A solicitor reached out to me yesterday asking how I’ve been keeping and what I was up to. She works in the defence of claims against accountants.
I mentioned that I think there will be a lot of claims in future from people advised on the wrong structure for their property investment activities. She asked why.
I gave a simple example. One that I see a lot. £50,000 purchase of run down property. £20,000 spent of repairs to bring it up to scratch. Value of £100k achieved and remortgage obtained.
Property will make a couple of hundred pound a month but has to use up the £20,000 of expenses on day one first so no taxable profit for first six to eight years. The company was used to save tax and yet for a good while there is no taxable profit.
Let’s say they get sick of property and sell at year ten. So very little taxed income along the way but on sale there will be a £50,000 capital gain to tax. At the moment that is 24% in personal hands. It can be up to 26.5% in the company with maybe a third of the balance being lost on extraction in higher rate taxes. What does this mean? Well the tae home after extraction from the company will be about £24,000 but could have been £38,000 if done personally.
How annoyed do you think this person would be to find they spent £1,000 a year on fees to save tax that not only never materialised but ended up costing them tax? I’d say annoyed enough to sue in a lot of cases. Who will get the claim? Probably anyone involved. Accountant first, mortgage broker second and solicitor third. Why? Well none of them would have told them about the back end tax rates I suspect. Some will have even pushed a company as a tax saver!
My contact said she is already seeing some claims coming through for property related matters.
It will be very interesting to see how it all pans out!