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Cladding costs for landlord

Insurance/deposit arrangement reducing current income for future liability

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Hi there, have already found the prior thread on cladding as either capital or revenue.Thanks to all who commented.

An individial landlord of a single flat with cladding is expecting up to £50k of repair costs over the next two years. Flat has been let to same tenants for several years and we would expect the repair costs to be treated as revenue, not capital. Rental income is approx £10k p/a so would expect the repair costs to be carried forward for up to 5 years. 

Landlord would prefer to sell the property following the repairs and does not want to stay a landlord. Landlord has been discussing potential premium return insurance and advance payments/deposits with others that would (i) reduce future maximum liability, and (ii) reduce current income by larger upfront payments. Advance provision for costs is not normally possible but has anyone seen examples of these sorts of insurance or deposit schemes being used to achieve a similar result with a tax saving? Or somthing similar?

 

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By David Ex
27th Jan 2022 23:15

cladderer wrote:

Landlord has been discussing potential premium return insurance and advance payments/deposits with others that would (i) reduce future maximum liability, and (ii) reduce current income by larger upfront payments. Advance provision for costs is not normally possible but has anyone seen examples of these sorts of insurance or deposit schemes being used to achieve a similar result with a tax saving? Or somthing similar?

 

Don’t understand. Would have thought the options were sell now at £50k less or spend £50k and recoup with enhanced sales proceeds. Who’s insuring what and why?

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By cladderer
28th Jan 2022 07:44

Thanks - will explain a little more.

As you’ve probably seen in the news, cladded flats are now almost impossible to sell - no buyer can get a mortgage without an EWS1 form that confirms the cladding repairs have been carried out. So even taking that loss upfront isn’t really an option.

Cladding repairs won’t enhance the proceeds on sale. The landlord owned the flat for 10 years before the EWS1 requirements came into force and they are paying 50k to stand still. Like if you owned a property where you had 50k of storm damage that your insurer refused to pay out on - repairs won’t get you more on sale than the property was worth before the storm.

Landlord knows a big bill will be coming so wants to use insurance or similar to cap its liability and offset against current income (which could reduce tax). If the freeholder were to charge an advance deposit for the works of £20k, the landlord could pay and then net off against rental income for the next two years.

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By paul.benny
28th Jan 2022 13:22

So ignoring all the stuff about potential sale (or not) of the property, the scenario is
- owner (leaseholder?) pays an insurer a sum now to cover a future known liability
- cost risk (up or down) transfers to insurer
- owner gets tax relief now

I'll leave the tax considerations to others (although I'd say that if it were this easy, we'd be seeing such schemes more often).

The problem I see is that insurer may require a huge premium to take on open ended liability for a definite obligation and then still may fail to meet the liability.

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Replying to paul.benny:
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By cladderer
28th Jan 2022 15:31

Thanks - I think we’d be talking about a capped liability from the insurer (ie up to £25k) but 100% agree that there is risk of pay out.

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