The Below Market Value property industry emerged during a property boom – a result of big companies taking advantage of the large profit margins that came with purchasing property at a discount and then renting the property back to the original owners. Due to favourable financing conditions, instant paper profits could, and still can be made on such transactions allowing them to borrow additional funds and continue expanding. This has led to a spin-off of landlords and property investors looking to emulate these successes by locating their own Below Market Value property opportunities. However, there are numerous dangers associated with purchasing property BMV, which we explore in more detail below.
1986 Insolvency Act
A landlord who has legitimately purchased a BMV property may find themselves subject to a court order, which will reverse the sale or claim back the difference between the property’s open market value and sale price. This is a result of the 1986 Insolvency Act, which allows trustees of a bankrupt company to protect themselves. The landlord who purchased the BMV property may be subject to these provisions for up to 5 years after the sale took place.
Nevertheless, it is possible for a landlord who is looking to invest in BMV to protect themselves by ensuring the seller executes a Deed of Solvency. This effectively signs an undertaking which declares that they were solvent at the time of sale. An insurance policy will then need to be produced by the landlord’s solicitor, which will cover the landlord for a two-year period from the date of the transaction.
When investing in below market value properties, there are various tax implications on ‘instant profit’ and how the tax will be calculated after the property is sold. This is mainly based on intentions and is determined directly by the HMRC. Some circumstances will see you as subject to capital gains tax when the property is sold if you are deemed to be acting as a property investor. If this is the case, you may be subject to income tax and national insurance. All intentions should be accurately documented upon purchase of the property.
There are numerous points which may determine your tax status:
- Renovation & conversion work on a property
- Frequency of transactions
- Number of transactions
- Existing finance arrangements
- Length of ownership
- Renting properties out
In order to quickly sell a property but avoid income tax, you may have to prove to HMRC that there has been an unexpected change in circumstances which is deemed to be acceptable. Some examples include:
- An unexpected shortage of funds
- An unexpected and remarkable offer
- Relocation due to work or family reasons
- Bereavements, inheritance, divorce or separation
- Property market location concerns
- Better investment opportunity elsewhere for which immediate funds are required
Below Market Value Property Purchase
Purchasing below market value properties at auction can result in numerous legal and tax implication. However, this is a continually growing market for investors and property developers regardless.
Through the use of bridging loan finance, BMV properties can be obtained quickly in order to secure investment. At Tiger Financial, we can provide access to a secure panel of lenders offering flexible and bespoke bridging finance for BMV properties.
This article was written by Matthew Dailly, Managing Director of specialist bridging loan and development finance company Tiger Financial Ltd.
For more information, or to apply for a bridging loan, contact us.