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  • Property-a-holics

    Don't Panic Over Tax Changes!

    I shall be penning a report and some comparisons this week with regards to the recently announced tax changes.

    I have unsurprisingly been inundated with enquiries and requests from new and existing clients this last few weeks with regards to this and in particular buying via a Ltd Co.

    Three discussions I had this week beautifully reflected my general feelings on the matter and that is that assessment of your own circumstances and a careful and thorough costing is absolutely essential before jumping in head first especially with regards to going the Ltd Co route.

    Case One

    Applicant has already purchased a HMO in their own name and is remortgaging following a comprehensive refurb. They decided they'd rather go the Ltd Co route.

    Now ordinarily given a HMO is likely to be mortgaged with a commercial lender anyway then a Ltd Co will make little difference but as this was already owned by the individual that's a different matter.

    Firstly you cannot just 'transfer' a property into the company as I've already seen people suggest! This is a SALE and a PURCHASE. As such the investor will be facing capital gains tax on the sale and stamp duty on the purchase.

    But worse is yet to come. The lender will insist upon a full CASH deposit being put in by the company. So effectively the investor will have to put in the deposit TWICE.

    Unsurprisingly they changed their mind!

    While I'm here the EXACT same thing applies if using a trust; a trust is a separate entity and while it's in essence a paper exercise to move the equity and rent into the trust there is still a sale/purchase of equity and while you may get around the 'lender issue' you don't get around CGT and stamp duty.

    Case Two

    Applicant is on a significant PAYE income in the higher tax bracket. They have 8 B2Ls with several of them unencumbered. They easily qualify for the most attractive B2L mortgages and want 5 year fixed rates.

    They will face an increase of £2,000 pa in taxes when the full relief is withdrawn. (£250 pa per property.)

    However when comparing the costs of the best value 5 year fixed Ltd Co mortgage for their latest purchase they will be looking at an increased cost of £2,000 pa in interest - that's for ONE property!

    In addition the increased arrangement fees, legal costs and val fees added a further initial cost of around £4,000. Resulting in an average cost increase of £2,800 per year for 5 years. Again this is just one property.

    Unsurprisingly they changed their mind!

    Case Three

    Semi-retired landlord with substantial portfolio of 40 properties and an income of £30k pa - like many landlords I know keeping their income in the lower tax bracket. This group is the one most likely to be hit by the changes.

    They already have a number in a Ltd Co so are looking to refinance a number of the B2L ones they have into the company too.

    A major consideration for this client is IHT planning so a Ltd Co should be considered for a number of reasons. However age is a major consideration here with many commercial lenders having lower age requirements than B2L lenders. Additionally much shorter terms are often offered if interest only is preferred or required and that can cause real issues further down the line when the term finishes and the client is then even older.

    They were happy to pay the CGT and stamp duty and even put in deposits and so undaunted the client wanted to understand exactly how much this tax change would cost them fearing they may be forced to sell up.

    It would be £250 per property per year!

    Now that took him quite by surprise! If a landlord can't stomach £250 per year per property that's very worrying indeed!

    We both agreed a strategy of £10 pcm rent increase for the next 3 years would be an acceptable move that would be palatable to most tenants and adequately cover the tax increase.

    They haven't changed their mind as yet BUT only because of IHT planning not because of the tax changes. And they certainly won't be selling up!

    I hope that these three case studies (and I have many more) give a bit of insight into this for investors and prompt them into doing some sums for themselves. More importantly I hope it stops the feeling of panic I'm seeing amongst some landlords and communities.

    Now don't get me wrong - I am ABSOLUTELY 100% against this tax change and will fight it tooth and nail. It is a stealth tax, unfair, unjust, unprecedented and retrospective and I'm friggin livid about it!

    From the above we can see rents WILL rise; that is a guarantee so tenants should be as angry about this as landlords.

    But I also don't want anyone making rash decisions they may well regret later.

    As a broker my fees and commissions are higher for commercial lending (as it is for most other brokers!) so I have no financial incentive to offer this advice by any means and hopefully it will be seen with the impartiality that is intended.

    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com

    But isn't the BIG issue here if SVR's are increased to 8 or 9 % if greedy lenders wish to maintain the IR differential they have maintained whilst the the BOE rate is 0.50%!!
    Presently lenders on standard rates are about 4% ABBR!!!
    LL are looking to future proof their loans
    We need long term mortgages of 20 years etc so as to avoid another CC when liquidity dried up leaving LL stuck on ridiculous SVR's which bankrupted many
    LL cannot rely on there being another cheap fixed rate at existing criteria to be available
    Obviously that would mean less churn and so less business for ALL those involved in provisioning BTL mortgages.
    No way would I take on a cheap fixed rate for 2 years
    Osborne has already signalled changes to BTL mortgage criteria WILL be changing very soon.
    LL need to get a move on before the BTL criteria goalposts are moved very soon.
    MMR in some form or another is coming to BTL mortgages
    This will get rid of poorer LL who will be denied the leverage usage that has previously been available to them.
    Only the rich will be able to meet the criteria; essentially by putting more 'skin in the game' than required before!!!
    How this will affect the BTL mortgage demand is anyone's guess
    Looking at the effect MMR has had on the resi mortgage situation I foresee substantially less BTL mortgages for new properties being granted.
    Remortgaging will be vigorous though!!!
    I just can't work out where all the evicted tenants will be living!!
    Cos there will be lots of them!!
    Industry participants will be affected by these tax changes as LL massively rationalise their investments
    Much like when the mines closed the knock on effects devastated the North which still hasn't recovered 35 years later!!!
    Turbulent times ahead for many who are involved in the PRS I'm afraid!!!!

    I'm not disagreeing with you but that's nothing to do with the tax changes Paul!

    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com

    (01-08-2015 07:20 AM)Lisa Orme Wrote:  I'm not disagreeing with you but that's nothing to do with the tax changes Paul!

    We'll if I've understood things correctly which I appreciate I may not have at all I have worked out it is just not worth me doing extra work as it would tip that extra income ALL into the HRT
    Means giving 40% plus NIC of those earnings to the Govt
    No way am I going to bother!!
    Fortunately my normal income is nearly half of the maximum OBC of £23000
    Makes me wonder why I bothered when you can get so much for free!!??
    So even with mortgage interest and rent and other income I am just under the HRT
    Never thought I'd be glad to be poor!!!
    Though if IR increase that might tip me into the HRT!!!
    Let's hope the petition works!!
    Something I'm sure lots of other LL are hoping!!?
    It does seem though that old homily plan for the worst and hope for the best is an avenue denied to most incumbent LL
    It seems selling up is the main way of avoiding the worst!!

    An increase in rates reduces your profits and as you only get relief to the lower tax rate anyway it'll either make no difference or you'll pay less tax!

    Don't get me wrong if your cashflow is tight rate rises plus the extra tax will hurt but don't confuse the two together.

    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com

    An increase in interest rates doesn't reduce taxable profits under the new rules...you just end up paying 80% of the increased interest straight out of your pocket, regardless of your marginal rate.

    I have to say your worked example (£250 more tax per property per year) seems low.
    I guess he has borrowings of about £40k per property at about 3% IO (or a bit more at a lower rate)?

    I think we all agree that everyone needs to put their own situation through the calculator then go from there.

    For some it's "so what" for others it's devastating. Worst hit are those who have job income and have followed momentum refinancing investing with lots of properties at >=75% LTV and bought since the cheap rate trackers ceased to exist.

    I guess we either have to sell most don't want to as we see that property goes up over the long term and we have worked hard not to be a burden on the state . Plan b is make enough extra money profit to pay the extra tax although by the time the new regs come in fully the interest rates may b say 2% above what they are now maybe more the challenge is most pro landlords would have built up their portfolio based on say making £200 per month so many properties built up great until George says oh and by the way you now have an extra cost..a huge impact ..so plan c is make more money the margins on btl via own name is past history limited companies are the future more costs though so do we sell do we hold many will.still not be able to do that ..yet..for us on our current debt plus 2% increase plus a 20% New tax equates to an extra £7000 per month in extra costs that's £84,000 extra per year after 2021 ..got some harder work to do or maybe plan f ..not sure what that is yet..HMOs for us are our main plan moving forward come on George it's not easy doing what we do you just made it much harder ..and hey as a provider of houses that you the government couldn't be without it just doesn't make sense landlords may sell prices may drop and some first time buyers may get on the ladder but lhas and low paid zero hour contract people won't be buying..and the housing list will rocket .

    HMO's aren't they fraught with difficulties 're council licensing Article. 4 and all that!!??
    Plus once an HMO it can only ever really be an HMO
    To restore a HMO to a family dwelling is impractical in most cases
    I suppose the business case for HMO's are that with reduced rental property supply the demand for rooms exponentially increases!!
    But they are hard work which most residential LL aren't interested in!!
    FHL seem to me more attractive
    Residential property is a busted flush I think in the normal sense
    Could LL in London etc operate an Airnib sort of operation
    Sort of quasi hotels!!!
    I do believe that the standard relatively lazy business model of single occupancy lettings is over financially for many LL
    Most just won't or can't be bothered to be a bit more innovative in their lettings arrangements that LL such as you are prepared to consider
    I definitely include myself amongst those lazy LL!!
    Mind you I am looking at converting my residential properties to FHL and moving myself lock stock and barrel to such a FHL area where I could self manage
    The major issue I have is the funding requirements for FHL
    Which I know absolutely nothing about!!!!

    Hmos are hard work alot of rules I think that's why we have joint venture investors joining with us they provide the cash we do all the work it's a big part of our model moving forward nice to be lazy but if your financial future is being challenged then change has to happen the dinosaurs became extinct but the alligators survived ya gotta do what ya gotta do like you said Paul move and manage yourself we are all 're evaluating our position even though we have a few years to adjust and take appropriate action for some that may not be possible George apply the new rules but for future bought properties ..
    Yeah I know what you are saying
    I just reckon a lot of LL are a bit battle weary
    You have obvious tenacity and will survive and thrive
    Most little LL are just not made that way
    You have the entrepreneurial spirit
    Most normal little LL haven't
    They know what they are and are not prepared to indulge in and usually that means not the more prosaic property business methodologies
    That is why with your mindset you will always rise above the chaff like me!!!!!!
    You could give me your whole sales pitch and I would still say no I'm sticking with normal lettings or I will exit the PRS
    There are many stick in the muds like me!!
    They form the backbone of the PRS!!
    Much as we should be possibly more creative in our thinking most of us are destined to be dinosaurs!!
    Howver remember the dinosaurs were around for a long time before their demise!!
    I think things will be tough for us dinosaurs
    It could well be of our own making due to our inflexibility
    Sometimes the old dog just can't be a###d with learning new tricks!!!
    Those old dogs will just fade away like so many old soldiers!!!
    Let us hope that those old dogs are replaced with young pups full of vitality if for no other reason than for the poor old tenant looking for somewhere to lay his hat!!!

    I understand Paul it isn't easy and its going to get harder especially with not knowing where the market is going ideally up..well up over the next five years I am not a natural business man I have had to work hard at it I think we will all need to work much harder over the next 5 to 7 years I believe so that's what we have to do until we can sell some of the stock we have..it's pixxing me off because part of my plan end game plan was to hold for the next 7 to 10 years to enjoy the growth after the drop now it will probably mean that we will sell some earlier a lose some of the profit ...cashflow net profit increase the goal..