BUSINESS INSIGHTS.

Byline: ANDREW FITTO N

PROPERTY values have suffered a significant decline from their 2007 peak but many commentators are predicting a rebound or at least a period of slow recovery.

The recent fall in property values provides investors with a unique opportunity to review their portfolios now and take steps to manage more effectively the tax consequences of a recovery in values.

Given increasing tax rates, particularly for individuals, failure to take action could result in unnecessary exposure to tax. In addition, careful planning in relation to indirect taxes such as VAT and stamp duty land tax (SDLT) should result in maximising sales proceeds or in reducing costs of acquisition for a purchaser.

Investors should take the opportunity to decide now whether their property portfolios should be in individual, partnership or corporate ownership. Companies are excellent vehicles for holding and selling properties where the income and capital profits are reinvested within the business. The maximum rate of tax here is 28%. But they are poor choices if the owners wish to extract profits- the effective rate of tax on extracted profits is currently 46% and will increase to 54% from April 6, 2010. Where investment properties are sold and profits extracted, ownership individually or through partnerships may be more efficient. Here extracted profits from sale are taxed at a mere 18%. In particular, limited liability partnerships, with the combination they afford of limited liability to the owners and tax transparency (ie no double layer of tax on extracted profits), are often the vehicle of choice for property investment.

If investors find that they have a less than optimum property holding structure, the recent fall in property values, combined with careful tax planning, may enable them to move their portfolios into better designed structures without triggering tax charges. This will in turn increase their options and potentially their post-tax profits when values recover.

Now is also an excellent time to review indirect tax opportunities. In particular, whilst SDLT is a tax paid by the purchaser, in commercial terms it is often a cost that falls on the vendor by way of reduced sales' proceeds.

Vendors can structure their affairs to minimise SDLT on a sale of property. By doing so they will typically add up to 4% to the value of the property on sale. One option, for example, is to hold properties through special purpose vehicle companies where shares (at a tax cost of 0.5%) rather than the property itself (at a tax cost of up to 4%) can be sold. All options need to be explored so that the right balance between indirect and direct tax objectives is achieved and the planning is structured to meet the specific needs of the investor.

The time has never been better for property investors to plan their tax affairs efficiently.

Those who do not seize the opportunity now may be storing up problems, and unwanted tax liabilities, for the future.

Andrew Fitton is a tax director at PricewaterhouseCoopers LLP in Newcastle. For more information, please contact Andrew Fitton on [phone], email [e-mail] or visit www.pwc.co.uk/newcastle