47
Property Investment Seminar Witney Blanket Hall Wednesday 12 th October 2016
Property Investment Seminar
Witney Blanket Hall
Wednesday 12th October
2016
Property Update Brendan Kay – Martin & Co
Funding Your Investment Laura Lamb – The Mortgage Company
Maximising Your Returns Darren Green – The M Group
Legal Update Geoffrey Cotterill – Everyman Legal
Agenda
Property Update
Brendan Kay MARLA
An Agents View ~ What Does it all Mean?
Buy to Let Regulated
Non Regulated
Let to Buy
Holiday Lets
Ltd Company BTL
2016 ~ What on Earth Happened?
• SDLT
• Brexit
• Interest Rates
• Mortgage Relief
Looking Ahead ~ 2017 and Beyond
• Lower capital growth
• Low interest rates
• The "Article 50" effect – BRENTAL?
• Multi-generational living
• Parent landlords
• Increasingly onerous legislation
• Focus on PRS / sentiment
Sales Update
• Oxfordshire 32% above the national average but West Oxon below county average
• Still not building enough (7% last 12 months)
• OX28 £301,788 average price (last 12 months)
Non Regulated
Let to Buy Holiday Lets Ltd Company BTL
Witney flats up 29% on 12 months previously
Number of Properties For Sale
Falls across the board except 3-bed houses (+22%)
Rental Update
ONS +2.6% England +3.5% South-East
BTL Asset Class
• Average yield @ 4.8% p.a –
£9,600 p.a./ £48, 000 over 5 years
• Average Witney property +40% (Capital appreciation £80,000)
• BTL Total = £328,000
• Savings @ 2.5 % £221,184 (interest reinvested)
Last 5 Years - £200,000
BTL – Be Smart • Stay Local • Rent Reviews
• Stay Competitive
• Know Your Market
• Balanced Portfolio?
• Re-mortgage
Stay Current Aug 19th - No drop off in instruction level (RSPA) Aug 25th - Rents grew 2.4% in year to July (ONS) Aug 31st - Number of properties to let up (ARLA) Sept 1st - House prices up 5.6% (Nationwide) Oct 4th - BTL activity down 58% (BBC)
And Finally…… 'Property is better bet' than a pension says Bank of England economist, Andy Haldane.
“As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”
Buy to Let Regulated
Non Regulated
Let to Buy
Holiday Lets
Ltd Company BTL
Property Investment Seminar
Buy to let
Mortgages Laura Lamb
Agenda
• Buy to let criteria
• Different Types of Mortgages
• Types of Repayment
• Upfront purchase costs
• What’s happened in 2016
• What are we predicting for 2017
Buy to Let Criteria
Rent calculation • Dictated via the lender depending on rental income and loan to value. • Mortgage balance x 5.5% divided by 12 + 25% so on £150k purchase
the rent would need to be £920 per month minimum. • This is set to become tighter under new FCA rules.
Affordability • Generally income of 25k or more • Proof that the applicant can live on their income and won’t be reliant on
surplus BTL income. • Homeowner preferable
Deposit • In Oxfordshire at least 25% due to the required rental covers.
Age • After 70 it becomes very difficult to apply for a BTL mortgage
Types of BTL
Student lets and HMO (house of multiple occupancy)
• Restricted number of lenders
• Generally only available to experienced landlords and home owners.
DSS (department for social security) /Council Lets
• Tempting for perceived guaranteed rent as tenant receiving housing benefit
• Statistically much more likely to need to evict a DSS tenant
• More likely to need to repossess
• Lenders don’t like it because the leases tend to be longer and lenders prefer short term AST’s
Let to Buy
• Stamp duty increase on the PURCHASE!
• Some lenders don’t lend to first time landlords
• Always regulated
Normal Buy to let
• Regulated or non regulated
• Products are generally specific for LTD company BTL which means
rates are normally higher but generally they work out as only slightly
more expensive than standard BTL and of course you have the benefits
of the tax savings.
• There are around 5 lenders currently willing to consider Ltd company
BTL
• The directors and majority shareholders will need to give personal
guarantees
• Generally the LTD company will need to be a Special Purpose Vehicle
(SPV) – this is a company let up to hold property only.
• Becoming more popular following the recent tax changes
Limited Company BTL
• Products are generally specific for LTD company BTL which means
rates are normally higher but generally they work out as only slightly
more expensive than standard BTL and of course you have the benefits
of the tax savings.
• There are around 5 lenders currently willing to consider Ltd company
BTL
• The directors and majority shareholders will need to give personal
guarantees
• Generally the LTD company will need to be a Special Purpose Vehicle
(SPV) – this is a company let up to hold property only.
• Becoming more popular following the recent tax changes
Types of Mortgage Deals
Fixed
• Set monthly payment
• Rent fixed
• Easy to calculate margins
Tracker
• Rates are set to stay low
• Some flexibility
Types of Repayment
Capital repayment
• Pay the capital balance down
• End up with an unencumbered property
• Good if you own one or two buy to lets and are planning to use them as a pension
• Generally don’t generate any income monthly
Interest only
• Just pay interest
• Capital growth
• Normally some monthly income surplus
• Can overpay
Purchase Costs
• Valuation costs £500 • Lender booking fee - £1000-£2000 average • Solicitor costs • Stamp Duty rates - Normal vs BTL
0-125K – 3% vs 0% 125k – 250k – 5% vs 2% 250k – 950k – 8% vs 5%
950k – 1.5 Mil – 13% vs 10%
Extra 3% on all BTL,LTB, Second homes
£250,000 house first purchase or home switch = £2500 2nd property or BTL= £10,000
Rate examples
75% loan to value
2year deal 2.29% with a £1000 fee
5 year 2.62% with a £1000 fee
65% loan to value
2 year deal 1.79% with a £800 fee
5 year deal 2.49% with a £1000 fee
2016 in Review
• 3% Stamp duty charge
• Regulated BTL products introduced
• Tougher rental requirements and assessment
• More products available now than we have seen since before the housing market crash with lower rates and fees for BTL, the number of deals available was recently reported to be in excess of 23,000.
Projections for 2017
• Tighter rental cover requirements will continue to be imposed by lenders.
• Income tax changes
• More regulation around the sale of BTL products.
• We believe we will see an improvement in the longer term 3-5 year fixed rates as rates are set to stay low.
• Significantly less Let to buy applications being processed which in turn should lead to higher rents for landlords.
Maximising your returns
Darren Green, BA(Hons), FCCA
Keep on right side of HMRC
• Notify HMRC
• Complete tax return each year
• Keep suitable records – letting agents help
• Know what type of property you are letting
– Unfurnished
– Furnished
– Holiday let
– Commercial
What taxes will I have to pay
• Income tax at 20%,40% or 45% - based on rent
receivable
• No National Insurance
• Stamp duty land tax on purchases
• Capital Gains Tax on disposals (18%/28% for residential properties rather than 10%/20%)
What expenses can I offset?
• Letting agents fees
• Maintenance and repairs
• Buildings and contents Insurance
• Interest and finance costs (more on this later!)
• Accountancy fees
• Utility bills (if paid by landlord)
• Ground rent, services charges (if paid by Landlord)
• Gardening, cleaning etc
• Legal fees if short term let
• Other direct costs of letting the property – telephone, advertising
• Pre letting expenditure (if not materially enhancing property value)
The changing landscape
• Changes from April 2016 • Increased SDLT
• Removal of the Wear & Tear Allowance
• Increase in rent a room relief
• Changes from July 2016 • Potential for property sales to be taxed at income tax rates rather
than CGT rates (could be as much as 47% rather than 28%)
• Changes from April 2017 • Tax relief on mortgage interest……….
Interest changes from April 2017
• Reduction phased in over 4 years from April 2017:-
16/17 17/18 18/19 19/20 20/21
% of interest allowed as a deduction 100% 75% 50% 25% 0%
% of interest given as 20% relief N/A 25% 50% 75% 100%
Effective interest deduction will be:- 100% 80% 60% 40% 20%
• Beware also the ‘Stealth tax’ • Basic rate payers into Higher rate tax payers and Higher rate into Additional rate payers
• Restriction in child benefit / Tax credits
• Increased student loan repayments
• Will have greatest impact on higher rate tax payers, highly geared
landlords and particularly those with large portfolios
Some examples
• Example 1: Higher rate tax payer - Low geared,
single property
2016/17 2020/21
Rent £7,200 £7,200
Repairs (£1,000) (£1,000)
Interest (£2,500) -
Net profit for tax purposes £3,700 £6,200
Tax at 40% £1,480 £2,480
Interest relief at 20% of £2500 - (£500)
Total Tax liability £1,480 £1,980
After tax income £2,220 profit £1,720 profit
STILL PROFITABLE
Some examples
• Example 2: Higher rate tax payer - High geared,
single property
2016/17 2020/21
Rent £7,200 £7,200
Repairs (£1,000) (£1,000)
Interest (£5,000) -
Net profit for tax purposes £1,200 £6,200
Tax at 40% £480 £2,480
Interest relief at 20% of £5000 - (£1,000)
Total Tax liability £480 £1,480
After tax income £720 profit (£280 loss)
NO LONGER PROFITABLE!
Some examples
• Example 3: Basic rate tax payer with other
income
2016/17 2020/21
Other income £38,000 £38,000
Rent £8,500 £8,500
Interest cost (£4,000) -
Total income £42,500 £46,500
Personal allowance (£11,000) (£11,000)
Net profit for tax purposes £31,500 £35,500
Tax at 20% £6,300 £6,400
Tax at 40% - £1,400
Interest relief at 20% of £4,000 - (£800)
Total Tax liability £6,300 £7,000
EXTRA £700 of tax due to being pushed into Higher rate!
Some examples
• Example 4: Substantial property portfolio (jointly
owned) 2016/17 2020/21
Rent £600,000 £600,000
Repairs and other costs (£200,000) (£200,000)
Interest cost (£350,000) -
Total income £50,000 £400,000
Personal allowance x 2 (£22,000)
Net profit for tax purposes £28,000 £400,000
Tax at 20% £5,600 £12,800
Tax at 40% - £94,400
Tax at 45% - £45,000
Interest relief at 20% of £350,000 - (£70,000)
Total Tax liability £5,600 £82,200
After tax income £44,400 (£32,200 loss)
NO LONGER A SUSTAINABLE PROPERTY BUSINESS!
Is there a silver bullet to all this?
No but consider….
• Transfer property into Spouses / Civil partner – if Tenants in
Common then can alter split
• Increase profitability
– Higher rents
– Protect rents
– Lower costs
– Lower interest rates now & going forward!
• Review borrowing arrangements
– Best rates / Can borrowing be restructured i.e. business /
Commercial property borrowing?
• Incorporation ……..
Incorporation?
– Advantages • Interest still tax deductible in full
• If profits retained in company then only tax is at Company rate (currently
20%, 19% from April 2017 and 18% from April 2020), rather than income tax
rates (20%,40% or 45%)
• Flexibility on remuneration i.e. salary / dividends
– Disadvantages • Existing properties - Possible CGT and Stamp Duty on Transfer to Limited
company
• Tax on Dividends increased by 7.5% (except first £5000)
• Administrative costs of company
• Funding
• ‘Double taxation’
Will CGT and SDLT always apply to a
transfer?
– SEEK ADVICE OF OWN TAX ADVISER OR ASK US TO
REVIEW BUT……
• CGT may not payable if running a property business – Business is transferred in exchange for shares in Limited company
– Significant activities and reasonable time spent in management (This is key!)
– Seek to profit and ran as a business
• SDLT – Can be reduced to the same level as Commercial property (4%) if 6 or more
separate dwellings transferred
– SDLT may not be payable if the property business is ran as a commercial
partnership
» Partnership agreement
» Partnership return, bank account, accounts
» Partners held out as such to outside world i.e. stationery, advertising
» Invoices, agreements etc in name of partnership
Action plan?
• Review property portfolio and assess those properties most affected i.e.
high borrowing
• Review borrowing and try and reduce either by lower rates (Speak with
Laura), paying down debt or restructuring, perhaps consider how any
separate business or commercial property is financed
• Make sure you are generating best rental income (Speak with Brendan)
• Are you claiming for all costs you could?
• If spouse / civil partner is a lower rate tax payer then consider property
ownership percentages
• Speak to your accountant (or us) as to whether incorporation would work
for you
• Don’t let the tax tail wag the commercial dog!!!
Buy To Let - Legal Update
Geoffrey Cotterill
Energy Performance Certificates
Deposits
Topsy-Turvy Tories
“La La Land” Labour
Back to the 1970’s
