Rate increase could be the first of several more…

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Initial Reaction to the Rate Rise:

An interest rate rise is bad news for some, good for a few, but could be quite devastating for some people and businesses already in trouble, particularly if this rise is the start of a trend.

With incomes already squeezed for many people, even having to pay as little as £25 on an average mortgage each month could push them over the edge. It has been estimated that one in 10 mortgage payers could end up with a household budget problem.

Buy-to-let landlords, already under pressure from tax increases, could also find the going gets tough if rates go on an upward swing over coming months, and as the economic as the tide changes, though the rate of increase is likely to be gradual.

The rate rise might also send thousands of businesses to the wall as the number of firms reaching significant levels of distress over the past years reaches almost half a million, that’s according to business recovery specialists Begbies Traynor. This is often the result of businesses taking too many risks and being lulled into a false sense of security in the ultra-low interest rate environment which has existed over the last few years.

The Nationwide building society is to implement an “across-the-board” increase in mortgage costs as it announces that the 0.25% interest rate rise to 5% will be passed on in full to all of its 600,000-plus variable-rate home loan customers.

That would immediately add £22 a month to the monthly mortgage costs for example, on a £175,000 mortgage and £51 a month for anyone on a £400,000 mortgage, that’s assuming they have a 25-year term.

There are said to be as many as 5 million people on variable-rate mortgages in the UK.

Peter Gettins, product manager at mortgage broker London & Country, has said:

“The prospect of variable rates increasing from here is now looking more and more likely.”

Andrew Ellinas, Director, Sandfords

“Inflation has been creeping up and The Bank of England’s Monetary Policy Committee has increased interest rates to 0.5% to compensate, despite the annual growth rate being at its weakest for four years.

“A 0.25% rise is not going to have a significant impact on the economy as a whole, but it will further depress a falling property market, particularly in prime central London. Currently, the market is flat.

“As an example, there are two blocks of apartments near our Regent’s Park office that are historically very sought-after and if a property came available we would be swamped with buyers and a sale would be made very quickly.  In one of those blocks, in the same month in 2016 there were three apartments on the market and they all sold. This year, there are ten apartments currently available but there are no buyers for them.  In the other block, a very similar situation, there was one property on the market in 2016 and in 2017 there are ten that are not selling.

“There are two main reasons for this. The first is that they are overpriced. Vendors still believe that values are what they were two years ago. I called the top of the market just over a couple of years ago and it has been drifting down ever since, with a bit more yet to go.  With so many tax changes (increased stamp duty, an extra tax for buy-to-let investors and foreign investors’ tax) and Brexit looming, there is too much uncertainty and buyers, particularly overseas investors, have been put off making big financial commitments.

“The government is being urged to abolish stamp duty ahead of the budget. Undoubtedly, this would be the best thing to happen to the property market. London is the driving force for every market and scrapping this tax would provide buyers with an incentive to start moving again.”

Angus Stewart, Chief Executive, of Property Master

Angus Stewart of Property Master, which matches up landlords against a database of over 2,000 mortgage products, said of today’s base rate rise:

“For many buy-to-let landlords this will be the first rate rise they have seen. If they are on a fixed rate now they will have some protection but they need to think of the higher costs they are likely to face once that deal comes to an end.  Today’s rise is unlikely to be the last as the Bank seeks to normalise rates following the market crash and then last year’s Brexit vote.”

“This creates a whole new environment for buy-to-let landlords and comes swiftly on the back of tightening lending criteria and the tapering of mortgage tax relief.”

“We expect that the buy-to-let market will become increasingly professionalised as smaller players facing increased cost and regulation will seek to exit the sector.  For those that remain we can expect many to begin re-mortgaging before rates move any higher and it is interesting to see that there has been a mixed response from lenders certainly in the run up to today’s decision with a number continuing to offer low fixed rate deals.”

Christian Spence, Head of Research and Policy at Greater Manchester Chamber of Commerce, commenting on today’s decision by the Bank of England’s Monetary Policy Committee to raise the Bank Rate from 0.25% to 0.5%, has said:

“Today’s rise, the first in ten years, was not unexpected. The Committee hinted strongly in its previous meeting that a rise was likely this time. Whilst the increase is, as expected, small, and its effects on the economy overall will be small, it sends a strong reminder to consumers and businesses that interest rates can indeed increase.

“Whilst spreads on commercial and personal loans remain low, there will be little direct negative impact from this move, but it may cause some to reconsider the likely forward path of rates over the coming years. With the UK economy slowing over the past year to growth of 1.5%, a rise may feel unusual, particularly when in our judgement inflation will rise little further from its current level.

“This move is not without its risks, particularly with the current levels of uncertainty in the UK economy for both domestic reasons and with the ongoing Brexit negotiations. We reiterate our call to government to move rapidly to provide certainty to UK businesses across the country of their proposed policies for the coming years, and they must use the November budget to support business growth and confidence for the future.”

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BofE Base Rate increased 0.25%

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The Bank of England has increased the Base Rate for the first time since July 2007 from 0.25% to 0.5%.

Despite modest economic figures and a cut in projected growth rates the current 3% inflation rate was apparently too much to ignore against the 2% medium term target.

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As expected BoE raises Bank Rate to 0.5%

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Breaking – Bank Rate Rises by 0.25%

The expected rise, the first time in 10 years, was announce this morning by the Bank of England BoE) following its Monetary Policy Committee (MPC) meet.

Following plenty of hints and much speculation in the press recently about the rise, which is now announced, a move from the current 0.25pc to 0.5pc.

The UK economy is not particularly strong but there are some signs of growth, albeit marginal, with a 0.4pc GDP third quarter rise, an improvement over the previous two quarters of 0.3% each.

The main reason for this rise, is to stave off rising inflation, but with the stock market at record valuations, and consumer credit still worryingly high, there are fears that the Bank now has little in the way of “ammunition” to fight off another severe downturn.

Slashing interest rates has been the natural response to a downturn, but with these rates at or near zero there is not a lot the Bank can do there. This small rise therefore could at least give the Bank a little leeway in this regard, should the worst happen.

More Quantitative Easing is still a possibility, but more debt and asset price inflation (houses in particular) and more damage to savers and pension funds, despite its mini-boost effect, is far from a desirable move.

Philip Hammond, the Chancellor, is now on record as saying he wants to eliminate the deficit slowly by the middle of the 2020s, though some experts have said that he has room to spend up to an extra £10bn in the budget and still meet his deficit reduction, targets. However, other demands from pressure groups such as public sector workers may yet mean that balancing the budget and reducing overall national debt could be pushed back even further.

Meanwhile, UK house prices grew by 0.2pc between September and October, according to the Nationwide, and annually prices year-t-date to October increased by 2.5pc, up from 2.3pc in September. This takes the average property price in Britain to £211,085, exceeding expectations, but still a flat market compared to last year’s comparable figure for October of 4.6pc.

With the average house price to earnings ratio at around 7 times, any rise in interest rates will no doubt hit demand for property if the MPC raise rates today. Relatively low mortgage rates even after a small rise, and full employment, will help, but inflation coupled with falling real wages put pressure on household incomes, and this will likely put off potential first-time buyers.

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The BoE is expected to increase interest rates today…

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Bank Rate Increase?

Interest rates are expected to rise for the first time in 10 years when the Bank of England (BoE) Monetary Policy Committee (MPC) meet this morning.

There have been plenty of hints and much speculation in the press about the rise, which is expected to be in the region of 0.25pc to 0.5pc.

The UK economy is not particularly strong but there are some signs of growth, albeit marginal, with a 0.4pc GDP third quarter rise, an improvement over the previous two quarters of 0.3% each.

The main reason for the rise, if it comes, is to stave off rising inflation, but with the stock market at record valuations, and consumer credit still worryingly high, there are fears that the Bank now has little in the way of “ammunition” to fight off another severe downturn.

Slashing interest rates has been the natural response to a downturn, but with these rates at or near zero there is not a lot the Bank can do there. A small rise therefore could at least give the Bank a little leeway in this regard, should the worst happen.

More Quantitative Easing is still a possibility, but more debt and asset price inflation (houses in particular) and more damage to savers and pension funds, despite its mini-boost effect, is far from a desirable move.

Philip Hammond, the Chancellor, is now on record as saying he wants to eliminate the deficit slowly by the middle of the 2020s, though some experts have said that he has room to spend up to an extra £10bn in the budget and still meet his deficit reduction, targets. However, other demands from pressure groups such as public sector workers may yet mean that balancing the budget and reducing overall national debt could be pushed back even further.

Meanwhile, UK house prices grew by 0.2pc between September and October, according to the Nationwide, and annually prices year-t-date to October increased by 2.5pc, up from 2.3pc in September. This takes the average property price in Britain to £211,085, exceeding expectations, but still a flat market compared to last year’s comparable figure for October of 4.6pc.

With the average house price to earnings ratio at around 7 times, any rise in interest rates will no doubt hit demand for property if the MPC raise rates today. Relatively low mortgage rates even after a small rise, and full employment, will help, but inflation coupled with falling real wages put pressure on household incomes, and this will likely put off potential first-time buyers.

Tom Entwistle

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Massive cost after Grenfell cladding found on my building?

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The Grenfell fire has quite rightly forced all owners of high-rise blocks of flats to consider their safety, and in particular, analyse their cladding, if any.

I am the leaseholder of a flat in such a building.

It has been told it has the same cladding as Grenfell Tower

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IDS joins National Landlord Investment Show panel…

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Iain Duncan Smith writes:

Some months ago I attended The National Landlord investment Show, on the issues surrounding the buy to let market and I am now returning to discuss the issues that still affect the market and to what degree the tax changes have made to the market and those operating in it on Tuesday 7^th November at London Olympia.

The Buy to let market is undergoing some significant transformation. Last time I spoke, people were worried that in a bid to strengthen the position of first-time buyers, the government has taken a number of measures in order to tilt the scales in favour of first-time buyers and against BTL landlords. After the general overhaul of the stamp duty system in 2014, the government added a 3% surcharge on second homes in April 2016.

Furthermore, starting from April this year, BTL landlords will no longer be able to reclaim the full amount of mortgage interest paid on their tax return. As landlords will all be aware, until 2020, the amount of mortgage interest that can be deducted will be gradually be reduced to zero and replaced with a 20% flat rate rebate. This move will impact the profitability of investments for a large number of private landlords, particularly if inflation rises.

As if that wasn’t enough, the Prudential Regulatory Authority’s tightening in underwriting standards for mortgage lenders will also have an impact on the industry. I understand why they are doing this as they are stressing the importance that in these transactions, all parties involved take risk assessment seriously. They seem particularly worried that previously, investors and lenders haven’t evaluated the profitability of the investment carefully enough. With the Bank of England putting this market in its sights, now the stress is on the integrity of the market.

However, while recent developments in the sector certainly pose challenges for private landlords, strong demand for rental units and capital appreciation still work in favour for those carefully selecting a Buy-to-let property as an investment for the future.

For example, I see that the total amount of rent paid to private landlords in Britain is now more than double the amount of mortgage interest paid to banks by homeowners, as rising house prices push more people into the rental sector. Over the 12 months up to July, those renting paid about £54bn to buy-to-let investors. This is because I suspect that the number of people renting property across the country rises and rents rise.

However it remains the case that the group most affected by the Government’s changes are the smaller landlords. There is no question but that it is this group who are experiencing the squeeze. The latest figures seem to show that the bigger landlords, those with 4 or more properties are still investing, whist the smaller ones are far less likely to.

I see also that HMRC are now saying that some 40% of private landlords are not now dealing with their tax requirements correctly. It is difficult to know where this is going to end up but it seems to me that there is a drive to professionalise the operators in the market place with these regulatory and other changes complicating the tax treatment and changing the cost base.

It is interesting that the market is adjusting to this and I notice that there seems to be a significant move to buy properties outside London, in areas where the price is low but the rental demand is strong. University towns are a good example of this. After all younger people are responsible for about half of Britain’s total rent bill, paying around £24bn to landlords over the past year.

So although there are genuine issues making it more difficult for the buy to let market, particularly for the small property owners, there are offsetting positives.

Mortgage rates are at record lows and are helping buy-to-let investors make deals stack up and population growth means that there is a growing demand from tenants. Also, rents that should rise with inflation and the long horizon for interest rate rises mean many investors should find the market attractive enough.

Nonetheless, I will still press the Chancellor to think again about the tax changes made by George Osborne which have affected the amount of rental property on the market and I hope with some progress at the next budget.

However for me the biggest danger for everyone would be the arrival of Jeremy Corbyn and his very anti-private property ownership policy agenda. Not only would that be a disaster for this marketplace but also for the UK. Yet that is one for me and my colleagues over the next five years.

By Iain Duncan Smith

Comments from Tracey Hanbury Editor of Landlord Investment Show and Co-Founder of National Landlord Investment Show add’s

We are inviting you to be part of the UK’s largest Landlord panel debate at the National Landlord Investment Show on Tuesday 7^th November at London Olympia. This is a great opportunity for Landlords & Investors to voice their concerns and get valuable feedback from this specialist panel.

The National Landlord Investment Shows have successfully organised 52 exhibitions across the UK providing UK Landlords with key information on ever changing issues. It also provides a great service for all services within the private rented sector providing them with the platform to meet with 1000’s of Landlords & Investors who may require their services including;

• Tax advice, evictions, UK investment opportunities, Landlord Insurance, Deposit schemes, finance solutions plus much more.
• Other key features of the exhibition include:
• Meet with 100+ exhibitors
• Attend up to 37 seminars on the day
• Receive a complimentary subscription to Landlord Investor Magazine

Attend the hottest Landlord debate in the 450 seat auditorium with key industry figures and main guest Iain Duncan Smith to get answers on Universal Credit, Brexit, Licencing and mortgage updates.

For more information you can contact Tracey@landlordinvestmentshow.co.uk

Or call the office on 0208 656 5075

Register for your tickets at www.landlordinvestmentshow.co.uk

To subscribe to Landlord Investor Magazine please visit www.landlordinvestormagazine.co.uk

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No Inheritance Tax Relief on Holiday Lets

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Breaking – Inheritance Tax:

A recent tax case which went before the First Tier Taxation Tribunal has cast doubt on the availability of inheritance tax relief on properties let as furnished holiday accommodation.

Business Property Relief (BPR) provides 100% relief against inheritance tax (IHT) when a business activity is deemed to be “wholly or mainly trading”.

However, if a business activity is in the main investment, then no IHT relief will apply to the assets involved after death. Some years ago the case of Pawson and Green which found in favour of HMRC setting at a high level the amount of ancillary services required holiday lets to qualify as a full trading business and therefore for Business Property Relief (BPR) to apply.

Now, the recent case of Executors of Marjorie Ross v HMRC appears to have confirmed this legal position, even it would seem if very high levels of services are provided to guests.

The case revolved around Mrs Ross who died in 2011, owning at the time eight holiday cottages and two flats in Cornwall, plus other property in Weymouth, in a partnership. Mrs Ross’ share of that business amounted to and was valued at between £1m and £1.5m.

Owners of holiday lets need to seriously consider their position and succession plans in light of this decision. A lifetime gift of a holiday property may become a more attractive option, as such a gift may still qualify for Capital Gains Tax holdover relief. Where a holiday let business can be integrated into a wider trading business this may also be helpful, although this approach is not without its own dangers.

An appeal in the Ross case may be forthcoming, accountants are urge owners to consider their position along with their tax advisors in light of this decision.

The furnished holiday lets were adjacent to a hotel which Mrs Ross ran until 2002 when she sold it. After the sale the new hotel owner agreed to provide certain services to the guests of the FHLs including dealing with enquires and bookings, accepting left luggage, delivery of bar meals, discounts in the hotel and ordering milk and newspapers. The taxpayer’s representatives argued that BPR should apply as the business provided services “more akin to a hotel than a typical self-catering holiday”.

HMRC contended that the properties were marketed as self-catering accommodation and while the services were more extensive than those considered in previous decisions, those services were not enough to count as the greater part of the business, i.e. to tip the business over threshold of being one of mainly trading, rather than one of mainly holding investments. The Judge agreed with HMRC’s argument.

Landlord should note: the restricted deduction for interest that started to apply to buy-to-let businesses from 6 April 2017 does not apply to furnished holiday lets.

There are special rules for a rental business to qualify as furnished holiday lettings, in particular the property must be available for letting for 210 days a year, and actually let for 105 days.

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