A New Concept in Property Management
It’s amazing how much of what we spend every day actually comprises tax. If you buy a pint of beer, or a gallon of petrol, most of what you hand over the counter is going straight to the Government.
These examples are well known, however it’s also true in the case of other expenses, including what you pay your letting agent for looking after your buy to let property.
This is especially acute if you are letting residential property, and so can’t reclaim VAT.
If you think about it, what you’re mostly paying for is someone’s time. One way or another, the agent is going to pass on to you the cost of employing his staff, together with a profit, and the total bears VAT.
We had a think about this recently, and decided that the taxman was taking an altogether too great cut out of the monies paid by landlords to agents.
Let’s assume that the agent pays a staff member, who is the one who actually looks after your property, a wage of £100. On top of that £100 there is employer’s national insurance, at just under 14%, that is about £14.
As well as the actual staff wages, there are the overheads of running the office etc, which, using tried and tested formulas, we will assume is about the same as the actual staff wage, ie £100. So now we have base costs for the letting agent £214, to which he will be applying his mark up. Let’s say that mark up is 50%, so another £107 is added to arrive at what he charges you, which is £321.
The £321 then bears VAT, which is now at an all time high rate of 20%. This now adds another £64 to the cost of his services to you as the landlord. In fact, the end cost is £385 including all of the different elements we’ve mentioned.
A Fantasy World?
Now bear with us a moment while we take you into what might seem like a fantasy world. Let’s assume that the tax elements in the above sums just disappear.
The letting agent’s costs become £200, being the staff salary of £100 together with overheads of £100, but no employer’s national insurance. If we assume he still has a 50% mark up to this cost, that leaves you with £300 as your cost. Because we are now living in a tax free world (wouldn’t it be wonderful?) that is the final story – no VAT on top. So the cost of employing the letting agent has gone down from £385 to £300, a 22% decrease.
The Fantasy Becomes Reality
As you may have already have guessed, the above isn’t just a pipedream. It is possible to cut the taxman out of benefiting. (Don’t feel too sorry for him: he still gets the tax on the letting agent’s profit, and on your increased profit from letting the property.)
Employer’s national insurance disappears, firstly, if the workers in the business are partners rather than employees. This can be achieved most easily by forming an LLP and making the individuals members.
Secondly, and more ambitiously, it seems to us that the VAT can be avoided as well if the letting agent, instead of contracting with you to provide services, becomes a form of partner in your letting business.
Hence the concept of “Letting Partners” is borne.
An Added Bonus
As well as the lack of VAT, though, the Letting Partners idea as we have developed it, has an extra, potentially significant, bonus for landlords who enter the scheme.
This is that, like any other partner, the letting agent will take a percentage profit share out of the property letting business, rather than just a straight percentage of the rents received. Therefore the agent is obviously paid less the more expenses such as repairs, insurance and so come to. This means they have an incentive to keep these costs down which, at the moment, letting agents haven’t got.
The Practicalities
Because the concept is a new one, indeed we think this article is the first time it has hit the public arena, it would clearly be a mammoth task trying to explain it to all of the letting agents up and down the country. So what we have done is set up central office which has the wherewithal to perform all the functions of a letting agent remotely, except the holding of keys. This would still remain local.
We think this idea is both innovative and very attractive. If you would like to find out more, do please contact Alan Pink either by e-mail to alan.pink@alanpinktax.com or by telephone on 01892 539000.
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