Real estate and construction - How do we build from here?
As the real estate and construction sectors begin to adjust to a ‘new normal’, it is vital to consider whether their long-term plans are robust enough to drive future growth and manage risks.
“Looking to the future for real estate and construction businesses is not easy as they react to the present, but failure to do so will come at a cost. As these sectors begin to adjust to a ‘new normal’, it is vital to consider whether their long-term plans are robust enough to drive future growth and manage risks.” Says Ray Abercromby, tax partner at Smith & Williamson LLP.
Real estate and construction companies have had to contend with some of the toughest conditions in 2020. In many cases, short-term considerations have had to take priority over longer-term strategic planning. In collaboration with Midlands Insider, Smith & Williamson has taken the pulse of the real estate and construction sectors across the region, finding that while confidence for the future remains intact, businesses are struggling to keep their growth plans on track.
The objective of the survey was not only to understand the difficulties businesses are facing right now, but also to discover if they have strong long-term growth plans in place to ensure future sustainability. Ray adds: “The right business growth plan can keep businesses focused on the risks and opportunities, ensure the protection of key assets and provides a secure platform for growth.”
Business confidence and Covid-19
The survey showed surprising confidence among respondents, with around 50% of real estate and construction businesses surveyed saying they were very confident or reasonably confident about the future. Covid-19 does, however, continue to cast a lengthy shadow; around two-thirds (64%) of respondents said it remained the most influential factor in their long-term growth plans.
That said, access to talent, cash flow and working patterns also loom large for many businesses. Brexit has dipped right down the priority list, with only a handful of respondents highlighting it as an area of concern. Despite this, we believe Brexit still has the power to disrupt, with a potential impact on staff, supply costs, and supply availability.
How are businesses in the Midlands dealing with these short and long-term challenges? A combination of getting the right business strategy in place, securing reliable funding and putting a skilled and capable workforce in place. Staff are particularly important, says Ray Abercromby “Ultimately, getting the right people in place can help accelerate businesses’ recovery from the crisis. It is encouraging to see firms putting this high on their priority list.”
Talent management and succession planning
A crisis can provide an opportunity for reflection, to focus on staff wellbeing and help ensure the right people are in the right place. When stock values are lower, it can be a good time to consider rewarding key staff (or attracting new talent) with equity. In our experience, while share schemes can deliver tax advantages, they are also a proven and effective way of aligning staff with corporate goals. In particular, we find that creating and awarding growth shares can do just that – drive growth.
The survey showed that around two-thirds (67%) of respondents were happy with the succession planning they have in place, either because they are happy to let the business grow organically (37%), or because they have put a long-term growth strategy in place (29%). Only 5% had not thought about it at all.
Ray says: “Organic growth doesn’t obviate the need for a plan. Businesses should set out how growth will happen, thereby protecting investors and driving the business forward in a structured way. This should include bringing in an element of succession planning at an early stage. In short - no plan, no protection, no growth.
“When considering exit planning in these challenging times, business managers should think laterally. If buyers dry up, could the company be sold to the staff? This can have real tax advantages, particularly if – as might be expected - tax rates rise. Don’t rule out management buyouts. Debt is cheap, making geared acquisitions more attractive.”
Government support and tax changes on the horizon
The Government has been active in supporting businesses through the crisis, but when asked what longer-term measures they would like to see, respondents prioritised public spending on infrastructure. The Government has said infrastructure will form a major part of its spending plans, but details of how funds will be spent remain sketchy.
Reducing business rates is also a priority for many businesses, with 36% of respondents saying it was important to them. Increasing public investment in housing and relaxing the planning regulations were also on the list of priorities.
The other main area for hoped-for reform was in reducing the taxation burden (27.5%). With a major fiscal deficit, this looks increasingly unlikely. The Chancellor’s Budget looms next year, bringing a potential increase in capital gains and corporation tax rates.
Julia Rosenbloom, tax partner at Smith & Williamson LLP says: “We are expecting to see some aspects of an IHT reform document published earlier this year come into effect. In particular, we anticipate the potential abolition of Potentially Exempt Transfers (PET), essentially the ability to make a gift of unlimited value that is exempt from Inheritance Tax (IHT) if you live for another seven years.
"Coupled with a probable increase in the rate of Capital Gains Tax, this would represent a significant restriction on people passing on their wealth, making it much more expensive to gift to their children or grandchildren."
We have been advising our property clients to either accelerate existing sales, take steps to bank the current tax rates and/or consider restructuring their businesses, where this ties in with other commercial motivations or existing plans. However, any acceleration of tax cannot be undertaken without both the cash to pay the tax, and the right advice to do this properly.
As well as triggering tax on current valuations, it may also be worth putting in place steps to pass future growth to the next generation family in a tax efficient way, which could provide a strong platform to avoid the impact of future tax rises.
Any action taken in anticipation of changes does, however, involve significant risk. Changes may not be introduced as expected or anticipated benefits may be caught by a subsequent change, for example -so it’s worthwhile seeking advice before any action is taken.
Interestingly, the survey suggests IR35 has slipped off the agenda, yet it has the potential to create real difficulties for construction businesses. The reformed IR35 rules will go ahead in April 2021 and it is crucial to be prepared. Getting caught out by these new rules could impact cash flow and business growth plans at a time where businesses may remain exposed to Covid-19 and Brexit pressures.
If you would like to explore how we can help you drive business growth please get in touch.
Notes to editors:
The survey was carried out in conjunction with Midlands Business Insider magazine between 1st September 2020 and 9th October 2020. 133 respondents were recorded.
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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.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.