UHY Haines Norton’s Managing Director Grant Brownlee explains how property purchasers can benefit from the right property structuring techniques.
It was suggested to me recently by one of my clients that I share this little story as it may be of assistance to other clients.
My client had been trying for some time to sell a unique coastal house on the outer edge of Auckland. It is an absolutely stunning property. Many people that saw it for the first time fell in love with it. Some of them made offers and a couple of them were accepted, however, the deals fell through as they were conditional upon the purchasers selling their own homes and in both cases their homes failed to sell.
During one of our regular catch up phone conversations, my client mentioned that he had a new customer keen to buy. My client had signed a sale contract with a buyer, but again it was subject to the buyer selling their own home. The buyer needed to do repairs to their own home before they could market it for sale and time was running out. They had called my client concerned that they would not be able to sell their home in time. They were unwilling to obtain bridging finance.
The purchasers owned their home freehold, so if they sold it and added their savings they had enough cash to buy my client’s property. I suggested to my client that the purchasers might like to consider keeping their old home as a rental property using a structuring technique that involves selling it to a “Look Through Company”. I laid out the plan for my client and suggested to my client that if the purchaser was interested in the idea they discuss the plan with an independent accounting firm as I could not advise them directly due to a conflict of interest. So they took independent advice and as a consequence they went ahead with the plan and were able to complete the purchase of my client’s property. Everyone was happy.
So what was the plan? Here is an extract from the email I sent to my client after our phone conversation:
“… a common structure for people who want to move out of their family home, turn it into a rental property and upgrade to a new home is as follows:
- Form a Look Through Company, with shareholders being Mr and Mrs.
- Sell the old family home to the Look Through Company.
- Make the Look Through Company borrow from the bank to pay out Mr and Mrs (often the purchase is 100% financed using the old and new house as security for the bank).
- Mr and Mrs use the cash they receive from the Look Through Company plus what they have saved to purchase their new home.
- Rent out the old home to tenants.
Under this scenario there is often a tax refund generated for Mr and Mrs, due to the fact that the Look Through Company’s interest expenses and other expenses exceed the rental income. Under the Look Through Company rules, Mr and Mrs are the taxpayers for the company and therefore the losses pass through to them personally and offset their salary income. The effect is to lower their overall personal income, which usually means they have had too much tax taken out as PAYE, so they get tax back.
In addition, if they have the view that the Auckland property market will continue to climb, they get the benefit of capital gains on two properties instead of one……”
The structure I suggested above is very much bread and butter advice for most Chartered Accountants.
The key point of this article is that frequent conversations between client and accountant are critical if you want your accountant to add value to your situation. This particular client often involves me when key decisions are to be made. As a result, we have built an effective working relationship that has enabled me to frequently add value for my client.