Base Rate held at 0.25% but it’s not all good news

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The Bank of England Monetary Policy Committee (MPC) today voted to keep the Bank Base rate at 0.25%. Good news for Buy to Let mortgage borrowers, but the reasons are less good for the economy.

2017 Growth forecasts have been reduced again from 1.9% to 1.7% with lower household demand filtering through from the drop in the value of the Pound squeezing prices and household budgets.

The Pound has fallen 0.9% so far against the Dollar after the announcement of the freeze in interest rates, which has a direct impact on foreign exchange rates.

The MPC was this month split more heavily in favour of keeping the rate the same with the “Doves” winning by an increased margin of 6 to 2.

Mark Carney, the Govenor of the Bank of England, held a press report at the announcement saying:

“The UK economy is beginning the process of adjusting to a new, as yet uncertain, economic relationship with the European Union. Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises. And it can support UK households and businesses as they adjust to such profound change.

“The MPC has long emphasised that the effects on inflation of the Brexit process would be the product of its impact on demand, supply and the exchange rate. And it has consistently stressed that as a result, the implications for monetary policy would not be automatic. The August Inflation Report, released today, updates on how these and other dynamics are affecting the economic outlook.

“Since the referendum was called, UK households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU.

• Financial markets, particularly sterling, marked down the UK’s relative prospects quickly and sharply.
• Households looked through Brexit-related uncertainties initially. But more recently, as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes, they have cut back on spending, slowing the economy.
• Businesses have been somewhere in between. But since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment.”

To see the full speech Click Here

The official MPC summary reported:

“The MPC’s overall assessment of the outlook for inflation and activity in the August Inflation Report is broadly similar to that in May.  In the MPC’s central forecast, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption.  Growth then picks up to just above its reduced potential rate over the balance of the forecast period.  Net trade and business investment firm up, and consumption growth recovers in line with modestly rising household incomes.  Net trade is bolstered by strong global growth and the past depreciation of sterling.  The combination of high rates of profitability, especially in the export sector, the low cost of capital and limited spare capacity supports investment by UK firms over the forecast period, offsetting the effect of continued uncertainties around Brexit.

CPI inflation rose to 2.6% in June from 2.3% in March, as expected.  The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices.  Conditional on the current market yield curve, inflation is projected to remain above the MPC’s target throughout the forecast period.  This overshoot reflects entirely the effects of the referendum-related falls in sterling.  As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period.  As slack is absorbed, wage growth is projected to recover.  In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt.  Consequently, inflation remains at a level slightly above the 2% target.”

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Mixed Partnerships For Tax Planning Purposes

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A mixed partnership is where you form a Limited Company to manage your properties and make that company a partner in your business.

This structure is particularly useful for people who manage their own properties and where the viability of full incorporation is questionable.

One of the main reasons for making the management company partner is to remove any suggestion from HMRC that you wouldn’t qualify for incorporation relief at a later date on the basis. If the company isn’t a partner HMRC might say that you don’t qualify for incorporation relief because you are not incorporating the ‘whole business’. They might also say you are not a business but rather passive investors on the basis that management is dealt with outside the partnership.

In a mixed partnership for rental property purposes the company partner can charge up to 15% of gross rental income for performing its management activity without falling foul of HMRC’s alienation of income rules. This would reduce your personal income and hence the tax you might otherwise pay at the higher or additional rates of personal taxation.

The company would pay tax on its profits at the 19% corporation tax rate (scheduled to reduce to 18% next year and 17% the year after). This is far lower than your personal tax rate as higher rate tax-payer. You would also be able to utilise your annual tax-free dividend allowance (currently £5,000 each) to draw money from the company if you need it. Any further profits in the company could be retained for further investment into the business and the company could also be utilised for further rental property acquisitions. Remember that companies are not affected by the restrictions on finance cost relief.

As you would not be transferring the legal ownership of any properties there would be no tax to pay and you wouldn’t be disturbing any of your existing mortgage arrangements.

Mark Smith at Cotswold Barristers can deal with the partnership agreement and all legal documentation relating to incorporation of the company partner and formation of the partnership in accordance with the above for a very reasonable price. Before you rush to contact him for a quote though we strongly recommend that you complete a tax consultation with Property118 to ensure this is the optimal tax planning strategy for you to consider.

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If the mixed partnership strategy is the right one for you then you will want to keep professional fees to an absolute minimum. There are a number of tasks you could deal with yourself in regards to formalising a mixed partnership structure. I have split these tasks into three categories of Compulsory, Strongly Recommended and Recommended.

COMPULSORY TASKS

• complete and file form SA400 with HMRC. This is an application to formally register your partnership. You will need a business trading name. Please see the link below.

https://www.gov.uk/government/publications/self-assessment-register-a-partnership-for-self-assessment-sa400

• To officially appoint individual partners and register that fact with HMRC a form SA401 will need to be completed and filed for each partner. Please see the link below.

https://www.gov.uk/government/publications/self-assessment-register-a-partner-for-self-assessment-and-class-2-nics-sa401

Whilst the form mentions paying Class Two National Insurance contributions, payment of National Insurance by landlords is entirely optional. The legislation in this regard is linked below.

https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim23800

There is also a very good write-up on the Tax Faculty website of the Institute of Chartered Accountants England & Wales which I have linked to below.

https://ion.icaew.com/taxfaculty/b/weblog/posts/propertylettingandnationalinsurance

• To officially appoint the company partner and register that fact with HMRC a form SA402 will need to be completed and filed. Please see the link below.

https://www.gov.uk/government/publications/self-assessment-register-a-partner-for-self-assessment-if-theyre-not-an-individual-sa402

• Once you receive confirmation from HMRC that your application to register a partnership with HMRC has been approved you will receive a letter from them with a UTR (Unique Tax Reference) number for the partnership.
• The partnership will need to file an annual SA800 partnership tax return – see link below.

https://www.gov.uk/government/publications/self-assessment-partnership-tax-return-sa800

STRONGLY RECOMMENDED

• As soon as HMRC approve your application and provide a partnership UTR you really ought to open a business bank account in the trading name of the business and ensure that all of the business transactions of the partnership are run through that account, e.g. rent collection, mortgages and insurance payments etc. Santander are offering free business banking at the moment. All business related income and expenses should be transferred to the new business bank account as soon as possible.

RECOMMENDED

• A business website
• Business stationery including letterhead and business cards
• A business email account
• A business telephone number
• Appoint a chartered accountant who is familiar with property partnership accounting..

All of the above are helpful if/when you reach a point whereby incorporation is viable. This is because you will then need to convince HMRC that you are indeed running a business which is entitled to claim incorporation relief, as opposed to curating an investment portfolio which does not qualify for the relief.

One of the reasons for making the management company partner is to remove any suggestion from HMRC that you wouldn’t qualify for incorporation relief on the basis of not incorporating the ‘whole business’ or that you are not a business but rather passive investors on the basis that management is dealt with outside the partnership.

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Shawbrook Bank MD Discusses Restrictions On Finance Cost Relief

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In this 97 second video, Shawbrook Bank Managing Director Stephen Johnson discusses buy-to-let tax changes and their potential impact.

His key message is that if you do nothing your cashflow could be particularly hard hit, particularly if you have a large highly geared portfolio.

You can watch this short video below.

Clearly the banks are now taking this seriously and are also adjusting their lending criteria accordingly. We are hopeful that the banks will openly explain, in more simle videos like this one, how and why their lending criteria and mortgage pricing is likely to swing in favour of Limited Company lending in the coming months and years.

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Fire Safety Guidance – changes needed after Grenfell

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The Residential Landlord’s Association (RLA) is warning that existing guidance for landlords on fire safety is “contradictory and outdated” and needs updating to better support good landlords.

At the present time, landlords are expected to follow fire safety guidance issued by LACORS, a body that no longer exists. These fire safety regulations date back to 2005 along with building regulations guidance issued in 2006.

The RLA argues that there is also “contradictory guidance” published in 2006, which covers the Housing, Health and Safety Rating System (HHSRS), used by councils to assess risks in dwellings. For example, the RLA claims, HHSRS guidance suggests a higher standard for detectors and alarms than the existing smoke detector regulations.

The RLA is calling also for a “clear agreement in England and across the devolved administrations” to ensure better enforcement and implementation of the responsibilities of councils and fire services of fire safety standards in communal areas in blocks of flats. The RLA says it “believes that there are too many inconsistencies in approaches from local authorities across the country.”

RLA Vice Chairman, Douglas Haig, said:

“Whilst establishing the cause of the devastating fire at Grenfell Tower is of paramount importance we must not, in the meantime, delay a full review of fire safety standards applying to all housing tenures, including the private rented sector.

“This means updating guidance for landlords which at present fails to reflect the realities of modern day technology and building design. This patchwork quilt of guidance is too easy to exploit for the small minority of landlords who have no place in the sector and gives unclear and inconsistent advice to landlords who wish to comply and ensure that their tenants are safe.

“We need also to ensure better and more consistent enforcement of the regulations. Tenants in any part of the country are entitled to have confidence that the approach taken by fire and local authorities is consistent and offers them the same protection regardless of tenancy type.”

The RLA represents over 50,000 private sector residential landlords in England and Wales.

• The LACORS guidance can be accessed here
• The Regulatory Reform (Fire Safety) Order 2005 is available here
• Building regulation guidance covering fire safety can be accessed here
• The Housing Health and Safety Rating System guidance is available here

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