UK: Property Bulletin - A Briefing For Investors, Developers, Surveyors And Other Professionals In The Property Sector - Planning For An Uncertain Future.

Last Updated: 28 January 2009
Article by Nick Cartwright and John Voyez

Will a boom follow the bust? Probably. In the meantime, we offer some advice on planning for the future, minimising your tax burden and making use of capital allowances. We also discuss what to look out for if you think a supplier is struggling financially.

THE BIGGER PICTURE SCENARIO PLANNING FOR PROPERTY SERVICE COMPANIES

By Denis Burn

Denis Burn explains scenario planning, and how it can help property service companies in the current market.

Scenario planning helps businesses to spot good opportunities and to make decisions that are more resilient to future uncertainties. It has been likened to 'rehearsing the future'. The UK property market, as it moves from credit crunch through recession to recovery, is an environment in which industry players could make use of this tool.

The technique was founded in the 1960s, and has since been widely adopted in response to rapid change, increasing complexity and rising levels of uncertainty.

Scenario planning offers a number of benefits, and now underpins the plans and decisions of many businesses, for good reason.

  • Decisions based on scenario planning are more resilient because cause and effect have been rehearsed.
  • The process builds effective teams. It is creative and enjoyable, it uncovers and feeds on differences of opinion, it challenges assumptions, it shares learning, and it builds new perspectives of what might be possible and where new opportunities lie.
  • Scenario planning helps a business to be more alert to external developments; it becomes more observant and nimble.

Scenarios are easy to communicate so that employees are more aware of the drivers of success and potential dangers. Businesses are less likely to be ambushed by unexpected events (and better able to respond). Scenario planning is more useful if it is structured around an important and far-reaching decision, or possibly a 'what if' event. For example, you may be considering the impact of the retrenchment of the commercial development market on your business and clients, or wish to test an existing strategy against the emerging realities of the economic downturn, tenant insolvencies and government policies.

With a specific question in mind, you can identify forces that will influence the success or failure of your property business strategy. The most important and uncertain forces become the foundations of different scenarios.

Building detail into these scenarios allows you to consider how the future might unfold for the real estate sector during the next few years and how your strategy would stand up. This is a creative session: scenarios take the form of a narrative with characters – stories that link together complex interactions and possibilities.

The idea is not to make forecasts of what is most probable, but to identify what is plausible. Scenarios are not an end in themselves but tools to improve strategic thinking and decision making. They provide a way for you to test out and improve your strategies.

However, a critical ingredient of successful scenario planning is the skill and experience of the facilitator. Smith & Williamson provides this skill, drawing on our detailed involvement with property service companies and valuable experience and insight from other sectors. If you would like to discuss this management technique further, please contact us.

LOOKING FOR LIQUIDITY WHEN CASH IS KING

By Mike Fosberry

Mike Fosberry explains how professionals can invest together for a mutually beneficial pension outcome.

The pension simplification reforms, which came into force in 2006, allow for greater flexibility and innovative solutions. Importantly, the new rules don't distinguish between companies and private individuals – allowing for the advent of the Family Self-Invested Personal Pension (SIPP). The Family SIPP is made possible through a little-known but highly desirable feature of the regulations that can have far-reaching consequences for those involved in business together.

The Smith & Williamson Family SIPP enables professionals (solicitors, barristers, accountants, chartered surveyors, dentists and business partners) to consolidate their existing pension pots into one fund that can be used to purchase commercial property. Pension funds can buy freehold or leasehold, whether offices, surgeries, retail units, leisure facilities – even land – and includes their existing trading premises. However, great care must be exercised if there is any residential element.

Such an approach creates liquidity from existing capital, without the need for any new monies to be invested, and is therefore likely to be of great interest in the current economic climate which is hindered by credit constraints. Wellinformed investors will be looking for opportunities to exploit unfavourable conditions; by using this approach they have the chance to harness capital that may have been invested into pensions some time ago, when times were far less challenging than now.

As well as all the normal features and benefits of a SIPP wrapper, the Family SIPP offers a number of other benefits and tax advantages.

Gearing and tax efficiency

Tax-efficient gearing of up to 50% of the net asset value of the pension fund is allowable. Preferential fast-track borrowing terms have already been secured for Smith & Williamson clients.

There are four major tax advantages to this approach.

  1. Substantial tax relief on the initial pension contributions.
  2. Rental income generated from the leasing back of the property is free of tax.
  3. No capital gains tax is payable on the future disposal of the property.
  4. Pension funds are inheritance tax efficient up to age 75.

Special features

The scheme allows for the potential to reallocate between scheme members any investment growth on assets held within the pooled fund. Under certain circumstances, this point alone opens up a number of important wealth-management and succession-planning opportunities. Furthermore, a full range of retirement options are available, including a lifetime annuity, unsecured pension (pre-75 drawdown), alternatively secured pension (post-75 drawdown) and even a scheme pension.

Due to the structure, the scheme becomes central to the business, so it can help to engender a more partnership-centric mindset. It allows for an unusually nimble and flexible structure that can efficiently accommodate partners retiring, dying and leaving, and new partners joining the business. This facilitates tax-efficient succession planning.

With more and more people wanting to take control of their pension funds, with liquidity being such an issue in the market right now and with the commercial property bargains that are out there, this is a timely solution that could tick all the boxes. If you feel it may be of benefit to you, please call us to discuss the Smith & Williamson Family SIPP.

TOP TAX TIPS FOR TROUBLED TIMES-MANAGING CORPORATION TAX

By Mark Webb

Mark Webb offers some suggestions on how to effectively manage your company's corporation tax liabilities in a downturn.

As the property industry is facing a particularly acute downturn, businesses will need to review and tighten processes. Therefore, the opportunity to manage your company's corporation tax burden should not be overlooked.

Tips to manage corporation tax

Make provisional loss claims

If a trading company becomes lossmaking, the delay between paying tax for the previous profitable year, say 2007/08, and using losses from 2008/09 to reclaim the 2007/08 tax can have a detrimental effect on cash flow. However, if there are losses in a period, the company can put forward a provisional claim for those losses to be carried back. This can reduce a tax liability which would otherwise be due. Presently, companies can carry back £50,000 of qualifying losses for three years, in addition to the normal one-year carryback relief.

Consider stock writedowns

Accounting rules require trading stock to be held at the lower of cost and net realisable value. At the moment, some sizeable stock writedowns are likely. These writedowns are generally an allowable deduction for tax purposes, so companies should consider their effect carefully with regard to the following.

  • Current year profits and the creation of losses.
  • How to use the resultant losses (i.e. group relief or carry back).
  • Planning if trading losses are to be carried forward.

Accrue for costs/bad debts

If costs are incurred the diligent accrual of these should maximise the reduction of taxable profits, and thereby the tax payable. Similarly, any specific bad-debt provisions should be made to reduce taxable profits.

Review capital expenditure and claim capital allowances

There have been a number of changes to the capital allowances regime that property companies can use to their advantage. In particular, the introduction of an integral features pool, with the rate of allowance set at 10%, should not be overlooked. This has expanded the expenditure on which capital allowances can be claimed. Additionally, certain expenditure may qualify for enhanced capital allowances, enabling relief at 100%. Therefore, you should review all capital expenditure to ensure that relevant capital allowances are claimed in full.

Apply for enhanced tax reliefs

If your company is carrying out any remediation or renovations, there are a number of less well-known tax reliefs that you should review to ascertain if they are applicable. Three of these reliefs are particulary relevant, namely:

  • business premises renovation allowances
  • land remediation relief
  • flat conversion allowances.

These reliefs can result in accelerated or enhanced tax losses and, in some circumstances, payable tax credits, thereby improving cash flow.

Claim refunds of quarterly payments

Companies and groups within the corporation tax quarterly payment regime may have made instalment payments based on projections which are over-optimistic in current market conditions. Where reduced or £nil corporation tax liabilities are now forecast, any overpayments of instalment payments made to date should be reclaimed without delay.

Relieve profits from cessation of trading activity

If there is a cessation of a company or group's trade, and trading losses are incurred in the final year of that trade, these can be carried back up to three years from the start of that final year. This potentially valuable measure could result in tax refunds which can increase cash available on cessation.

But it's not just about the tax

However, there are a number of practical and commercial factors to consider. These suggestions are not exhaustive, but generally companies should look to:

  • optimise cashflow
  • claim all available reliefs
  • review capital expenditure plans
  • ensure effective compliance and administration.

In considering these general business principles for a downturn, the contribution that effective tax planning can make should not be ignored. Please contact us to discuss how your business can benefit from effective management of tax obligations.

CONTRACTORS IN TROUBLE: SPOTTING THE WARNING SIGNS

By Steve Tancock

As building projects slow down, developers need to be watchful of suppliers running into financial trouble. Steve Tancock suggests what to look out for.

The market for new housing developments has almost come to a standstill, leaving contractors faced with either completing projects with little likelihood of sales or 'mothballing' them until the market recovers.

As a result, a number of major construction companies have imposed more onerous trading terms on their subcontractors. They are also rationalising their list of sub-contractors by insisting upon a test of solvency to gain or retain preferred supplier status. While this is of benefit to those on the list, it is bad news for those who haven't made the cut. However, it may be a double-edged sword for those on the list as the trading terms and conditions they are signing up to may be particularly prohibitive regarding profit and payment terms, and continued turnover is the only benefit that they derive in these difficult times.

For those working within the industry, be they contractor, sub-contractor or subsub- contractor, the essential component for continuing to trade successfully is payment in cash on time to meet debts as they arise.

Look out for cracks

As a developer or a contractor employing multiple sub-contractors for a development, it is important to be able to identify signs which indicate that a sub-contractor may be experiencing difficulties. There are a number of warning signs you should look out for.

  • Contractors/sub-contractors will try to increase their valuations by as much as possible and their applications for payment may be inflated significantly.
  • The availability of labour on site is often a key indicator of a problem with a sub-contractor, as are apparent delays due to the lack of availability of materials or goods. The latter may indicate that the sub-contractor is unable to purchase materials due to poor current payment records with suppliers.
  • 'Word on the street'. Dissatisfied employees or sub-contractors often make their feelings known to other trades on site, thereby signalling the predicament of their employer.

These signs are often accompanied by requests for payment for easily removable materials on and off site, causing potential problems in the event of a failure by the sub-contractor. Retention of title issues also come to the fore and you may discover that you have paid for goods you can no longer find or use.

Payment and cashflow problems are now widespread in the industry. It is important to maintain cash flow with your key subcontractors and suppliers to enable you to meet your contractual obligations to your client.

Provide scaffolding for support

However, if there is a failure of a supplier or sub-contractor, your contractual obligation to your client remains. There is no opportunity under standard building contracts for you to pass the default onto your client. Your client will still expect the project to be completed on time and within budget. Therefore, it may be in your company's best interest to help the potentially defaulting party to continue trading so that your project reaches completion and your company does not incur damages.

Demolish or renovate?

Specialists in turnaround management can, on your behalf, review the operations of a company experiencing problems to establish a suitable strategy for recovery. Based on their assessment of whether the problems are terminal or not, they will either recommend insolvency or suggest changes so that the company can continue trading. These may include changes to management practice and procedures that may result in improved cash flow and more proactive management. These may initially protect the business's short-term future as a prelude to it becoming more successful at the end of the review period.

Therefore, if you believe that any of your suppliers or sub-contractors are experiencing financial difficulties and insolvency is a possibility, address the issue head on, do not sit back and wait. Ensure you maintain cash flow as necessary with your various suppliers, paying within the terms while not unnecessarily exposing your business to cashflow problems from early payments.

In such circumstances, turning a business around to ensure its continued success requires early intervention. It is also best to ask an insolvency practitioner what your position is relative to the potentially insolvent party.

If one of your sub-contractors, or even your company, is experiencing difficulties, ask for a free review by an insolvency practitioner at Smith & Williamson. We can help ascertain whether there is an insolvent trading position or not. For your own business, avoiding insolvent trading is critical because of the personal liability that arises for the directors of the company or you as an individual.

A RESTORATIVE RELIEF

By Nick Cartwright

BPRA should encourage developers to renovate or convert derelict property.

The Business Premises Renovation Allowance (BPRA) was brought in to incentivise individuals and/or companies to bring certain properties back into use. BPRA provides a 100% initial capital allowance for qualifying costs on renovation and conversion of unused commercial property in designated areas. However, it is a temporary tax incentive and is only available for expenditure incurred before 11 April 2012.

To qualify for the relief, the property must:

  • have been vacant for at least 12 months
  • be situated in a designated disadvantaged area (such as certain locations in and around Newcastle, Sheffield, Liverpool, Birmingham and Coventry)
  • be renovated/converted for the purpose of a trade, profession or vocation, or as an office or offices, and cannot be used as a dwelling.

To claim the allowance, the person incurring the expenditure does not need to be carrying on a trade or property business, provided he/she has a relevant interest in the property. Where applicable, this relief can provide substantial benefits to a developer undertaking a typical redevelopment project, through relief or increased access to finance. In the current marketplace it can make the difference between a project proceeding or not.

However, the mechanics of the tax relief are complex and care is needed to ensure that the relief available is obtained and retained, as in certain circumstances it can be clawed back. Furthermore, the cost of acquiring the property itself, the cost of land and any extension of the building, development of the land or provision of plant and machinery (other than fixtures) do not qualify for BPRA.

Where circumstances suggest that BPRA could be available, it may be worth considering the cashflow impact of waiting until a building meets the conditions for claiming BPRA before incurring the expenditure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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