Stamping it out

As sure as night follows day, where a tax springs up, a loophole will ultimately follow. Yet, the buyers of prime property in London and beyond are refusing to let the prospect of stamp duty rates of five percent from next spring get them down. Equally, property developers are seeking new ways of not allowing the recently increased level of Capital Gains Tax now set at 28 percent to affect their profitability margins.

Specialised tax planners, like Mulbury Hamilton Tax Solutions, are already finding legal ways around the tax burden, saving buyers hundreds of thousands of pounds in the process.

Many wealthy property buyers feel that they are unfair targets for those politicians struggling to balance the country’s books. Some are fighting back against their tax burden by using the loophole-du-jour: a special purpose vehicle (SPV), or a company or trust set-up with the property as its sole asset in order to avoid capital gains tax. Equally, the mechanism is structured in such a way that the property purchase is not subject to SDLT upon acquisition. At the same time, there is no vendor participation and the planning allows all UK high street banks to still grant a mortgage over the property acquisition.

This is evident with some leading private equity companies who are in the process of buying and refurbishing properties in Knightsbridge, Mayfair and Chelsea, which will be sold in this way. We are beginning to see more and more corporate institutions and high-net worth clients moving into this type of purchase structure since the proposal of the five percent SDLT tax charge was recently mentioned.

Meanwhile, the developer Rigby & Rigby is already marketing two prime houses using SPVs. A five-bedroom property in Wilton Place, Knightsbridge, has a guide price of £6.95m, while a townhouse in Eaton Terrace, Belgravia, is on for £6.56m. Based on the current four percent rate of stamp duty, the SPVs would bring estimated savings of £278,000 and £262,400. If the rate jumps up to five percent next spring then these savings increase by another £69,500 and £65,600 respectively.

Another way to avoid the impact of stamp duty is to buy land and build a property yourself. Only the plot is liable to the tax, not the cost of the build or the final value of the property, so if the land costs less than the stamp duty threshold of £250,000, there will be nothing to pay.

Shane Turrell of Mulbury Hamilton Asset Management (MHAM) has put this tax break to use on the new Rocky Lane development at St Agnes, Cornwall. Prices start at £475,000, but because buyers purchase the land and then enter into a contract with a sister company of MHAM to build their property, they are effectively self-builders and will ultimately be taxed as such.  Mr Turrell, a senior tax partner within the Mulbury Hamilton group, states that: “it is such a simple yet powerful structure to legitimately avoid paying any SDLT”.

But, how have we got to this? Apart from the obvious, why is it that so many wealthy individuals now wish to avoid paying the taxes due. Perhaps the answer lies within the fine mess of stamp duty rate changes that resulted from the budget back in April 2010, meaning that buyers are going to feel even more pain at the rate change pinch points. The current government will be adding another pinch point at £1m from April this year.  Something for those who own (or hope to own) property in Kensington to bear in mind, where over 48 percent is worth over £1m.

Sellers can feel no sense of satisfaction either as this causes properties for sale to clump together just below the break points. This is easily demonstrated, with around 480 vendors selling on www.globrix.com with prices between £499,000 and £500,000. Is not one of them convinced their property is worth a penny more than £500,000? We predict that the current number of 140 properties for sale at £999,000 – £1m will at least double from April 2011 when the five percent payment applies above £1m.

About Mulbury Hamilton
Mulbury Hamilton Tax Solutions specialise in helping clients and businesses reduce their exposure to various UK taxes through extensive high-level tax planning.  Strategies include protection against inheritance tax, creditors and divorce, as well as off shore tax planning and exposing ways to fully access 100 percent of one’s pension fund.

Mulbury Hamilton was winner of both the Estates Review 2010 ‘Tax Boutique of the Year’ and ‘Wealth Management Firm of the Year’ awards.  Shane Turrell commented, “It’s fantastic for us to receive these awards.  We made great progress in 2010 and we hope to be able to deliver even more to our clients in 2011.”