Money Matters - Q&A Special

By Touchstone Education

Sep 06

This is the special edition where I answer your questions.

First question:

If the flat, or if the property, has got a lease, are you checking that each individual lease allows for a short-term let?

It depends. I'm going to give you two answers to this. If you are taking a long-term contract and you're going to be paying them the rent regardless, I would strongly suggest that you do. Make sure that the lease permits subletting. Make sure that the lease permits you to rent it out by the night to other people. The second scenario is where you're not strictly doing a rent to rent, you're doing what I would call, a management agreement. This is where you're managing a property for somebody else and you're charging a commission. Now I prefer doing that. So rent to rent, let's make sure everybody understands this, this is where you give the land lord, I don't know, a £1000 a month for a property, whatever it is. And then you rent it out for 100, £200 a night. Now in that circumstance, you’re responsible for paying the rent to the landlord regardless to what happens. So you don't want to be committed to paying £1000 a month and then discover you can't let it out on Airbnb or Booking.com or whatever else, so absolutely. However, if it's a management agreement and you're taking a percentage of the turnover on behalf of the landlord, different scenario for me. Because if for whatever reason you have to stop doing it, well, you've got no ongoing costs. So your risks are completely different. So I'll tell you, to repeat the question, with regard to rent to rent, if you literally mean rent to rent, then the answer to your question, KA, is yes. Right, that's number one.

Question 2:

What's your thoughts on buying land and building something that would benefit nicely from service accommodation? What do you think the time or return on investment would be worth your while or would it be pretty complicated?

A fantastic question to ask and unfortunately it's one of those how long is a piece of string? Because do you want to take a piece of land and build a house and use it as service accommodation? Or do you want to take a house that's already built. If you do the first, if you build the house, you're typically going to make, 30% of the capital value of the property as profit. So let's say it's £450,000 property, you're probably going to make £150,000 profit by doing that, but, it's going to take you a year to a year and a half. Now for me, service accommodation is a quick cash flow strategy. So I wouldn't do that and I've never done that, I've never actually started from the ground and built something. I'd far rather take something that's already built, and do it quick, because, you've heard me says this before, the most valuable thing that you've got is time. Now if every time you do a project, it takes a year or a year and half or something, to go from ground up to money, that's a lot of your life that you're burning before you actually get anything. So what you're talking about Tyson, and it's fantastic, and I understand why you're doing it, you're talking about return on investment. How about this, how about you consider it's not only return on invested money, which is what I think is what you're referring to, but how about if you think its return on time invested. So not R-O-I, but R-O-T-I, ROTI, it's a concept that I'm very keen on, because, you know, all of us have got finite time on the planet and ultimately, it's about what you do with that time, isn't it? So it's never about the money for me, it's about the choices that the money gives you. And if your life is to be the richest, most vibrant possible version of your life that it possibly can be, then I personally, wouldn't want to burn that amount of time building it from the ground up.

Question 3:

All right so John's question. The LLP benefits you suggested of operating your property as service accommodation look appealing. What are the negatives of a LLP in this situation?

So, let's step back. 2003, I think it was, well maybe 2004, but anyway, 15, 16 years ago, it doesn't matter, Aniko and me bought a care home, and we converted it into a house, and ever since we've been living there, round numbers we bought it for 450 and it's worth about 1.3 million, so we've done all right. But that's been our home for the last decade and a half, and that's in Scotland. Now we're moving from Scotland to England and we don't want to lose the house, we want to be able to go back to Duneira whenever we want to, so we thought, "Well, how can we manage all this?" So the solution, ultimately, was to sell our house to an LLP, to a limited liability partnership, that we already owned. Why is that good? Well, we're going to have to pay some commercial stamp duty because we're selling a service accommodation unit to a LLP, so it's tens of thousands of pounds, but, the property we buy down here, because it's not a second home, we don't have to pay the extra 3%. So the difference in the stamp duty is about 20k, so we're paying probably about 20k more than we have to. That's one of the downsides, John, about £20 000 cost, extra cost, in terms of stamp duty. Many people that are watching are thinking, "Jesus, £20 000, that's a lot of money," well, yes, but it unlocks two massive benefits. The first massive benefit is that Duneira, because it's a eight bedroom mansion, over an acre, looking onto the sea, as a serviced apartment is incredibly attractive, especially where it is, it's on the west coast of Scotland, literally looking onto the sea, and it's about five miles from Loch Lomond, it's gorgeous which is why we moved there. So the analysis that we've done says, when we run as a serviced apartment, we're probably going to make £15-20 000 a month, profit. So would you be prepared to pay £20 000 in tax so that you could make £15-20 000 a month? Of course you would. But the second huge benefit it unlocks is capital allowances. So what's capital allowances? An amount of money you can earn tax free. Now I know many of you that are watching this won't have a clue what capital allowance is because it's not the sort of stuff that you learn in school. Many accounts don't know what it is and they'll give you the bad, wrong advice on it. So you need to know enough so you can educate them. Otherwise it's going to cost you a fortune. But just doing that one thing is going to give us, give you and me, Aniko, roughly £600 000 in capital allowances. Now to decode that for you, it means me and Aniko are going to earn £600 000 and pay, legitimately no tax. So if you're a 45% tax payer, blimey, will even if you're a 40% tax payer, that's still £240 000. And even if you're a basic, whether you'd be doing this kind of project if you're a basic rate tax payer is pretty unlikely, even if you were, it's still going to save you £120 000 in money. So let's ask the question now again properly in the round. Would you be prepared to pay an extra £20 000 as stamp duty so you could keep a massive house in Scotland you'd otherwise lose? So you can benefit from selling it and not paying any capital gains tax because you just sold your PPR. Make £15-20 000 a month and get £600 000 tax free, that's a pretty compelling list of reasons.

What’s the downside? Here's some downsides. Downside number one, most people can't do it, most people won't even think of doing it, but try and actually do it, they can't, because they don't have the right level of knowledge, they don't have the right level of education and that's not me sitting here in my training rooms saying I'm bright and you're not. I've had the right education and I've taken the right action and I'm surrounded by the right people. And if you would like to have some of that, if you'd like to improve your level of knowledge, if you'd like to improve the network that you're surrounded by, if you'd like to sit in this chair or one of these chairs, then I'd like to invite you, as my guest, for free, to come and spend two days at one of our Six Figure Summits, and learn all about property, and learn all about tax, and learn all about LLPs and service accommodation and all the other stuff on these fantastic questions here for free. Why am I doing that? I don't know if you can tell, but I'm passionate about doing this, because property's been fantastic for me. But I happened to have benefited from a previous business career where I was running big companies and they spent a fortune on me, to educate me, to be one of the very best people to do with tax, and property and structure. They paid for me to do a first degree, they paid for me to a MBA, and then ever more importantly, they gave me all the advisors and a big bucket of cash to go and buy and sell things. So I used to do it for a living. Now I'm doing it for myself, and I want to teach you how to do it too. So click on the link below, come and spend two days, as my guest, it's completely free, we'll feed you, all the refreshments, tea, coffee, whatever else, here in Doncaster, one of these seats. Or if you want to come to London or Glasgow, we do the same thing.

Question 4:

How tax efficient would it be in future years to transfer ownership of assets within an LLP, not the whole LLP, to a family member, son or daughter, could they still run property as they say, and take advantage of similar capital allowances?

I don't know where you picked that up from, that's the sort of thing I say. And that is a sophisticated application of knowledge, so well done Rainbow. So the answer the question, how tax efficient would it be in future years to transfer ownership of assets than in a LLP, fantastically. The way we do it, so we have propco, opco. Propco over here, LLP, owner of the asset. Opco, operates the asset. And because you've split ownership and control, ownership and cash flow, normally if you want to gift something to your children or whatever, the cat's home, you've got to live for seven years. So if you're going to gift something, odds are, almost for sure, you're going to gift it too late, in which case, you pay inheritance tax, you're going to gift it too early, in which case you live a lot longer. But in either case, as soon as you gift the asset, you lose the income. Unless, you do it in an LLP, a limited liability partnership. Because a limited liability partnership is governed not by shares and shareholding, it's governed by a partnership agreement. And that partnership agreement can be written in such a way that while you're alive, you're the senior partner, you pass on, and your children or whoever, move from being the junior partners to the senior partners, you can write all of that into the partnership agreement. So from an inheritance tax perspective, LLPs are fabulous. Thank you for the question, Rainbow.

Question 5:

I've just had this experience too. Let's says you've got to your 60s, 70s, 80s, and you've got a property, the mortgage it paid off and you've got 100s of thousands of pounds, good, well done, you worked hard for it, you're entitled to it. But now, let's say that you don't die, the scenario here is what happens if you go into a care home?

Well, this happened to one of my great aunts, Peggy, recently, well not recently, she went into a care home, 16 years ago, and to explain, she lived with her sister, so it's Peggy and Gladys, they never got married. At least they've travelled the world, had a very nice lifestyle, they inherited a few quid from their parents, but long story short, they had a couple of jobs, a job each over their entire lives, so by the time they retired they had two houses, a home and a holiday home, had some savings. Gladys passed away, Peggy on the other hand, shortly after that, when she would've been in her late seventies, was sufficiently unwell she had to go into a care home. And from her late seventies until a few months ago, she was in a care home, she died at the age of 96, so she was in a care home for, I don't even know, I think it was about 18 years. And you know what care homes cost. So she started a care home career if we call it that, with a big amount of equity in her properties and a big amount of money in the bank. But in that scenario, you've got to pay for your care until you've got the last, I think its £16 000. So her fortune dwindled to £16 000, how do I know? Well, she had four cousins, and no other living relatives, and my dad was one of those four cousins, that's why she's my great aunt. And I got sent a copy of her will because my dad is already dead, he died five years ago. And the way the will is written is one quarter of her money goes to each of her four cousins, but if any of her cousins have passed away, it goes to their children. Now I'm one of four, my dad's passed away, so just doing the maths, I get a quarter of a quarter which is a 16th. And I've been told, that I'm going to get £1000. So I know when she went into the care home even back then, 20 years ago, she had millions, but the care home has sucked all that money out of her estate to pay for her care. So instead of being to pass on millions of pounds, she gets to pass on £16 000, is that fair? I don't know. And I can tell what my mum's reaction to that has been. My mum, she's still very fit, she's in her late 70s, and she travels all over the place, plays bridge, does the garden, loves it. As soon as that happened, and as soon as my mum realized the financial implications of getting put into a care home long term, she sold her house. And what she's doing is she's gifting a quarter of her money, to each of me and my three brothers and sisters. So she's giving me a quarter of her house now, because she's terrified that in her 80s and 90s, she could get put into a care home and she'll lose the lot. Now I don't care about the money, I care about my mum. And I don't even need the money, and it's not me that's driving this, she just phoned me up one day and she said, "Paul, I don't want any arguments, "I'm just telling you what I'm going to do." So, Juliet, I can't tell you what the best thing to do is, I can tell what happens if you don't take some action and you end up, not you, but older people ending up in care homes, they're going to lose the lot. So what my mum is doing is she's gifting it early. Juliet is asking me about the seven year rule, mm-hmm, if you gift it, you transfer it to somebody else, and you then survive for seven years, then it's completely free of any inheritance tax. What also happens is the more years that you survive, the less tax you have to pay. So if you died, sorry it's not very cheery is it, it's all about death. But if someone were to pass away today, above the threshold which is £320, £330 000 whatever it is, forgive me if I'm £10 000 out, you've got to pay 40% tax. And if you live for seven years, that tax goes to nothing, if you've gifted it. But you can imagine like a curve after one year, two years, three years, four years, and five years. So even if weren't to live for the full seven years, it would still be better to have gifted it now rather than not. I'll tell you what the best thing to do is, Juliet and anybody else that's listening, get yourself educated, and speak specifically to someone called an estate planner. They're probably someone that does wills, because you need to make sure that from an inheritance tax perspective, you're covered, you know what you're doing, so my specific advice to that question, is speak to an estate planner.

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