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Seems very plausible but would appreciate you giving an example of the solution. Examplwe should have cost of property, investors' return, rental amount, how rentor becomes owner and what is the long term return? One of the questions is how does the rentor cover the cost of the property plus a reasonable return to the investor if the payment required is excessive relative to his income? Arent you describing 100% financing with the only differwence being the investor would accept a minimal return in exchange for an equity position in the property? An example would make it more understandable.
by An American in London on Thu Apr 3rd, 2008 at 04:43:54 AM EST
The starting point is always the question: what can an Occupier of land and property afford to pay?

And then: where does he/she get that from?

And then: how can we restructure and unitise the flows that result?

One of the key points to understand in the model is that  Property (as an object) is never sold again, remaining nominally in the hands of a Custodian.

I am sure you will know that this is exactly how conventional institutional share trading (for instance) works now.

What happens instead is that the bundle of rights and obligations is divided between financier and user of finance in a simple but radical new way.

So the Occupier may change - and rent somewhere else.

The Financier may sell his "nth's" or "Units" to another Investor (probably Occupiers).

A "Manager/Operator" may also change.

But the freehold stays in Custody.

Some would say that's not a million miles away from the current position with the Queen as "Custodian" of all freeholds.

Anyway.

We set an "affordable" "Capital Rental" (questions of subsidy and alternatives to taxation may be addressed through Community "Location Rentals").

Say that gives us an initial flow of £100k in the first year relating to a pool of properties.

First, we index link it.

Then we simply divide the resulting index linked revenue stream into "n'ths" .

If these are (say) "thousandth's" each of them carries the right to £100.00 in the first year, rising with inflation thereafter, and backed by "ownership" of one thousandth of the relevant assets.

Now it's simply a question of the price of such a "thousandth" unit. And of course a "thousandth" of this pool is a "millionth" of a "Pool of a thousand Pools".

If we sell them for £4,000 they have an initial return of  2.5%. and we raise £4m

If we sell them for £2,000 that's an initial return of 5% and we can raise only £2m.

There's a big market out there for index-linked assets, for sure. Its "asset-basis" is also relevant to Islamic Finance if it's structured correctly.

Of course, the more "affordable" it is (especially if government backed) then the more certain it is that it will be paid.

If you are interested in finding out more, drop me an email. I'm working on practical real world examples.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Apr 3rd, 2008 at 07:54:59 AM EST
[ Parent ]
What's the current tax situation on this?

You said in the article that income=rent is equivalent to ownership.

If you have to own sufficient "units" to pay the rental from income after tax, then, assuming a marginal tax rate of 30% (roughly that of those who pay basic rate tax and NI)

£100,000 property, 5% capital rent = £5,000 pa

£5,000 grossed up = £7143

Investment required to live "rent-free" in a £100,000 property = £142,857

by Sassafras on Thu Apr 10th, 2008 at 01:11:16 PM EST
[ Parent ]
Oops.  Of course there'd be no NI on investment income.  But the principle of having to invest more than the house is worth remains the same.
by Sassafras on Thu Apr 10th, 2008 at 01:13:56 PM EST
[ Parent ]
Tax is always a key issue of course, and we have to look at this model in the context of a rational and holistic approach to taxation and pensions policy.

This government is falling over itself for people to "get on the property ladder". But all the government does do is bid up land prices further.

This approach essentially takes the land out of the equation (properties are never bought or sold again) and opens up new policy options (which I have not outlined in the article for the sake of simplicity) for the relationship between the community/municipality and the individual.

Firstly, is it in fact "income" or a "capital gain"? One could probably configure "Equity Shares" to be the latter, and few indeed use up their capital gains allowance each year.

Secondly, when the LLP was legislated in 2001 the government specifically prevented pension tax relief on "Property Investment LLP's" so it is not currently feasible either for institutional or personal investment (in a SIPP, say).

But I would bet that this will change soon enough if UK investors see foreign pension investors accessing tasty UK asset classes which they cannot.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Apr 10th, 2008 at 03:41:01 PM EST
[ Parent ]
Tax is always a key issue of course, and we have to look at this model in the context of a rational and holistic approach to taxation and pensions policy.

Isn't that another way of saying that this will work just fine as long as the current taxation system is redesigned around it?

I cannot imagine that the Revenue is going to lie down and accept an index-linked rental income as equity without a fight.

If normal taxation on investment rules apply, that would make the investment required to live rent free in a £100,000 apartment (for a 20% taxpayer) £125,000.  And, for a 40% taxpayer, £166,667.  Assuming zero management charges.

I wish you luck, but I hope you have some very good tax lawyers, and sufficient case law to obtain an insurance-backed indemnity for your occupier-investors.

by Sassafras on Thu Apr 10th, 2008 at 06:02:00 PM EST
[ Parent ]
Hmmm...I think there is some confusion here.

As I see it, the situation is precisely the same as applies with an offset mortgage. As far as I know, if an individual pays off part of his mortgage loan temporarily with "savings" which he may then draw down upon, he does not get taxed on an imputed amount of loan interest he is thereby not paying.

The same applies here. The Occupier may acquire "Equity Shares" (ie proportional shares in the land/property rental values) at a market price by paying more "Capital Rental" than is due.

He does this through membership of a "Land Partnership" property pool which is essentially a Cooperative of Property Occupiers in partnership with a Cooperative of Property Investors where the freeholds are all held by a "Custodian".

These "Equity Shares" confer no taxable income, as far as I can see, but do reduce the Capital Rental due.

The partnership framework essentially allows a new form of hybrid tenure of indefinite duration or "evergreen" lease.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Apr 10th, 2008 at 07:05:24 PM EST
[ Parent ]
It's not quite as simple as that, though, is it?  Because you'll be asking the Revenue to accept that the same unit can be the equivalent of a a guaranteed income share in the hands of one taxpayer, but ceases to be taxable when that same unit is transferred to another.  But the proof of the pudding is: have you got Revenue approval for the scheme?

The other thing that occurs is: what would happen regarding the principal private residence tax exemption if home "ownership" is through shares in a cooperative?

Assume I bought my occupier-investor units for £100,000 ten years ago.  They're now worth £200,000, and I want to sell.  Would it be tax free, as it would be if I'd bought my home outright?

by Sassafras on Fri Apr 11th, 2008 at 04:23:11 PM EST
[ Parent ]
Sassafras:
Because you'll be asking the Revenue to accept that the same unit can be the equivalent of a a guaranteed income share in the hands of one taxpayer, but ceases to be taxable when that same unit is transferred to another.

I don't think so. The "interior" of an LLP structured as a framework in this way is a very interesting zone, because what we are seeing is essentially transfers between partners.

This is not a million miles away from the sort of internal transfers that go on within a multinational but not with the same end in view of tax avoidance.

It is the "Occupier" members who are the origin of any income of any other pure "Investor" members. The income of one member of the partnership is essentially coming from another member's use of the capital within the partnership.

The income received by non-Occupier members is to all intents and purposes similar to interest from deposits with building societies.

The difference is that this income is not in fact "guaranteed": if there is no Occupier, there is no income, which is an "Equity" risk.

I don't see how the Revenue could say that an Occupier is in receipt of any income for as long he is in Occupation and his Equity in the Pool does not exceed 100% of his rental obligation. ie for as long as he is making net payments to Investors.

The taxman gets his hands on the income non-Occupier investor members receive for the use of their capital.

As he should.

Proof of the pudding is in the eating of course, as you say, and we wouldn't dream of going "public" with such schemes until we have talked it through officially with the Revenue. This is very much a process under development and any input from experts like yourself is extremely valuable.

Sassafras:

Assume I bought my occupier-investor units for £100,000 ten years ago.  They're now worth £200,000, and I want to sell.  Would it be tax free, as it would be if I'd bought my home outright?

As things stand probably not, because it's not "your" residence although you do have the exclusive and indefinite right of occupation for as long as you pay the Capital Rental.  But it wouldn't be too difficult to "bed and breakfast" each year, I guess, if that were advantageous.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Apr 11th, 2008 at 06:29:26 PM EST
[ Parent ]
Assume that the occupier pays the market rent and the total price of the shares equals the market sale price of the property. That gives you the rate of return on investment, not counting maintenance costs. Any attempt to exceed that rate of return is doomed in the long term.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Carrie (migeru at eurotrib dot com) on Thu Apr 3rd, 2008 at 08:54:20 AM EST
[ Parent ]
Now the "market rent": and its relationship between the "Capital Rental", the "Maintenance" and the "Location Rental" (which is essentially the free ride property owners get from public expenditure on infrastructure) is where it gets interesting.

I reckon I've cracked it, and have a practical solution which would work.

And that's just the sort of project I'm working on up here in Scotland...

In fact the deadline on one (300 property) bid was two hours ago.

Fingers crossed....(it's just the start mind you)

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Apr 3rd, 2008 at 09:01:07 AM EST
[ Parent ]
Yes, but a more low-brow approach would be just to saunter over to the nearest real estate agent and ask...

For instance, the other day I saw an ad for a property with an asking price of GBP540k which claimed a yearly rental income of GBP37k (the building comprised several lodgings and commercial premises). The return rate there is 6.9%. If you tax income at the marginal rate (40%) you get a 4.1% return rate after tax. This doesn't include council tax or maintenance, but those would be added to the rent and would not accrue to the investors so they net out.

The point is that trying to extract more than, say, 5% nominal after-tax returns from property is simply not realistic. What? That's not enough for investors? Then that will depress the property price until the ratio is as they desire.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Thu Apr 3rd, 2008 at 09:33:44 AM EST
[ Parent ]
Well, one of the interesting effects is that the model eliminates a lot of transaction costs, including stamp duty on sales (cos there wouldn't be any sales).

What would happen is that stamp duty would apply on purchase and sale of "Units" as on conventional shares, I think.

There are two roles for current intermediaries. An estate agent brings Occupiers together with properties, and financial service providers bring Investors in property pools together with investments, make markets etc

Btw I don't think people realise how regressive UK Stamp Duty is for the average Joe Blows with chunky mortgage loans.

If you consider the amount of actual "Equity" people have in their homes the application of Stamp Duty to the gross sale price gives rise to outrageous rates of taxation applying down the average "chain", in comparison to the net proceeds which flow, particularly in the lower levels of the market where people are struggling "up the ladder" into second or third homes etc

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Apr 3rd, 2008 at 10:31:32 AM EST
[ Parent ]

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