Free services for Landlords

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Hi Property118 readers, I occasionally hear about FREE services for landlords, and I’m now in contact with a company that provides two free services that could benefit many landlords: Room in roof insulation Free central heating boilers The room in roof insulation is for properties with an attic room.  The company will come and insulate the… Read more

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Free services for Landlords

admin    Uncategorized     agents

Hi Property118 readers, I occasionally hear about FREE services for landlords, and I’m now in contact with a company that provides two free services that could benefit many landlords: Room in roof insulation Free central heating boilers The room in roof insulation is for properties with an attic room.  The company will come and insulate the… Read more

The post Free services for Landlords appeared first on Property118.com.

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Rallying call as Autumn Statement approaches

admin    Uncategorized     agents

The legal bid to force a judicial review of the Government’s controversial Mortgage Interest Relief – or Tenant Tax – plans failed at the High Court. But all is not lost. While Steve Bolton and Chris Cooper have confirmed they will not appeal the decision, the RLA is continuing to lobby at the very highest level […]

The post Rallying call as Autumn Statement approaches appeared first on RLA Campaigns and News Centre.

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What does Heathrow expansion mean for property?

admin    Uncategorized     agents

Expanding airport capacity in the UK has been a hot topic for years. The South East of England has taken the limelight in the political debate, as Gatwick and Heathrow became the top contenders for expansion proposals. For big business, Heathrow has always been the preferred option. However, it has also attracted the most criticism from both Tory MPS and local residents alike, claiming that the expansion would increase noise pollution due to low flying aircraft over nearby schools.

Despite the opposition, Theresa May’s government ministers approved the long-awaited decision at a cabinet meeting on Tuesday 25^th October 2016. Transport Secretary, Chris Grayling, described the decision as “truly momentous”, indicating that the expansion would improve both trade and jobs. But what do the proposed expansion plans mean for property?

Due to delays in decision-making, the construction work is not likely to begin until at least 2020. This means that Heathrow’s third runway won’t be fully operational until 2025. That being said, effects on property in the surrounding area are expected to take affect long before more flights start coming in and out of Heathrow’s runways.

Heathrow airport is already the third busiest in the world, so it is unsurprising that the surrounding office market, in locations such as Slough, Maidenhead, Bracknell and Reading, is already thriving. A staggering 120 of the UK’s top 300 company HQs are based within a 15-mile radius of Heathrow airport. The Thames Valley is already home to giants like Apple, Cannon, GlaxoSmithKline and Toshiba. With stronger international transport links and more connections proposed between the UK and China, more multinationals are expected to relocate to this area over the coming years, boosting demand for commercial property and pushing up prices. Further job opportunities in the region is not only good for the local population, but will also attract other professional residents looking to move closer to their workplaces.

This in turn should further support house price growth in surrounding areas. Noise concerns from aircraft are expected to have very little effect on the residential property market. As a result of Crossrail plans and on-going regeneration projects, Slough is already experiencing a huge increase in property prices of up to 19pc per year, which is twice as fast as the rest of the South East.  Reading and Wokingham have seen prices increase from 28pc to 33pc between 2014 and 2016 and the rate of increase is expected to go up further as a result of the confirmed runway expansion. With more people looking to move to these well-connected suburbs and business hubs, perhaps it is prime time to invest in property in Berkshire. Obviously it is still very early days to pin down exact rental price increases, but it is likely that Berkshire property will fetch even higher rental yields over the coming years.  Arthur suggests keeping a close eye on Berkshire as the next residential property hotspot and a huge potential for investment!

As a landlord expanding their existing property portfolio, it is essential to ensure that it is managed effectively. Arthur property management software enables property managers to do just that, by giving them control over all aspects of their portfolio from their computer, tablet or mobile phone. Our app brings landlords, tenants, contractors, agents and owners together, in a single user interface, which makes problem solving easy, from wherever you are in the world. The Arthur software is guaranteed to help you get your property portfolio in order, no matter what size…

Come and try our 30-day free trial today!

Arthur Online

… LandlordZONE.

View Full Article: What does Heathrow expansion mean for property?

Guarantor not paying rent and bailiffs are backlogged?

admin    Uncategorized     agents

My tenant who is on benefits is in arrears and the guarantor is not paying the rent. Do I take legal action against,the tenant or guarantor? I have been granted order of possession by the court and the council have told tenant not to move out until a bailiff knocks on the door. I have… Read more

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Don’t struggle with Inheritance Tax

admin    Uncategorized     agents

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 […]

The post Don’t struggle with Inheritance Tax appeared first on RLA Campaigns and News Centre.

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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.

View Full Article: Tougher buy-to-let regulations not the answer to solving UK housing crisis

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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Is Incorporation Really the Answer?

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Recent changes in regulations, and in particular the March 2016 Budget announcements have changed the tax position of landlords significantly.

Shelter from the income tax implications of these rulings has increased the appeal of a company as a structure for ownership of residential property.  Moreover, changes in corporation and capital gains tax have lessened some of the former drawbacks to company ownership.

Tax on gains made through property held in a company.

The, so called, double tax charge is a reason that companies have not historically been a popular with UK landlords.  However, the reduction in both the main rate of both corporation tax and capital gains tax have reduced this classic drawback of the double tax charge.

When a property is disposed of, usually either sold or transferred as a gift, the company realises a gain or loss.  If there has been any overall increase in value this gain will be subject to corporation tax.  The rate of corporation tax for 2016/17 is 20%, however it is due to reduce to 19% in 2017 and again to 17% in 2020.  On withdrawal of the proceeds by the owners any increase in value of the property is also subject to tax.  Income tax would apply if the funds are withdrawn as dividend, but given the tax implications, it would be more prudent to wind the company up and treat the distribution as a capital gain.  The rate of capital gains tax is currently 20%.  Since, this gain will be on proceeds after deduction of corporation tax the overall gain could be said to be 36% (i.e. 20%, plus 80% of 20%.)  This combined rate will reduce to approximately 33.6% by 2020.  This compares to a rate of 28% for gains on residential property held privately.

The percentages above are broad estimates to show a comparison between the two forms of ownership.  The actual rate would be lower for a company due to indexation allowance and lower for an individual due to the annual allowance.

In general, capital gains tax will be greater for property held in a company.  However, careful planning could reduce this tax.  This planning could include:

  Disposal of the property while not UK resident;

  Appointment of shares to family members taxed at lower rate; and

  Investment of proceeds in a pension.

Residential property cannot be owned by a pension.  Therefore, company ownership can be used to achieve market exposure and subsequent pension contributions to secure tax advantage.

Tax on rental profits achieved through company owned property

Until 6 April 2017, it will still be possible to deduct mortgage interest from rental profits subject to income tax.  However, from 2017/18, the percentage interest that can be deducted from taxable profits will taper, so that by 6 April 2020 no interest will be tax deductible.  In its place, a tax reducer equal to 20% will provide a form of relief.  However, a higher rate taxpayer currently finding 40% tax relief on interest payment will by 2020 obtain only 20% relief.

There is currently no restriction on the amount of interest that can be deducted from profits chargeable to corporation tax.  For a higher rate taxpayer, tax payable on profits for a mortgaged property could be considerably lower if owned through a company.

A taxpayer can obtain relief from general income on a loan made to a close company.  This will provide:

  Full tax relief for mortgage interest irrespective of the profitability of the property.  For private landlords, rental losses can only be used to reduce future rental profits.

  Greater profits can accumulate in the company, either to be paid to shareholders taxed at a lower rate, or to be accumulated and withdrawn as capital on winding up.  The ‘capitalisation’ of rental profits could confer considerable tax saving as explained later in this article.

  More favourable loan terms.  Companies are inherently riskier to a creditor, and in practice corporate loans cannot be secured at all or for the same value.

For individuals earning over £200,000 a cap may apply to the amount of tax relief available on interest.

From 2016/17, each person is entitled to a dividend allowance of £5,000.  This allowance is valuable to higher rate, and additional rate, taxpayers.  In effect, a husband and wife could withdraw company rental profits of up to £12,500 per year, and pay only £2,500 in tax.  This compares to tax of £5,000 on the same income if both spouses are taxed at the higher rate.

A higher rate taxpayer would suffer tax at 32.5% on dividends withdrawn over the £5,000 allowance.  Therefore, there could be a benefit to retaining funds in the company, and withdrawing the funds as capital gains when the property is eventually sold and the company is dissolved thereafter.  The combined rate of corporation tax in this case would be 36% (or lower if a tax year after 2016/17.)  This rate of tax is explained above.  By comparison, landlords subject to higher rate tax and with the property in their own name would suffer a rate of 40%.

Moreover, the capital gains tax element would not be payable until the company is eventually dissolved.  Therefore, retained funds could be used, for instance, to repay a company mortgage or to invest in further property.

Non-residents

Since 6 April 2015, all non-residents have become potentially liable to capital gains tax on their UK rental property.  Depending on the prevailing tax regime in the country of residence, tax savings can be achieved through company ownership.  This is because a non-resident is not subject to UK tax on the disposal of a share.  Dividends are disregarded income for an individual who is not UK resident.  It is therefore only the corporation tax element of the gain which would be subject to UK tax.  The timing of disposal of rental property could form a key part of retirement planning where the landlord’s intention is to emigrate in the future.

Inheritance tax

Inheritance tax is charged on the value of a person’s estate, which includes any gifts made in the seven years prior to death.  Therefore, the transfer of property in seven years prior to death could be subject to both inheritance tax and capital gains tax.

Probate value determines the gain or loss made by the beneficiary on disposal of the inherited property.  Thus, death creates a ‘capital gains tax free’ uplift in value for property.  Given that the proceeds from a property sale could form part of the estate, a plan to simply hold property until death can be tax efficient.

Property owned in a company will not enjoy the same tax benefit.  On a future disposal of the shares by the beneficiary any capital gains tax would be calculated by reference to the market value of the property when inherited.  To the extent, capital gains tax is avoided in the same way as for property held privately.  However, the overall gain on company property has two elements.  The value of the property for determining gain subject to corporation tax will still be its original cost, regardless of any changes to the shareholders.

Company ownership is likely to be more tax efficient where it is not the intention to hold the property for a lifetime.

By the same token, if structured carefully a company can become a useful mechanism in inheritance tax planning.

Rental property can form a significant part of a person’s wealth.  A company can facilitate the transfer of a property, and the income which it generates, to various children, grandchildren and other beneficiaries over time.  This way the family wealth can be imparted in a controlled and gradual manner.  This is the kind of arrangement that would previously have been performed by a trust.  However, it is probable that the rates of tax on a trust will not be as favourable.

Recommendations

The tax advantage gained from the use of a company is more likely to be realised on properties that produce high yields rather than capital growth.  The higher the mortgage cost the more suited the investment to corporate ownership.

For couples, a company could allow for double the dividend allowance.  The use of an alphabet structure could facilitate transfer of income to the spouse taxed at the lower marginal rate.  By contrast, a married couple are taxed on rental income in the same proportion as they own the property, regardless of the way this income is paid.

It will rarely be prudent to transfer an existing rental property into a company.  The purchase of additional residential property is subject to a further stamp duty of 3%.  The transfer would be treated as a disposal for capital gains tax purposes.  Therefore, an increase in value from the date the property was acquired to the date that it is transferred into a company would be subject to capital gains tax.  The rate of tax is currently 28%.

The government could legislate to block any means of avoiding tax through company ownership.  An entire disruption is unlikely given the various areas of tax law that would have to be simultaneously changed.  Nonetheless, any arrangements to save tax should be regularly reviewed in response to changes in regulation, and a clear exit strategy put in place.

Ray Coman, FCCA, CTA

Director

https://comanandco.co.uk/

Watch our one minute video here: https://www.youtube.com/watch?v=Haxo2pzDRfs

… LandlordZONE.

View Full Article: Is Incorporation Really the Answer?