Property - 27 annual income is, more or less, £35,000. My in Europe in the early 1990s and has were involved. Supply, however, has Serviced apartments by Tim type of business. are emerging – the city’s new creative cleaning bills, maintenance, Wi-Fi, utilities established itself across the Continent with increased by more than 5% in the last Steele quarter has created 650 jobs since it was etc. come to £600+ a month or £8,000 a around 2,600 facilities totalling nearly 7.5 year and occupancy is also up by 5%. Net There are other connected property established in 2014. It is anticipated that year. My net income – allowing for 10% for square million metres of space, albeit with rental rates in London are more than twice If you are interested in running a more active opportunities. If you decide to go into this the Nottingham enterprise zone will create ongoing maintenance – is around £23,000 differing levels of maturity in each country. that in the East Midlands and the north. type of property investment business then area and manage the properties yourself, 10,000 jobs over the next few years. There a year. That’s around 6%. However, the Interestingly: consider the advantages of renting out short- you will almost certainly be able to pick up are plans to unite parts of Nottinghamshire property came with a large garden and I am Self-storage facilities first appeared in the term, serviced apartments. While Airbnb other landlords interested in paying you to and Derbyshire under a new combined considering selling it as a building plot or • Four in ten of the facilities are in the UK United States of America in the 1960s and has done much to open up this market it look after their short-term accommodation authority. This could help to create as many even putting some garages on it to rent out. and eight of ten facilities are in six specific since that time the industry has expanded would be wrong to think that it is the only for them. This can be a very useful stream of as 50,000 new jobs and will require the I received an unsolicited offer of £450,000 countries. in that country dramatically so that there game in town. In the UK, there are over 30 additional income. Nor do you necessarily building of some 35,000 new homes. One for the house so I have already made a very • The average amount of storage per are now over 53,000 facilities. It didn’t really different major websites matching serviced have to buy the properties you rent out. of the interesting property opportunities substantial capital gain if I want to take it. capita is 0.015 square metres with the UK, arrive as a concept in the United Kingdom apartment owners with people looking to Many people work in this area by ‘renting to to watch is that of the growth of the This has been one of my most successful Netherlands and Iceland having three times until the 1990s, but today there are more rent. Moreover, although the leisure market rent’. You could, for example, take a five-year Nottingham tram network. The second recent deals. than 1,000 facilities across the country. The this level. is huge, the business market is every bit as lease on a property and agree a fixed rent phase recently opened, doubling the size primary reasons why people turn to self- • Facility sizes range from less than 1,000 valuable and worth more. Pundits believe at slightly below market rates in exchange. of the system. There are plans for further • A six-bedroom flat in London Fields. storage are moving home, marriage, divorce, square metres to over 10,000 square metres. that business rental is going to fuel much of If you can rent for 5% less of the property’s extensions including to Kimberly, the I bought two ex-council flats at auction retirement and – for business – a useful way • Average occupancy is increased from 74% the future growth. This is because short-term value and rent it out at 15% of the property’s future HS2 station at Totten and to Derby. to keep archives, stock or office equipment. and knocked them together to create a to 78% in the last year. assignments are forecast to grow to over a value there is obviously a substantial margin Research by Notts TV News suggests single property with six bedrooms, three • The largest operators across Europe fifth of all international relocations in 2017, to play with. Incidentally, it is sometimes property price rises in some areas served by Is it a good investment? Well, quite a few bathrooms, a large kitchen and a laundry represent 27% of the total number of while long-term assignments are expected to worth listing with a site like Airbnb or the first phase have outperformed rises in companies offer investors an opportunity room. The property, including renovation facilities. fall over the same period. Booking.com as they usually have tools Nottingham generally over the decade. It is and decorating, cost me £650,000 in 2014. • There have been around €400 million of to buy units in larger self-storage centres. that tell you the average occupancy rate in also worth remembering that Nottingham Many guarantee returns and minimum My total rent last year, including a few voids, transactions in the European market in the The best way to explain the attraction of a particular areas. If you want your business to is one of the UK’s largest academic centres. investment can be for as little as £3,750. was £32,000. My total running costs were last year. short-term, serviced apartment business is be a success, you should aim to choose areas Its two universities have no fewer than Such investments usually come with £7,400. Allowing 10% for ongoing voids • Three-quarters of operators expect next to take a typical example. For approximately that have an average occupancy of around 57,000 students and although numbers are guaranteed rental income for the first two and maintenance I reckon my return is low year to be more profitable than the previous 70%. falling they still have to offer huge potential years and impressive projections of between £300,000 you can buy an attractive two- – just 3.5%. However, the good news is that year, although more than half of respondents for development in the right location and 10 and 12%. Leaving aside the potential bedroom flat in Edinburgh. If you let that another similar property is currently on the do not forecast increasing rents. Finally, if this opportunity is of interest to with an appropriate product. In terms of for such high returns, many investors are apartment out on a long-term let you can market and should make £750,000. The you, consider joining the Association of HMO one does require planning consent attracted to the idea because self-storage is expect around a 5% yield, or £15,000 rent rents in that property are a bit higher, too. I Why has there been so much growth? Serviced Apartment Providers (ASAP). for conversion of a property into HMO, and considered suitable for self-invested personal a year. Letting it on a short-term basis, you plan to sell my own and I expect to make a The short answer is that 72% of Europe’s pension (SIPP) investment. However, should be able to achieve a gross yield of It now represents a growing number of additional licensing is required in specific total return on investment of £140,000 – or population live in cities and this is expected financial advisers warn that after the period up to 15%. In other words, around £45,000 operator members and has a range of areas. What about prices? The average 11% a year – over the two years. to rise to 80% by 2020. The pressure on of guaranteed returns comes to an end it income a year. services that will help you make your property price in the city is £123,672. space in these urban environments is is likely that the yield will drop. For my business a success. The average market rent in Nottingham is HMRC views property as a passive increasing, resulting in smaller living spaces own part, I wouldn’t touch these collective Of course, short-term renting does increase £856 per month with a two-bed property investment. My property investment is a per person and rising residential property schemes with a barge pole. your costs. To achieve that kind of rental Tim Steele lives in Glasgow and has a renting for £710 per month and a four-bed full-time business. I invest my own money, prices. London is a prime example of this income you could be servicing as many portfolio of over 20 properties. renting for £1,160. Average room rent in collect my own rents and oversee all the trend, with its population hitting an all-time My own experience was that it is perfectly as ten different tenants a month. You can Nottingham is £307 per month. work. I never borrow and I expect to see an high of 8.6 million this year, and projected feasible to buy a building and convert it. expect the cleaning bill each time you The East Midlands overall gain every year of approximately 10% to rise to about 10 million by 2030. House My first unit was in Cork, Ireland. I paid change tenant to be around £60. You are • Derby. Derby is considerably smaller before my own expenses. I pay an effective price growth has been 8% a year over the €180,000 for the site and the same again also going to see higher costs when it You are interested in investing in property than Nottingham with a population of tax rate of 25% across the board so my 10% last five years, causing the percentage of for a purpose-built building. It took me comes to maintenance. While most tenants outside London and the South-East. You just 247,000 but it is expected to grow by is actually worth 7.5%. I also lose about the population renting to rise from 17% two years to achieve 70% occupancy and will treat your property with respect, you are a little nervous about heading all the way over a quarter over the next two decades. 1% to inflation. I estimate that the £4m I in 2001 to over 25% today. In addition, I managed a net yield – after all costs – of have to allow for higher breakages and to the North. Perhaps you should consider Traditionally a major railway engineering have invested in eight properties brings the average size of a one-bedroom flat in 6%. However, I added a serviced office more frequent decoration. Booking fees buying property in the East Midlands. Price centre, private sector engineering is still me a disposable income of around 6.5% or London is now only 47 square metres, to the facility and boosted my net yield can vary dramatically but you should allow rises in the East Midlands have fallen behind the city’s largest industry. The city claims £21,000 a month. I like property because highlighting the squeeze on space. Areas of to 9%. I sold the whole facility and I am for up to 15% of revenue. the hotter South and yet have generally done to have the highest average salaries in the it offers security. The stock market can do high-density housing, particularly in higher currently looking for a suitable building better than property prices further north. country outside of London and the South- what it wants. The bond market can do what socioeconomic areas, tend to be high users in Greater Manchester. My tax advisers There are difficulties to overcome, as well. There are four core areas you should look at: East, at roughly £34,600 a year. It certainly it wants. People always need bedsits! of self-storage. have suggested that I should be eligible You may need planning permission. In achieved major growth over the last five for the 10% entrepreneurs’ relief if I am London the rules are quite clear – if you • Nottingham. Nottingham is traditionally years and has attracted some £3 billion of Jonathan Brooks is a US property investor Interestingly, nine out of ten people able to pull off the same trick again in the want to rent for more than 90 days a year a city that depended on light industry but inward investment. The city is recognised who now lives in London. have heard of self-storage in the UK but UK. I also plan to increase my income by then you must get planning permission. You recently it has moved much more into as a top-ten city to start a business in and is understanding the product remains quite offering document shredding. also need to check, if you hold the lease, the service sector. Financial and business a top-ten location for premium retail. It is Self-storage by Declan Murphy low, at around 30%. Six out of ten people whether your freeholder will allow you to services, logistics and retail are the main served by both East Midland’s airport and, couldn’t name a single self-storage brand Declan Murphy is an Irish property investor rent in this way. Remember, too, that not all employers, while advance manufacturing, of course, Nottingham. It has a much smaller The self-storage industry started to emerge and few had any idea what sort of costs living in Manchester. banks are enthusiastic about funding this clean technology, life sciences and digital student presence compared to Nottingham 28 - Property with only one university of some 11,300 18,600 students. The average property manufacturing and engineering. A new students. It is somewhat easier to establish price in Loughborough is £193,000 and the enterprise zone has been set up with the an HMO in Derby. The average property average market rent is £1,069. The average intention of creating a science and high-tech price is £141,067 and, interestingly, a single rent for a typical two-bedroom flat is £550. manufacturing-themed ‘zone of excellence’. It room rents for £402, which is higher than And for a four-bedroom house it is £1,000. is believed that this could create 25,000 new in Nottingham. However, the rent on single jobs over the next 25 years. Leicester has a dwelling properties is somewhat lower. • Leicester. The population of Leicester has housing shortage, particularly of affordable According to one leading rental manager grown by 17% over the last decade, faster housing. The University of Leicester has there is a shortage of stock for professional than anywhere else in the UK except London 10,000 full-time students and the larger De tenants and demand is high. and Manchester. Traditionally, the city was a Montfort University has 27,000 students. major footwear and knitwear manufacturing The average property price in Leicester is • Loughborough. Originally, Loughborough centre. However, the economy is much more £146,038 and prices have been rising at close was a small manufacturing centre but the diverse and significant industries include to 9% a year. The average market rent in town is now a popular commuter location logistics and distribution, professional and Leicester is £750 per month and a typical one- and has a significant university with some business services. There is some advanced room rent in an HMO costs £363 per month.

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