For the past 12 months, the focus for policymakers has rightly been on taking the sting out of the pandemic. With a bill of £280bn and rising1, however, at some point they must turn their attention to shoring up the country’s finances. While the pain has been deferred so far, tax rises now appear to be inevitable and property investors should start to plan ahead accordingly.
The rumour mill on the March Budget has been in full swing. Chancellor Rishi Sunak is reported to be considering a rise in corporation tax, plus a national property tax to replace council tax and stamp duty2. A recent report by the Office of Tax Simplification (OTS) has recommended aligning capital gains tax rates with income tax rates. Some economists, however, believe it is far too soon to contemplate tax rises with the recovery still precarious. As yet, nothing definite has emerged from the Treasury.
We see a number of clear trends in the property deals that are happening today. The first is that many are being pushed through quickly in anticipation of rising rates, even if nothing has been confirmed. Business owners are well aware that it can take considerable time to get deals agreed and they do not want to leave it too late and find half their gains have evaporated because of higher taxation.
We are also seeing property excluded from the sale of other trading assets. Buyers are increasingly saying ‘yes’ to the trading company and ‘no’ to the business property. This gives sellers a real headache – they have no need for the business property without the trading assets and have to effect a sale elsewhere at a time when the commercial property market is soft.
The reasons for this reluctance are varied. With future working arrangements unclear and broader adoption of agile working, it may be that buyers do not want any additional property. It may be because the market is generally weak and they are unsure on valuations. The building may no longer suit the modern working environment. It is clear that buyers will no longer take on a property hoping that it will meet their needs; what they really need is certainty.
This separation can easily derail a transaction. We are helping sellers gauge the market well in advance of a deal. We also need to be creative in finding ways to remove the property from the transaction and tidy up the target company so that the seller can achieve their sale in a sensible timeframe. Leasehold interests will need a landlord’s consent in place prior to undertaking a project, to separate the property. These things can be administratively complex, and it is advisable to be well prepared.
A second consequence of potential tax rate changes is the impact on owners’ inheritance tax liabilities. Previously, owners of property trading companies could be quite relaxed – corporate tax rates were low and if assets were held until death, they could expect inheritance tax relief. The OTS has suggested removing some of these reliefs. With tax rates under consideration, it may be better to err on the side of caution and consider a strategy of gifting assets during one’s lifetime.
We would suggest those owning property trading and property investment companies give some thought to how they are going to transfer the wealth to other family members sooner rather than later. They will need to get solutions in place before it is too late and tax rates start to rise. In a separate article, we will talk about the use of growth shares to “freeze” the value of a portfolio; this is one of a number of potential solutions that can be deployed if the timing is right.
The message for property owners is that there are solutions as long as the right advice is taken early on. There could be some uncomfortable announcements in the Budget but there will be plenty of ways to mitigate their impact.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.