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.
- 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.
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.
- 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
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.
Show Tax Consultation Booking Form
Show Tax Consultation Booking Form
Show Tax Consultation Booking Form
Show Tax Consultation Booking Form
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Fire Safety Guidance – changes needed after Grenfell
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
©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Fire Safety Guidance – changes needed after Grenfell | LandlordZONE.
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4 things Manchester’s student HMO landlords should do this summer
Summer is here and for many landlords, our student properties may be sitting empty until September! With Fallowfield and Rusholme house prices on the up, we’re looking at how can you keep your property ahead of the trend this summer!
The yearly migration of students leaving South Manchester and Salford has started and the majority won’t be back until September. In family cars packed to the brim, they’ll wave a teary farewell to their friends before posting a heartfelt “goodbye 11 Croke Close” Facebook post. But the job for you, the landlord of 11 Croke Close, is not quite done in the ever demanding world of the student HMO market.
As with many student heavy areas, the M14 postcode of Fallowfield, Rusholme and Victoria Park is positively booming, with property value up at +1.54%, where the average price for a 4 bed house is £243,000, and the average asking rent for a similar property is £1,324 pcm (Zoopla). Depending on quality and location of the property, that’s roughly an average rent of £80 per room, per week (Min. £60 – Max £120). How can you make the best of this situation?
- Security over the summer
As with many large metropolises, Mancunians have had to accept that a higher crime rate is all part of the urban package. Without sounding sensationalist, this summer you should reassess your property’s security as now is the time that criminals begin to take notice of empty properties.
As you can see from the graph, the rate of burglaries in the Fallowfield and Rusholme area starts an upward trend from July, so now is the time to start reviewing your security measures. Many criminals know that students move back home over summer whilst leaving their belongings in their student house, this means that your property which is full of white goods and student belongings could be a prime target!
The smart solution
The most obvious is keep an eye on your property. This could be a weekly check for any tell tale markings on the walls or doors of the property; a particular tactic burglars employ to identify targets. Ideally, the best way to keep burglars away is to have evidence that someone lives there. This someone may be a student or two staying on over summer, or, failing that, lights on a timer. Depending on your budget, it may be worth installing an alarm system. Nowadays, home security systems have become so sophisticated that you can operate them from a smartphone; there’ll be no need to drive out to cancel a false alarm! CCTV may be a step too far if you have live-in tenants, but faux-cameras can deter any interest.
- Recycling
This is another nuisance for locals and landlords alike. Quite often, with students checking out at different times and frantically cleaning, unwanted items get dumped for the landlord to clear up. As annoying as it may be, Manchester students and the universities have taken note and run initiatives to clean up the streets and ensure waste is disposed of correctly. The Give It Don’t Bin It scheme was hugely successful last year, with donations to the British Heart Foundation totalling £230,723 and the non perishable food donations providing 2000 meals for the food bank.
The smart solution
If you are left with recyclable or reusable items, donating them to the British Heart Foundation can go a long way. It may also be worth providing information for future tenants, or visiting them shortly before check out so that you and they know how you expect the property to be left.
- Maintenance
Now is the time to get into the property and sort out any minor issues (major issues will hopefully have been sorted when and where they happen!).
The smart solution
- For tough to remove blue or white tack stains, try using a magic sponge.
- For any white or black damp stains, check out this video
- For any cracks in wooden surfaces, try using a good wood filler and a sanded and varnished finish.
- For carpet stains, try using a highly effective Rug Doctor.
- Gardening
There’s nothing worse for the time poor landlord to discover a completely overgrown garden come September. To keep the lawn in good shape you’ll have to mow fortnightly for great results come marketing and photo opportunities.
The smart solution
We’d all love a cheap and easy fix to a minimal effort garden but, as time consuming as popping over every two weeks may be, remember that a well kept lawn communicates to prospective tenants that you care and put effort into your property. Another solution to a more manageable garden might be a gravel grounding and potted plants. Over the non live-in months of the summer, gravel can be covered by a heavy sheet to keep weeds at bay, whilst potted plants will contain themselves to their pots. A good rosemary bush, or strawberry plant wouldn’t go amiss.
Smart property are a student and professional HMO property management and investment company. They offer their services across Manchester, Salford, Sheffield, Leicester and Nottingham.
As well as their property management services, they offer a long term rent guarantee programme that Property 118 founder Mark Alexander found ‘so impressive’ he decided to invest in the company himself. Andy welcomes private landlords, developers and investors to talk to him and his team about property management, guaranteed rent, investment opportunities and block management contracts.
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What Documents do I need when letting a property?
Lettings Document Checklist:
When setting up a new Assured Shorthold Tenancy (AST) it has always been important to pay attention to the paperwork, which provides vital evidence should there be a dispute during or after the tenancy.
But since the Deregulation Act 2015, with measures that came into force for new ASTs from 1st of October 2015, and for all ASTs from 1st October 2018, including existing tenancies, it became a whole lot more important, and a whole lot more onerous on landlord’s and agent’s admiration systems, to find the time to have comprehensive documentation.
Without evidence, (1) it is likely you won’t be able to serve a valid section 21 notice, the two-month no fault notice informing the tenant that you will be applying to the court for a possession order if they don’t vacate at the expiry of the notice, and (2) you are unlikely to be successful in your court possession claim.
What is the Paperwork you need?
Here is our recommend 20 Point Document Checklist:
1. A documented Risk Assessment, Fire Safety, Furniture, Appliances, Legionella.
2. Tenancy Agreement – your tenancy agreements should be up-to-date taking into account the latest changes in the law.
3. Telephone & Interview Checklist – used to take details during initial enquiries.
4. Tenancy Application Form – the most important document after the Tenancy Agreement – gives all the background information you should have on every adult tenant in your property.
5. Tenant Credit Checks & References – a report from a reputable referencing agency – www.tenantverify.co.uk
6. Right to Rent Check – copies of ID documents, passports, driver’s licences, visas, home office letters etc.
7. Check-in / Check-out Checklist – itemised list and checklist so that nothing is missed out when checking a tenant in and out.
8. Inventory, including all meter readings, keys etc.
9. Deposit Protection Details and s213 notice – the deposit protected within 30 days and the notice served and receipted obtained.
10. Letters to all utility providers – informing the utility providers in writing or online of tenancy change overs.
11. Tenant’s Information Pack, Instructions – copies provided to every tenant.
12. EPC – a ten year certificate which must be in place first when marketing a property to let or for sale.
13. Gas Safety Certificate – annual Gas Check carried out by a Gas Safe registered engineer and a copy issued to the tenant.
14. Government’s “How to Rent” Guide must be issued to tenants at the commencement of every new tenancy.
15. Electrical Safety Certificate (not compulsory in England as yet but recommended every 5 years)
16. Rent Book if rent is paid weekly.
17. Regular Inspection reports – landlord’s insurance policies usually specify that regular inspections are carried out.
18. Licensing Details – if the property comes under any of the local authority licensing schemes.
19. Tenant’s Journal – keep a journal for every tenancy which records every contact and tenancy event for use as evidence in the future.
20. Tenant’s File – keep a file for every tenancy / property which contains all of these documents.
• Make sure you have a good comprehensive landlord’s insurance policy in place from a reputable supplier – see: www.landlordzone.co.uk/directory/suppliers-directory/insurance
• Make sure you keep proper accounts to record all your Income and Expenses from every property you own.
Seems a whole lot to think about and quite a bit of work, but if you want things to go smoothly, and just in case there’s a problem where unfortunately you need to evict, landlords and agents now need to arm themselves with this sort of documentary evidence.
See the LandlordZONE® documents’ section for all documents cited above: www.landlordzone.co.uk/documents
©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – What Documents do I need when letting a property? | LandlordZONE.
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High Net Worth loans for people with capital tied up in assets
The Financial Conduct Authority (FCA) defines a high net worth individual as someone with an annual net income of no less than £300,000 or with net assets of no less than £3,000,000. These net assets can include residential property and, consequently, there are many people who may be considered as high net worth on paper, but who find it difficult to access their capital wealth.
Second charge loans up to 80% loan to value can now provided for any purpose to customers who qualify as high net worth, enabling them to access this capital.
Loans are available with terms of 1 year to 5 years, with no maximum age and maximum loan sizes of around £10 million. As cases are individually underwritten, a flexible approach to income is taken and expats, foreign nationals and non-domiciles can be considered
Importantly, loans provide customers with the choice to roll up some or all interest for payment on redemption of the loan, and this can provide an important way of managing cashflow for individuals whose wealth is locked up with their assets.
It’s not just individuals who meet the high net worth definition through their asset wealth who can benefit from this approach. A sum of £150,000 was advanced to a customer who qualified for high net worth status through a significant net income of nearly £500,000 a year.
This individual lived in a property worth £1.5 million, with an outstanding first charge mortgage of just over £750,000 and wanted to borrow the money to pay a tax bill. They were able to provide a credible strategy regarding repayment of the loan, and so the lender advanced the loan on a two year term, with interest rolled up and payable at the end of the term. This helped the customer to raise a large sum to pay a tax bill whilst also managing their cashflow.
If you are interested in releasing equity from residential property to with a high net worth loan, please complete the contact form below and we will be happy to help.
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Reader’s letter to IDS “Once I got started I just couldn’t stop”
Dear Mr Duncan Smith,
Thank you for your reasoned comments in the Sunday Telegraph on 18th June regarding the treatment of private landlords by the current government. I apologise for the length of this correspondence, however, the changes affecting landlords is so broad-ranging and complicated, I haven’t been able to condense it any further.
The instigation of a retrospective tax on mortgages already taken out and only applicable to encumbered landlords (exempting limited companies both foreign & national, housing associations, holiday lets, B&Bs and hotels) is already negatively impacting the Private Rented Sector. Many landlords are planning to increase rents, incorporate their property business to reduce the tax impact, or turning appropriate homes into serviced accommodation, taking them out of the residential rental market altogether.
To disallow finance costs as a legitimate expense for landlords, but no other category of business, is unjustifiable and unreasonable. As you know, it is standard accounting practise that one pays tax on the profit of a business ie income minus expenses. Private landlords will be the ONLY business sector in the UK which cannot deduct legitimate business expenses against their tax liability. Some landlords will face an effective tax in excess of 100% and will have no choice but to raise rents or sell up, increasing the demand on councils for social housing.
We currently pay tax on our profits and the mortgage lenders pay tax on the interest they receive from us so in effect, this is double taxation.
Is the Government aware that in every major European country, landlords are entitled to full tax relief on mortgage interest (listed in an LSE study) and many of these countries are reputed to have a better-functioning PRS than ours, and without landlord licensing. In Germany, landlords may also sell a property entirely free of CGT after 10 years.
By the Treasury’s own calculations, approximately 400,000 landlords will be affected but it has confirmed that it has no idea of how many properties and therefore tenants, will be affected. If each landlord only has 1.5 properties, housing 2.5 tenants in each, this will potentially impact 1.5 million tenants – a consequence that the government and Treasury continue to ignore. Some estimates are even higher at 2m – 4.6 million tenants. If David Miles is correct and landlords will be forced to raise rents by 20-30% to cover the tax implications of Section 24, how will those Just About Managing afford this? According to research by the anti-landlord organisation Shelter, more than a million households living in private rented accommodation are at risk of becoming homeless by 2020 because of rising rents, benefit freezes and a lack of social housing.
The government arguments that ‘the relief reduction being phased in over 4 years means landlords will have time to adjust their business’. This is not necessarily the case for many who are tied into mortgages of 5, 7 or 10 years, most of them with early redemption penalties. And what of those who are in negative equity?
The Bank of England was concerned about the potential problems in the housing market, but if 25% of landlords sell up and flood the market with tens of thousands of properties, would the resulting price crash not also be a concern?
Twice Ireland introduced a Buy to Let tax and both times it had to be repealed after it caused rents to increase by 50% in 3 years, and homelessness soared. Their tax only applied to new BTL purchases so did not affect existing landlords. I would like to know why the Treasury thinks that an even more draconian tax, levelled retroactively, will not produce the same (or worse) result here?
How can the Government say they are committed to improving home ownership and reducing rents while simultaneously introducing a tax that will only result in higher rental costs, and therefore making it harder for people to save for a deposit?
Tenants are facing significant rent rises and the changes to Universal Credit is making it more difficult for them to secure a rental property. Tenants on housing benefits are already being evicted as they cannot pay the increased rent. Landlords are exiting the market thereby reducing the availability of property to rent.
Working Example from The Telegraph:
Landlord pays 40% tax.
Landlord’s BTL earns £20,000 a year and the interest-only mortgage costs £13,000. Tax is due on the profit. You pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
From 2020 tax is due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
You pay 40% tax on £20,000 (£8,000), less the 20% credit (20% of £13,000 = £2,600).
HMRC gets £5,400 and you get £1,600. Your tax bill has gone up by 93%.
This is a very reasonable scenario for a London landlord with just one property.
£20,000 income a year equates to £1,666pcm rent (Londonpropertywatch.co.uk states average price for 3 bedroom house in SW16 is £1,744pcm. £2,257 average 3 bed house in SW2 according to Zoopla).
£13,000 interest payment could be on one property with a mortgage of £350,000 paying an interest-only mortgage at 3.71% on a property valued at £466,000 (below the London average of £563,715 or £580,625 on Zoopla for SW2).
If mortgage interest payments go up by 1% by 2020 that would cost £16,485pa in interest and the landlord will pay HMRC £5,400 on a loss of £3,485.
So is this really only affecting the wealthy BTL landlords?
Recent changes that negatively impact the PRS:
- S24 Restriction of Mortgage Interest Relief pushing thousands of people into higher tax brackets as well as losing benefits such as Child Support.
- The end of the Wear & Tear Allowance of 10%, now only able to replace items, even though the property suffers wear and tear.
- Introduction of Right to Rent checks making landlords substitutes for the UK Border Force. Failure to comply incurs a fine of £3,000 and possible prison sentence. Landlords are not trained in spotting forged documents and the by-product of Right to Rent checks is unintentional discrimination, “when in doubt, don’t” (rent to foreigners). Those without passports are being turned away from properties. Is it working? Just 31 people have been deported in the first year with only £30k taken in civil penalties.
- Landlord licensing being phased in across much of the country. Fees between £600 – £850. Newham is introducing 2 new schemes making it compulsory for ALL PRS to have a Gavin Barwell said about Croydon Council’s Landlord Licensing Scheme in 2014 “It doesn’t take a genius to work out what will happen if this scheme goes ahead: landlords who make the payment will simply pass the cost on to their tenants. Lest I be accused of scaremongering, the Council admits this, though the admission is buried 19 pages into its report ‘tenants may be impacted by an increase in their housing costs as landlords seek to pass on some or all of the costs of licensing through higher rent levels’.
- Letting fees ban. Landlords will have to pay these and the cost will need to be passed on in higher rents. ARLA Propertymark expect rents to rise by up to £103 a year.
- Energy Efficiency Regs: Fines of up to £4,000 if a rented property is rated E or below, but no government assistance for those who need to invest to bring properties above this threshold
- Tightening of S21 eviction notice procedures. It takes an average of 45 weeks to get a tenant removed from a property, even if they have breached the tenancy agreement or not paid rent and the landlord is fully compliant. There is no law to force tenants to pay their rent but if we don’t pay our mortgage, we lose our house.
- Compulsory Tenancy Deposit Schemes. It is now law that if we submit a deposit a day late it could cost us three times the monthly rent in a fine.
- Stricter BTL lending regulations: The new rules require landlords to bring in higher levels of rent relative to their mortgage costs, making finding a home nearly impossible for Housing Benefit tenants. Furthermore, landlords with four or more properties will face additional stress testing from September 2017.
- 3% SDLT surcharge on all second properties. Buying a £200,000 home would now cost £7,500 in stamp duty, compared to just £1,500 before the changes. A £400,000 property will now add £22,000 to the price, instead of £10,000.
- Universal Credit changes and will be paid direct to the tenant, monthly, and often up to 8 weeks later than needed, forcing many into arrears. The council don’t have this system for their tenants so their finances are more secure. Housing benefit reduced to 30th percentile. Housing benefits capped/frozen.
- Rent Repayment Orders where landlords can be forced to repay up to 12 months’ rent back to a tenant.
- Court fees increased so it’s more expensive for a landlord to evict rogue tenants
- Making Tax Digital means producing 5 tax returns per property per year – and the government/Treasury thinks we’re not running a business!
- Rogue landlord database: While I accept there are some rogue landlords out there, most individual landlords have a good relationship with their tenants, treat them well and fairly and abide by the laws and codes of practice.
- There is also discussion of forcing landlords into longer tenancies, yet in many cases, it is not the landlord limiting the length, but the mortgage companies.
- Furthermore, there has been talk of minimum bedroom sizes for rent. This country has a huge proportion of Victorian and Edwardian houses with box rooms, many of them owned by landlords. On a search of 63 London properties with a third bedroom, 41 out of 63 would fail the proposed 6.5m2 minimum (average is 6.0m2). What would happen to the families in those homes, or the landlords who bought 3 or 4 bedroom properties who may find themselves paying a mortgage on the value of a 3 or 4 bedroom house, but only allowed to rent 2 or 3 rooms?
Not a level playing field:
The Treasury Minister, Mel Stride MP, recently confirmed that landlords are taxed more than homeowners, noting that they pay tax on their rental income, extra Stamp Duty and Capital Gains Tax, unlike home owners, killing off assertions made by the former Chancellor, George Osborne, that tax rises on private landlords were about levelling the playing field with home owners.
To argue that S24 was to support first time buyers is disingenuous. The PRS don’t generally compete against FTB as we tend to buy slightly larger properties, create new residences through converting pubs and offices, and refurbishing ones that are in poor condition to bring them back into use.
Buy to Let mortgage are commercial loans, not personal. They are not regulated or protected by the FCA. The mortgage company dictates the terms of the mortgage including who can live in the property, how many, what types of tenants are permitted and under what conditions. BTL mortgages are more expensive than residential mortgages.
When the Chancellor compared landlords with owner-occupiers, he ignored that fact that for us it’s a business, not a residence. Corporate landlords and housing associations provide the same service we do, yet they are permitted to deduct their finance costs.
The government appears quite happy to create an unlevel playing field with initiatives such as Help to Buy schemes.
VAT can be reclaimed on goods and services in connection with the construction of a new dwelling when it is intended for owner occupation, but not when it is constructed to rent out.
The police do not view malicious damage to a rented property as criminal, they claim it is a civil matter, and will not prosecute the perpetrators, whereas they would prosecute for damage to an owner-occupied address. The Criminal Damage Act is very clear on the first page that any deliberate damage is criminal even if it is by you to your own property.
“PRS provides sub-standard housing”:
Councils and registered social landlords are exempt from the health & safety regulations and licensing that apply to PRS landlords. The bedroom tax doesn’t apply to council houses, nor electrical certificates, hard-wired smoke/fire alarms, nor tenant packs etc, and yet council houses have taxpayer-subsidised rents. Why is it not a level playing field where regulations apply to all residential landlords regardless of their structure? Legislation should amended to remove this exemption forthwith.
Rented homes should be far safer than owner-occupied houses because landlords are obliged to provide lots of safety features that home owners aren’t. For instance, landlords must have gas appliances and flues tested at least once every 12 months and the tenant must be given a copy of the gas safety record to prove this has been done. Tenants must be provided with the EPC cert, How to Rent booklet and even appliance manuals by law in addition to Legionella Risk Assessments. All furniture and soft furnishings in rental properties must be fire retardant and landlords must provide working smoke alarms on every floor and a CO monitor, and make sure they are tested regularly. HMOs have even more onerous regulations to comply with. No home owners are required to do these.
Landlords are already legally obliged to provide safe, secure, hygienic accommodation — and if they don’t, councils have the powers to prosecute them. Punitive measures are in place against landlords. Councils like Durham prosecuted a landlord because she omitted to get a reference for a tenant.
A circular argument:
If the government wants more FTB to be able to afford to buy their own homes, with the need to raise rents to cover the new tax regime, it will take them even longer to save for a deposit.
Even if owner-occupiers buy a BTL property form a landlord forced to sell, it worsens the housing crisis as it removes that property from the rented sector, therefore rents go up more and people are forced into worse accommodations if they can’t afford a higher rent.
Shelter and other organisations have sometimes tried to blame landlords for homelessness, citing as evidence statistics about how the end of a private tenancy is the most common cause of homelessness. This is only because landlords are providing housing in the first place! However, research carried out by Simple Landlords Insurance found that Ministry of Justice figures reveal over half of repossessions in the first quarter of 2016 were in the social housing sector (57%), while just 15% of claims took place in privately rented homes. Also, the English Housing Survey found that 78% of tenants reported their last tenancy ended because they wanted to move. Only 1% of tenants said their landlord terminated their last tenancy.
A redistribution of current homes adds nothing to the housing stock. If landlords are forced into selling their portfolio, it doesn’t make more stock available. If individual landlords are forced to sell properties are likely to be bought by corporate landlords who have the finances available but are driven by the bottom line, not human or humanitarian instincts.
When the government released pension pots recently, a lot of people used them to invest in BTL, this potential infinite tax could wipe out people’s pensions or make them bankrupt, so what will happen when they need to retire? Will they be housed by their council? If so, where will the council find the stock?
The reduction of investor demand also reduces supply of ALL housing. If developers don’t have an investor income stream, they will build fewer properties and that means fewer homes, for everyone, including First time buyers and affordable homes created by larger developments.
PRS operating in a skewed industry:
Councils, Shelter & CAB have all been advising tenants to stay in properties until the bailiffs arrive which is illegal*, and incorrect. A council is not allowed to advise a tenant to stay in a property if they have breached the tenancy agreement. Councils argue that they can only re-house people when the tenant is homeless or threatened with homelessness. If the tenant has been issued with an eviction notice due to non-payment of rent or a breach, they have effectively made themselves homeless and are therefore not entitled to council accommodation, regardless of whether the bailiffs are called.
The government is introducing a national database of “rogue landlords and letting agents”. At present there is no central database for tenants where possession orders with money claims are registered, as the courts do not recognise possession claims with arrears as a County Court Judgement. If they did, this information would show up on tenant referencing. As it stands, a rogue tenant can move from property to property running up rent arrears and it does not show up on referencing unless the landlord goes to additional expense of trying to enforce the money order.
PRS Landlords are not money-grabbing fiends:
A new report from the National Audit Office has revealed that private sector rents have increased modestly, in line with earnings across England. But whilst the cost of renting in the private sector has largely followed changes in earnings, the figures show that rents in the social sector have increased faster than wages. The exception to this is in London, where rents are rising much faster as a consequence of the supply-demand imbalance in the capital.
These findings will surprise those who have falsely sought to argue that landlords are profiteering. So now the question is: why is the heavily subsidised social rented sector seeing its rents rising so much more than earnings?
According to Kent Reliance research, in the Capital the average cost, excluding mortgage costs and tax but including void periods, is £6,535 per property per year or 32% of the amount landlords receive in rent.
According to tax returns, two thirds of landlords equating to 1.9m people are Basic Rate tax payers and only 4% are Additional Rate tax payers so we are hardly “wealthy”.
When social housing was sold off under Right to Buy, it was not landlords who got the massive discounts, but social tenants, who often went on to sell these properties for massive, CGT-free profit.
My mortgage contract states that I must have a RICS surveyor value the rental potential of my property every year and we must raise the rent to the maximum the market can bear. I have fought this clause and have had a partial victory in that the lender will change this in future contracts but it still stands for existing borrowers like us!
Capping Deposits at one month (proposed):
Following the downturn, lenders were rapped for not managing risk properly. It’s surprising, therefore, that the same attitude isn’t taken towards landlords. Like all businesses, landlords price for risk. Higher deposits are a way for landlords to mitigate risk, which then influences the decision to let and the rent charged. If we cannot use our own judgement as to the reasonable amount of deposit to be held, rents will inevitably increase to compensate, or we will need to take more rent in advance. Other options to minimise our exposure to non-payment of rent or damage to our property might include making tenants take out insurance to cover their damage and to take out rent guarantee insurance, at a cost, if they can get it, but those who are most vulnerable are the least likely to pass referencing.
What about landlords who allow tenants with pets, as they take additional deposits to cover pet damage – will they ban pets? Research by Dogs Trust says 78% of tenants with pets have trouble finding a property to rent. The RSPCA and Cats Protection have voiced their concerns about removing private tenants’ flexibility to provide a higher deposit to cover the likes of pet damage.
Furthermore, some landlords take a higher deposit from tenants who have a poor credit history and they have been grateful for the opportunity to rent when others have turned them down.
It is estimated that around 40 per cent of deposits exceed one month’s rent. While capping them may reduce the move-in costs for some, it will increase the temptation for others to view the deposit as the last month’s rent, leaving landlords out of pocket at the end of the tenancy if, for example, the property has been damaged.
Deposits mean the tenants are invested in maintaining the property. If no damage, tenant gets full deposit refunded and the money is protected by DPS. There is mandatory arbitration for disputes at the end of the tenancy.
If landlords are unable to protect themselves by charging a higher deposit for tenants deemed high risk, they will stop letting to these tenants. They are not obligated to take on tenants with pets, for example, and, if there’s a risk that can’t be mitigated with a higher deposit thanks to new government rules, they’ll just stop letting to them altogether.
The PRS Is the solution, not the problem:
Shelter revealed in 2015 that a third of councils in England had not replaced a single home sold through the Right to Buy scheme since 2012, and in March this year it was revealed councils have been forced to pay more than £800m from Right to Buy sales to the Treasury over the past five years – money that could have been used to build more than 12,000 additional council properties.
From 1980 to 2013, 1.869 million council homes have been sold off (at a discount!) and replaced with only 1 for every 8 sold or even every 10 sold, depending which statistic you use. This has always been untenable. At least if Right to Buy schemes were scrapped now, councils could maintain the stocks they have, thus preventing the situation from further deteriorating.
Landlords have a strong track record of providing accommodation, being responsible for the creation of 2.5 million homes between the 1996 and 2013, which was 83% of the increase in dwellings over that period in England alone.
Private landlords often bring properties back into use, upgrade existing properties or extend the potential number of residents of a property, thus easing some of the housing crisis. If 100,000 landlords create one new property per year, this would be almost 50% of the government’s goal for additional housing per annum. Big build-to-rent developments take years to design, plan, implement infrastructure and build, and only supply a fraction of this number of accommodation per year. Bovis, for example, has a target of building 6,000 new houses a year.
If the responsibility for building houses is transferred into the corporate sector, profit becomes a driving force. Flooding an area with lots of new homes puts downward pressure on prices, which means builders and developers make less money per home so there is no incentive for big builders to create large numbers of homes.
According to the Treasury, there have been 45,000 affordable homes added to UK housing stock per year since 2010 which is nowhere near enough to alleviate the strain on those trying to find affordable homes to either rent or buy. The PRS has already provided three times this amount of new housing stock to the market.
Other Options:
Blaming and taxing BTL landlords is neither a long term nor short term solution to our housing crisis. The only real solution is to provide more housing, to which the PRS already contributes significantly. Would it not be more sensible for councils to joint venture with the PRS to bring buildings (back) into use in return for a set period of discounted rent to provide a low cost housing solution for councils?
If the government’s aim is really to get FTBs onto the property ladder, where the issue for them is raising the capital for the purchase and deposit, surely the simplest, fastest solution would be to cut or abolish SDLT for FTBs? On an average price 2 bedroom property in SW2 at £563,715 (Rightmove) this would save them £18,186 in up-front costs, surely much more effective than Help to Buy ISAs or FTB Guarantees?
Repeal the discriminatory s24 and the 8% CGT levy to encourage more PRS landlords to provide homes.
A thorough review should be held on the restrictions that mortgage companies place on landlords, such as preventing properties from being rented to LHA tenants, as HMOs, or stipulating the rents must be raised to the maximum amount supported by market conditions every year.
New builds pay a reduced level of VAT. If this were extended to those bringing disused properties back into the residential sector (whether for rent or sale) it would encourage smaller builders/developers to reinstate neglected housing stock, or create new stock. These properties would be un-mortgagable in their original condition so would create new stock that would otherwise not be available. The reduced tax take would be compensated by the increased activity in the market.
Curb or review council licensing of the PRS. Many landlords, especially in the north, only make about £100pm profit but have to pay in the region of £600-£800 for a license for each property. The license is justified as a way to ensure landlords are operating within regulations, so as a minimum, licenses should be per landlord, not per property.
Encourage or persuade mortgage companies to lend on non-standard constructions so that houses can be built more quickly using pre-fabs or steel frames, thus shortening the build timescale and costs dramatically.
Enable Universal Credit payments to be paid direct to landlords/agents so that landlords can ensure prompt, regular payments. And speed up the payments to UC recipients so that it no longer takes 8 weeks where they have to chose to pay their bills or eat.
SpareRoom, provided some research data which suggests that there are 20 million empty bedrooms in the UK and if just 5% were of them were rented out, there would not be a housing crisis. Perhaps there is room for the government to re-visit the tax free allowance of renting a room in a home to be per room, rather than per property.
Stop Right to Buy and keep social housing for those in need of social housing.
Where authorities claim they do not have funds to retro fit sprinkler systems and other Health & Safety measures, they could sell their properties at discounted prices to the PRS with stipulations to ensure full compliance with Fire regulations etc. And perhaps also agree a rent-back scheme.
Revisit the 3% SDLT surcharge for BTL which is stifling new purchases. For us to provide a home to a family it cost £21,600 in SDLT on top of all other costs.
Let councils keep the fines they get from breaches in Landlord Licensing to use to improve housing in their areas as currently it goes to the state which does not provide the council with an incentive to pursue rogue landlords through the courts. There will need to be protection/arbitration for landlords so that this doesn’t become a revenue-stream for councils.
Cap tenant fees, don’t ban them. Improve enforcement of letting agents having transparent fee structures.
Introduce a (mandatory) national register that identifies tenants with a history of non-payment of rent, vandalism and anti-social behaviour so we can avoid the nightmare situation of having a tenant who won’t pay or won’t leave.
Encourage and promote (or create a national) Tenant Reference Passport whereby they can get references done once, and use these for a duration of say 3 months, while looking for a home. This would mean they don’t have to pay for referencing for each property they try to get. (There are a few referencing companies already doing this).
Provide relief or incentives for landlords who bring their properties above the EPC rating of E, perhaps with VAT rebates for materials.
Improve the eviction process for tenants in breach of their agreements so that the process is streamlined and more efficient.
Some facts & figures:
- In 2015/16, the PRS accounted for 4.5 million households (20%).
- The social rented sector accounted for 3.9 million households (17%).
- According to the English Housing survey, a staggering 83% of new dwellings is due to the PRS.
- Average private tenancies are up to 4.3 years and around two thirds of tenants in the PRS have been in their existing property for more than three years and half for five or more years.
- According to new research from Saga Home Insurance in a poll of UK adults, 77% of tenants rated their current landlord as good or excellent, with just 8% giving a poor rating.
- A quarter of landlords are either selling or have sold property as a result of extra taxes being levied on the private rented sector. This could put 375,000 people out of their homes.
- RLA research has found that just 19% of landlords plan to invest in new property over the next year, with 58% considering reducing further investment in their rental properties due to recent tax increases.
- Kent Reliance found 19% of landlords now expect to reduce their portfolios in response to the new tax rules affecting higher rate taxpayers.
- According to Paragon Mortgage research, 11% of landlords reported having set up limited companies for their properties in Q2 2017. Other commonly reported actions taken by landlords in Q2 were to increase rent (20% of landlords), sell property and buy no more (20%), repay some or all of the mortgage (18%).
- RLA’s survey of over 800 landlords found that 56% of landlords faced having to increase rents over the next 12 months to cope with the tax changes.
- Due to the Prudential Regulation Authority’s new underwriting standards, a quarter of landlords (24 per cent) who have sought mortgage finance this year have found doing so more difficult. A further 6% are seeing their application rejected altogether.
- Mortgages for Business have reported that 78% of all Buy to Let applications are now in the name of limited companies post Section 24 mortgage interest relief reductions coming into force.
- A new survey by Ipsos MORI for the Chartered Institute of Housing states “Our analysis has shown that just £8 billion of the £51 billion of funding earmarked by government for housing up to 2021 will directly fund affordable housing.
- There are 100+ Acts of Parliament containing 400+ individual requirements affecting the way landlords own or manage properties.
- Over a quarter of landlords experienced rent arrears in the last 12 months.
- 50% of Universal Credit recipients are now in arrears or have increased the level of their pre- existing arrears.
- Over the last 5 years councils have spent £3.5bn on temporary housing.
- Two in five renters are not looking to buy a property and intend to rent long term, a survey of 1,000 tenants by the Deposit Protection Service (DPS) has revealed.
- The latest ARLA Propertymark PRS report reveals more than a quarter (27%) of agents saw rent costs rise for tenants in May.
Landlords’ costs have a huge impact on their tenants’ rents, and policymakers must therefore ensure that property investment remains an attractive proposition to all landlords, and not just institutional investors.
I sincerely hope that you will continue to use your influence to persuade the government and Treasury that S24 Finance Act #2 2015 “restriction of Mortgage Interest Relief” will cause considerable harm to our citizens, entrepreneurs and councils, and work towards a more positive, integrated approach to the PRS’s contribution to the solution of our housing crisis.
Yours sincerely,
Heather
The post Reader’s letter to IDS “Once I got started I just couldn’t stop” appeared first on Property118.
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Title Split Mortgage Implications
My wife and I are looking at the implications of a title split on a property we own.
We have obtained the necessary permissions and nearly completed the work to separate an extended 5 bed house that we jointly own into two separate dwellings (houses not flats). We wish to mortgage these separately and we are in contact with our regular advisor and a recommended solicitor.
We have been advised that when split at Land Registry the two new titles cannot be under the same joint ownership as the existing title and it has been suggested that we put one property in each of my wife and I’s names. That’s fine but it has a couple of implications for our circumstances which are that I have a btl mortgage qualifying income from a pension but my wife has no regular sufficient income. This means that:-
- I can get a good mortgage deal on my property but my wife cannot on hers.
- If we were to try and change the split of income from the properties we probably can’t give my wife income from my property as form 17 guidance talks about income from property that is jointly owned.
- Is there an alternative to putting the properties into our two individual names? Or another way to maximise the mortgage potential of the pair of properties?
Any helpful feedback would be gratefully appreciated!
Geoff
The post Title Split Mortgage Implications appeared first on Property118.
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Partnership Match Making For Landlords
Are you looking for another landlord to form a partnership for tax planning purposes?
We regularly speak to landlords who would be far better off from a tax perspective by incorporating their business. However, they are single, have less than 10 properties and don’t know who to go into partnership with. Therefore, HMRC do not recognise them as a business for the purpose of claiming incorporation relief to roll capital gains into shares at the point of incorporation and they do not qualify for the special treatment afforded to partnership when they incorporate either.
Naturally, one of the first things we ask them is whether they have any close friends or relatives who are in a similar position.
Unfortunately, many do not!
However, if two or more landlords form a business partnership and run their property portfolio as a business they may well qualify for both incorporation relief and the special SDLT treatment for partnerships after an initial three year period.
This makes me think there must be a business opportunity for matchmaking. When I mentioned this idea to our Hon. Legal Counsel he jokingly suggested “Tinder-For Landlords”.
This got me thinking, how big is this opportunity and how could Property118 go about facilitating such an introduction service?
That’s about as far as we have got with the concept so far so we are looking for ideas.
If you have any suggestions please post them in the comments section below.
Similarly, if you are a landlord looking for a partner, please feel free to use the comments section to tell other Property118 members a bit about yourself and if anybody responds showing an interest we will do our best to introduce you to each other.
Thanks in advance.
All the best
Mark Alexander – founder of Property118 and “The Landlords Union”
PS – also see the related article links to the top right
Show Tax Consultation Booking Form
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Fined £173,000 for renting an illegally converted garage
Amir Golesorkhi turned his garage into two small, substandard flats and had been letting them out to tenants for seven years while he was living in the main house with his wife in Colindale, North London.
Harrow Crown Court has found landlord Amit Golesorkhi guilty of breaching a planning enforcement notice served by Brent council in April 2008. He had illegally turned the garage of his own home at Colindale, North London into two small flats. He was fined £12,000 and ordered to pay £161,141. A confiscation order was given under the Proceeds of Crime Act to recover the money that Golesorkhi made as a result of failing to comply with the council’s enforcement notice.
Planning enforcement and Trading Standards officers described the flats as “not particularly nice places to live, especially as access was down a narrow, overshadowed alley via a side door”.
The post Fined £173,000 for renting an illegally converted garage appeared first on Property118.
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