Making Money

Contemplating tax investments

Sometimes when you’re in my role or have my kind of background, you often find yourself conselling your banker as to what is the best way to structure an investment and you keep losing him.

That is not really why I pay you, he mumbles under his breath.

It is something I’ve had to get used to. I don’t really have the time to manage my investments for retirement and I’d like my banker to think of me, but I’m not at a family office level yet, so I guess I’ve just got to stand in line.

And retirement is something we should all be thinking of, whether you’re 20 or 60. Everything you read about the subject says the earlier you start the better and I studied that at business school. But let’s be honest here between us, I didn’t really start giving a damn until I was 30. I was busy spending my time floating between the start of a career and the bar. But that’s another story for maybe another time.

I’m contemplating tax investments at the moment and not just any tax investment. This thing on the page in front of me can actually help me pay zero tax this year. Yes you read that right ZERO TAX.

Is there even such a thing you say? Are you going to try sell me some magic beans now?

Let’s be clear, I’m not selling anything. I’m a CFO of a listed company and I don’t do marketing or sales. I understand them, I counsel those leaders but I never sell, ever. I might be strong at negotiation and know how to distabilize the person across the negotiating table, but I don’t sell.

I’m actually contemplating an investment in an historical monument in France and the French government wants me to do it by allowing me to deduct all the money I spend on renovating the asset off my personal income for tax purposes. If my calculations are correct, and they are, then my tax this year will amount to the healthy sum of zero.

That sounds good does it? what’s the catch?

I hope you really did ask that second question! I always ask that and then try my best to find it.

So let’s talk about the investment a bit.

The asset is a magnificent old building in the heart of a town that is in the middle of some massive urban renovation. They’re putting in tramways, parks and attracting a host of companies to settle close by. A lot has already been done on this front. Thereby increasing the long-term appeal of the city through improvements to public infrastructure and hence appeal and populating it with your professionals to use those facilities. On the face of it, it is a pretty good place to invest.

Also, the tenant of the building I’d be buying into wants to create a luxury hotel along the lines of several other luxury hotels that the company owns around France. Another good point as they have solid occupancy rates at their other properties.

And then I get 20% cash back on the purchase because of the hotelier in the building. the cash back is the VAT. Usually I wouldn’t get that back but the property is commercial so the law entitles me to that.

The loan rate is about 1.5% so the interest I’d be paying would be minimal in the big scheme of things and the interest is tax deductible anyway, so that’s another bonus.

The only catch is that the rental yield is ridiculous low at the start of the lease. It’s about 1% and then steadily increases over the term to about 4% at the end of year 10. So I’m left with footing a lot of the bill on the loan side.

That seems like a reasonable ask to get 20% cash back on the purchase plus reduce my income tax to the equivalent of about 30% of the purchase.

Yes, you read that correctly. At the time I buy this asset I get 50% back in cash (VAT paid to me from the French government and then a zero tax bill). That means I can place that money in the market, earn a circa 7.5% annual return (depending on what the market does) and effectively double that investment in ten years. Plus I buy a prime property in a prime location that will be part of a luxury five star hotel and yields 4% (excluding prinicpal growth of the property.

The project has an IRR of 30% and the average annual return equates to about 14% a year, thanks largely to placing 50% of the value of the asset upfront.

This really does seem like an investment opportunity I can’t pass on and is a great example of how (sometimes) tax related investments, when structured properly can yield great results (on paper for the moment at least).

I’ll keep you informed as to how this progresses.





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