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Planning your families property portfolio

May 22, 2017
Planning your families property portfolio

Careful long term planning of your property portfolio can make a big difference.

Stamp duty planning

Stamp duty planning is an often overlooked part of a strategy for families.  Typically a family will develop and build a property portfolio and the cost of stamp duty is considered an unavoidable by-product of buying portfolio.

This is not true.

The fact is that WA stamp duty rates are marginal tax rates.  That is, the more expensive the property the higher the rate of stamp duty.  Further, the rates of stamp duty for commercial property transactions are higher than the rates of stamp duty for residential property transactions.

For example:

The Angolino’s are looking at their business succession strategy.  The intention is to create a large property portfolio that the parents can use to fund their retirement and eventually leave to the children who do not work in the business.  The children who work in the family business will receive the business assets.

If the Angolino’s buy a single factory for $10m they will incur $508,915 in stamp duty.

However, if the same $10m is invested in 20 residential houses worth $500k each: the stamp duty cost will be $268,660.

That is a stamp duty saving of $240,255!  This could make a massive difference to the succession planning of the business and the debt exposure the family takes on as part of their succession.

Exit planning

For many family businesses the desire to succession the business to the next generation often means that the “big lump sum” payment at the end does not come.  Often the passive investment capital in the family assets is eroded to preserve the business assets.

If the property portfolio consists of multiple properties: one individual property can be sold at a time to access the capital.  This is important as it allows a property portfolio to be slowly reduced over time and the taxable profit on the sale can be spread over a number of years.

If the Angelino’s were to sell the factory above, and generate a net taxable gain of $500k in one year the parents would pay $181,464 in tax in one year.  However if the properties were sold over 3 years the same $500k in taxable gain would become a mere $125,556 in tax (a saving of $55,908).

Estate planning

If the Angelino’s have three children who will share the property portfolio equally: how will you do that with one asset?

We have seen this done with several families where a committee is created to run the asset.  Such a concept can work really well and act as a tool to make your family closer.

However a single asset can become a point of friction.  One child may want to use the asset to fund future acqusitions.  One child might become bankrupt and the other child might become divorced.

The ability to divest different assets to different family members can make the estate planning significantly easier.  Likewise the use of different tax entities to hold and direct these assets can also make it a lot easier to pass on control of an asset to different family members.

Diversification

This is relatively obvious.  An asset mix of property that is spread over multiple suburbs in multiple states will enjoy a much more stable long term outcome than a strategy that is focussed in one asset in one suburb.

However: for astute families with insight – the one asset is a better strategy when they choose wiselyt

Small business capital gains tax concessions

A family with net assets under $6m can access amazing tax concessions.  However for many of our clients the success of the business means that the tax concessions on the sale of business assets is difficult to access.

If a family acquires multiple small assets the opportunity exists to dispose of investments assets prior to selling the business assets.  This means that the careful timing of sale of the assets might allow for the family to “downsize” their portfolio to such a stage that they now qualify for the small business CGT concessions as their assets are below $6m.

Now we are not saying that you should immediately change your property mix to start focussing exclusively on the small end of town.  Clearly a great investment will always give you a better outcome than a poor investment.  However careful planning of your business assets and your families investment assets, with an advisor who has insight across the tax and family issues, will make a long term difference to your strategy to create a legacy.

 



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