Re:locate magazine, spring 2008

Safe as houses?

Susan Bevan explains why GSPs are becoming an increasingly valued component of relocation packages.

The jury is still out on just how tough conditions in the housing market are going to get, but with prices sliding in most parts of the country and unsold property piling up on estate agents’ books, houses are a lot harder to sell than they were a few short months ago.

In uncertain times like these, the words ‘guaranteed sale price’ have an appealing ring for anyone who has got to move, and Guaranteed Sale Price (GSP) schemes seem sure to become an increasingly valued component of relocation packages.

Less certain is whether employers will respond with increased use of these costly carrots in the relocation exercise. Some of the bigger relocation companies that implement the schemes report increasing enquiries, and, at Connells, managing director Tim Rose has seen an upsurge of interest, prompting discussion with some clients of a hybrid approach aimed at managing costs and reducing clients’ risk exposure.

But it would be optimistic to expect GSP schemes to recover their prominence of a decade or more ago, when Cartus, for example, was providing them with 95 per cent of clients. This is down to around 75 per cent now, according to Rob Abbott, vice president, UK relocation services, and considerably lower figures are reported elsewhere.

“They are still a bedrock part of the business,” Rob Abbott maintains. “They are a tried and tested mechanism for moving people with speed and efficiency.” But they are also a ‘Rolls Royce’ product – and employers are less lavish than they used to be.

What are they?

Essentially, GSP schemes provide relocating employees with a guaranteed sum of money, based on the value of their old home, with the funds available when they find a new home to buy. They are in the happy position of a first-time buyer, able to clinch the deal on the new property quickly, unfettered by a house-buying chain.

The employer benefits from employees able to concentrate on their new jobs in the new location from the outset, without worrying about housing issues and family separation. There are cost savings for the employer too, with no need to subsidise temporary rented accommodation and commuting.

But this sensible idea suffered a heavy blow in the 1993 Finance Act, which brought relocation benefits into the tax net at the employee’s marginal rate. The tax-free allowance of £8,000 was none too princely then – and is even less princely now; it has never been increased. National Insurance contributions came into the picture, too. To avoid employees’ relocation support being substantially eroded by their having to pay tax on it, employers now have to gross up the employees’ tax liability as well if they want staff to move, appreciably increasing their overall costs.

Favourable aspect

The new regime initially had a favourable aspect for GSP schemes, since it put tax efficiency at a premium, and, after some tweaks to the fairly complex arrangements involved, they were a lot more tax efficient than the alternative route to the same goal – a low-cost or interest-free bridging loan. That approach was therefore largely abandoned in favour of GSPs.

But the taxation of relocation assistance also proved to have a delayed impact: accountants were now looking a lot harder at the cost of relocation benefits generally, with expensive GSP schemes coming to be regarded as a dispensable luxury.

While schemes vary in detail, the basics are fairly standard. A Relocation Sale Agreement guarantees the employee the availability of a sum based on the market value of his or her existing property. When a suitable replacement is found in the new area, the employee’s solicitor will ‘draw down’ the GSP funds to enable exchange and completion on the purchase.

In exchange, the relocation company, acting as agent for the employer, acquires a beneficial interest in the original property through power of attorney, looks after it while it is unoccupied and manages its sale to recoup the GSP funds.

Technically, the employee has entered into an irrevocable contract to sell his or her former home to the relocation company at the guaranteed price. However, while the company acquires a beneficial interest in the house, it does not acquire the equitable interest or become the registered owner.

While contracts are exchanged in the course of the procedure, the sale is only completed simultaneously with completion of the onward sale to a new permanent owner. This aspect of the arrangement, known as a purchase sub-sale, ensures there is no liability for stamp duty when control over the house changes hands. There should also be no capital gains tax if the ultimate sale exceeds the guaranteed funds. Other costs associated with the sale of the property also escape tax on the employee, including estate agents’ fees and maintenance costs.

Within this general pattern, the details can vary greatly depending on the employer’s priorities. These are recognised in the separate contract between relocation company and client, dealing with how costs are reimbursed and how the former’s management fee is calculated. While a flat management fee plus costs is the norm, there is scope for variation in which costs are covered by the management fee and billed separately. The management fee is far from the major part of overall cost.

Significant interest charges

Much more significant are the interest charges on the Guaranteed Sale Price funds advanced to the employee while his or her house is still on the market. If it remains unsold for any length of time, the interest costs can quickly mount up.

The larger relocation management companies that are the main providers of GSP schemes – such as Cartus, Connells, Countrywide Relocation Solutions, HCR Group, Phoenix ARC, Team Relocations and The Relocation Company – are in a position to provide the GSP funds from their own banks or treasuries, billing on the ‘carrying’ costs to the client. This is the most efficient path when urgent deadlines must be met on the employee’s house purchase, says Sean Eastman, head of business development at The Relocation Company. “We much prefer to use our own funds and avoid any hold ups.” However, if the client is ‘cash rich’, it may prefer to fund the GSP scheme out of its own resources, and some smaller relocation companies may offer client-funded schemes.

If the property fails to fetch the guaranteed price, the employer must reimburse the shortfall. This is the other area where there is the risk of substantial costs, with no comparable gains when properties sell for more than the initial valuation. Any such Gain on Resale is usually passed on to the employee – though part or all may be retained by the employer to offset costs.

The employer’s exposure to risk is obviously greater in falling markets, but, even when market conditions are favourable, the original valuation can be inaccurate. In this connection, it is obviously crucial that all parties, including the taxman, are confident the valuation is impartial. Here, the standard is for the relocation company to arrange for two written valuations by independent surveyors, who must be members of the Royal Institution of Chartered Surveyors (RICS). If their assessments differ by more than 5 per cent, a third valuation is undertaken. The average of the valuations is the figure offered to the employee.

RICS rules require market valuations to be based on prices recently achieved for comparable properties. This means that, when house prices are rising fast and optimism reigns, employees can be disappointed by the surveyors’ judgement, says Adrian Leach, assistant director, business development, at HCR. “It’s important to explain clearly that this is not the same thing as an estate agent’s asking price.” Once this is understood, however, most employees accept the valuation, says Phoenix ARC director Sharon Gulden. “We have about a 99 per cent acceptance rate.”

The buoyancy of the housing market in recent years has probably contributed to the declining use of GSP schemes. Instead, employers have ‘traded down’ by offering non-funded packages of services from relocation companies to help employees sell their homes as quickly and effectively as possible. Under labels such as Marketing or Homesale Assistance, such packages include drawing up marketing plans, instructing estate agents, advising on offers and handling the various chores of the sale – broadly the same expertise and services that are deployed to sell the house in a GSP scheme.

Real risks

So will the present market conditions prompt ‘trading up’ to provide more employees with Guaranteed Sale Price funding? Trouble is, points out Connell’s Tim Rose, the employer’s risk of a loss on sale is now very real indeed, particularly as, in a falling market, the valuers may be basing their estimates on out-of-date valuation figures. “In a falling market, these comparables can easily be three to six months old and well above today’s values.”

His solution is damage limitation via a staged approach, initially offering a Marketing Assistance Programme (MAP), then boosting it to GSP status if the house fails to sell within 90 days. To limit losses, the Guaranteed Sale Price may be only 95 per cent of the valuation. If the house fetches more, the employee gets the difference in the usual way. “We recognise that every relocating employee will have a unique set of personal circumstances and every employer is different, too. We sit down and discuss with each client what their business objectives and cost drivers are, and tailor their scheme accordingly.”

This may, Tim Rose thinks, be the key to giving GSP schemes a new lease of life in a moribund housing market and exploits what is something of a paradox. “It’s ironic that interest in GSP schemes is rising when their costs are potentially greater than ever – if no safeguards have been built in.”