Well March doesn’t really need any introduction, as Graeme Lovell gives his own particular insight to skiing and the potential for saving tax. It would be great to hear your view on the matter. Please add a message on LinkedIn or Twitter (@LangdownsDFK) or send an email to firstname.lastname@example.org
Well, as anyone who knows me well will testify, that’s not quite true. I drink copious amounts of the stuff when I’m away après skiing. But what I do hate is Red Bull Racing – or more specifically, their three time world champion Formula One racing driver Herr Sebastian Bloody Vettel.
The three-time world champion formula one grand prix racing driver sees the funny side
You see, amongst my various interests, I own a small portfolio of holiday homes around the world, including a rather pretty ski chalet, in a quintessentially charming village in the Austrian Alps. I purchased this in 2007, armed with the knowledge that planning permission had been granted to build a ski lift ending not far from my front door.
“along came a newspaper report about as welcome as a shunt up the rear with a carbon fibre nose cone”
True enough, a new piste was cut, and a new ski lift was installed at a cost of several million euros. In truth, it only extended part way down the yellow brick road to my chalet, but it was there, winking at me, at the top of the mountain.
Then, last weekend I was just about to go and buy a new welcome mat for the thousands of skiers due to pitch up some time soon demanding a fruity glühwein, and a bit of a warm up in the sauna, before dancing on the table to DJ Ötzi and his disco version of ‘Hey Baby … when along came a newspaper report about as welcome as a shunt up the rear with a carbon fibre nose cone…
”Sebastian Vettel buys a forest
The three-time world formula one champion has bought 60 acres of forest, an hour’s drive from the Red Bull Testing Circuit in Spielberg. The latest addition is at Kreischberg, whose skiing area is well known as the venue of the Snowboard World Cup. The Forest Lodge is located west of the famous ski resort, away from the slopes and in the middle of a hunting area. It is already known that Vettel is seeking to increase the plot to 115 acres…”
Now, west of the famous ski resort is … the mountain over the chalet. The local gossip is that Herr Vettel has been looking for somewhere to go hunting as relaxation between race-testing, and has paid way over the asking price for said land. Unfortunately, it seems as though he has done so in the middle of the proposed new piste down to the chalet.
Fortunately, the local government are still keen on making the piste happen. But clearly, it isn’t going to happen as soon as expected, and it might now have to take an indirect route (which, as it happens, might be no bad thing as the original site was pretty much a sheer drop). However, what it does mean is that there is going to be no huge hike in the valuation of the chalet any time soon…
Locals disguise their obvious disappointment at the ‘Sebastian Vettel Welcome Party’, where a cardboard cut out of a Red Bull Racing car took centre stage
… all of which seamlessly takes me on to the main thrust of this story: maybe now is the right time to incorporate this development into a bit of year end tax planning.
The end of this tax year is fast approaching, and with it the last chance to use up the capital gains tax (CGT) annual exemption. Now, when I said earlier that “I own a small portfolio of holiday homes”, that was a bit of a fib. More accurately, I own a quarter-share in a small portfolio of (four) holiday homes.
For 2012/13, each of our CGT annual exemptions are £10,600, so we could trigger capital gains of up to £42,400 before having to actually part with any tax.
We wouldn’t want to sell the chalet now, as when the new piste gets extended to the bottom of the mountain, its value will rocket. But a neighbour had his chalet valued a year ago, and the agent said its market value had already increased by €40,000 in the 5 years since purchase.
So, what we could do instead is sell the properties to ourselves…
“we can extract over £160,000 from a company, which normally could only have been taken as taxable salary or dividends”
Selling the property to a company which we all own can enable us to credit up to £42,400 to our respective director’s loan accounts, which can be extracted tax-free from the company. The base cost of the investment also gets re-geared, so that any future capital gains are based on the market value now, rather than the purchase price back in 2007. And any capital gains payable in the limited company are reduced by indexation (a form of inflation-proofing), and then subject to a corporation tax rate (20%) which will be less than the maximum capital gains tax rate (28%) which might otherwise have been payable.
What’s more we can repeat the trick in each of the next successive tax years, to increase the utilisation of annual exemptions, by transferring the other overseas properties. In effect, in four years time, we can extract over £160,000 from a company, which normally could only have been taken from it as taxable salary or dividends.
The ‘Welcome Party’ was at da Kastanienbar, a venue at which Graeme Lovell has in the past practiced Red Bull induced table top snowboarding visualisation techniques.
All of which might make you wonder: why didn’t we just buy the properties through a limited company in the first place? Good question…
Well, using a limited company wasn’t an option when the properties were purchased, as HMRC were at the time of the view that occupation of a holiday home by the shareholders triggered a benefit in kind, the extent of which was quite disproportionate to the rental value. Fortunately, that restriction was relaxed in 2008, so no benefits in kind are charged on overseas living accommodation any more, subject to certain caveats.
Admittedly, like Sebastian Vettel, I would also have Austrian taxation considerations. However, perhaps resolving this matter before 5th April 2013 is as good a time as any to address those.
The value might not escalate as soon as I had hoped, but maybe the profile of a three-time formula one world champion may bring its own rewards, in terms of occupancy, and playing the long-game as an investment strategy might well make a limited company a more tax efficient option, particularly given the possibility of lower rates of capital gains tax.
Apparently, ‘Red Bull Gives You Wings’. Maybe Sebastian Vettel has given my tax planning legs…