Don’t struggle with Inheritance Tax

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Property investors can struggle with Inheritance Tax: unlike most businesses, letting portfolios are afforded no special reliefs from Inheritance Tax. It can be difficult to balance the need to move capital wealth to future generations, against the need for income in retirement. With that in mind, some Inheritance Tax tips: Make good use of the […]

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Long-dated reversions

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A reversion is when the full (market) value of the property reverts to the interest of the superior landlord. An example of a long-dated reversion is a freehold ground rent. A ground rent is usually associated with a long-lease, the rent of the ‘ground’ – the land upon which the property is built, as distinct from the built-structure itself. Whether how the amount of ground rent has been arrived at is necessarily of the land alone, the amount would be low compared to the rental value of the property as a whole. On reversion, expiry of the lease, the rental would revert to the full value of the property (including the built-structure), depending upon legislation and case-law.

In the commercial property market, ground rents, including long-dated reversions, used to be sought after by higher-rate taxpayers desirous not of income, but capital growth. The tax advantage has been largely eroded but the investment case remains, particularly for pension funds where subject to availability it is possible to time the reversion date with the pension withdrawal. In buying a low rent, the purchase price is akin to a percentage of the full capital value of the property, virtually guaranteeing that the closer the reversion the more the property will go up in value.  Theoretical valuation is to calculate the net present rental income for the duration and add the estimated rental on reversion deferred by the duration. The rate of interest for each calculation is a variable. Together with the theoretical, the practical approach would include but not limited to what else can be bought for the same money to produce the same sort of yield but with more scope for investment angles and capital appreciation.

With low interest rates, long-dated reversions are attractive investment propositions. Given the choice for the same price between (1) a rack-rented or foreseeable rent review property whose capital appreciation depends upon an increase in that rent, and (2) a low rented property whose capital appreciation depends upon the number of years remaining until reversion, the latter would be less risky, particularly since any prospect of the tenant going broke would be welcomed.

The rent of long-dated reversions can be fixed throughout the term, or with preset fixed increases at specified intervals, or subject to rent review, either formulaic or geared to market rent. With a geared rent review, at each review the rent payable after the market rent is agreed or ascertained would be some percentage of the market rent (as defined by the lease). Long-term leases are rapidly becoming an instrument of the past and even where they continue to be granted the wording of the lease is more sophisticated than before.  It is very easy to overpay, a consequence of investment market (auction) sentiment, and, as one might expect, long-dated reversions are not all plain-sailing. The obvious downside is that anything can happen over a long time. Whether that matters depends upon the yield, the relationship between the purchase price and the reversion date.

Long leases at fixed or rising ground rents offer possibilities for the patient. There might be investment angles and scope for different interpretations that can result in substantial windfalls. A superb example is Brockhall Village, Lancashire: cited as the archetypal dream for every ground rent investor, this was a ground rent in a 999 year lease of a former mental hospital where the tenant, the NHS, having closed the hospital would have been able to sell the site for redevelopment had it not been for a restricted user clause and the freeholder, (Gerald Hitman was a school-friend of mine), refusing change of use. Instead, the freeholder took the lease back and developed Brockhall Village, a gated community including some 400 homes, hotel and training ground for Blackburn Rovers football team.

Commercial property geared rent review introduces inexperience to the subtly of rent review. To the inexperienced, a geared review might be thought a dead cert. but it is not. Inexperience might reason that long-dated review intervals should result in an overage (addition) in comparison with the norm, for example 21 yearly reviews compared to 5 yearly, the 16 years advantage of value to the tenant. Where inexperience goes wrong is in ignoring the possibility that in the market at the valuation date a long-term might not be in demand. Regardless of the long-dated review frequency, the term of the lease might not only cancel any overage but also reduce the rent.

Another factor enters the experienced way of thinking. The comparison between the review in question and the market at the valuation date including any evidence. With reviews to market rent, amongst the assumptions for the hypothetical lease is the notional term. Whether the notional term should be the unexpired residue or the original term at the review date, the specific nature of the premises and the locality are factors to take into account. Whether for the hypothetical tenant it would more advantageous or disadvantageous for a term to be more or less than the ‘norm’ is not something to be decided upon in isolation.

The case law concerns the date from which the notional term is calculated. To defeat any interpretation that the residue is more advantageous than the original term, or vice versa, some leases require the valuation to be based on either possibility. With geared rent review, where the duration of contractual term might be an issue, another possibility, provided the wording of lease allows, is the ‘market-led’ approach. A ‘market led’ approach goes beyond the original term or residue into the best of all, namely that a rent on a lease of any duration can be considered.

With long-dated reversions, anything can happen which is why it is so important for investors to appreciate that the direction that the market for the type of property and its locality is taking must remain in sync with the direction of the demand. To overcome resistance to rent increases, the theoretical aspects of rent review can be used to defeat the all-too-often casually-relied upon presumption in favour of reality, but the impact of success might not necessarily assist long-term capital appreciation.

Michael Lever
The Rent Review Specialist
Established 1975

… LandlordZONE.

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Tougher buy-to-let regulations not the answer to solving UK housing crisis

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Fran Mulhall, Regional Operations Manager at North East property specialists GFW Letting, explains why tighter regulations on the buy-to-let market is not the way forward in helping to fix the chronic housing shortage that UK families are facing.

“In the last year or so, the Private Rented Sector (PRS) has undergone sweeping change. As it’s continued to grow rapidly, the Government has introduced a range of new legislation that puts tighter controls, and more pressure, on UK landlords. New laws include the removal of the 10% wear and tear tax relief for furnished lettings (introduced April 2016), an extra 3% stamp duty payable on purchases of second homes above £40,000 from 6 April this year, removal of higher rate tax relief on mortgage interest staged over three years from 6 April 2017 and capital gains tax payable on the sale of an investment property within 30 days from 6 April 2019. In what many landlords are calling an ‘Alice in Wonderland’ tax grab, such measures are making it financially impossible for them to continue in the business, let alone expand their property portfolio.

Add to this the news that banks are tightening the criteria applied to buy-to-let mortgage borrowers – lenders now need to take into account a landlord’s costs including tax liabilities, verified personal income and possible future interest rate increases – plus the new raft of legislation to hit landlords then it’s no wonder the Royal Institution of Chartered Surveyors (RICS) has recently reported that the UK is facing a “critical rental shortage” which requires a building programme to focus on providing for tenants.

According to the latest research from RICS, at least 1.8 million more households will be looking to rent rather than buy a home by 2025. As a consequence of the governmental focus on home ownership and the heavy handed approach to the buy-to-let market, the real issue here – the national housing crisis – is not going to change and by punishing landlords or those trying to make a living out of leasing property, it only serves to exacerbate the fact that simply not enough homes are being built to house the UK’s growing population.

If we are going to make headway with the shortage of homes, the Government needs to focus on building and investment and encourage landlords to purchase buy-to-let property. The greater legal and financial legislation only serves to either drive landlords out of the business, deters them from adding to their portfolio or puts them in a position where they have to offset the additional cost of leasing out a property to the tenant i.e. higher rents at a time when rental rates are already at a record high.

To increase available housing stock, the Government should really be looking at reversing the stamp duty rise and also focus on encouraging developers to build specifically for the rental sector. Councils should also be incentivised to release brownfield sites for building homes for tenants. Only in this way will we be able to make up some ground in tackling the housing shortage and move forwards from there.”

Fran is also the North East and Cumbria representative for the Association of Residential Letting Agents (ARLA).To discuss this topic in more detail with her or for further information about GFW Letting’s services, please contact Fran on franmulhall@gfwletting.co.uk  or 0191 605 3151.

… LandlordZONE.

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Buy-to-Let still attractive investment

admin    Uncategorized     agents

Mortgage lender thinks Buy-to-Let is still an attractive investment compared to the returns available on other forms of savings and investment. The buy-to-let sector was shocked when the previous Chancellor George Osborne introduced some swinging tax measures last year, including a 3% stamp duty levy, a scrapping of the generous wear and tear allowance, and […]

… LandlordZONE.

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