Post-Brexit binge in commercial property?

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Pent up demand could see a boost to the commercial property market post-Brexit, according to new analysis of the commercial property market from Shawbrook Bank.

The ‘UK Commercial Property Market Report‘1, produced by Shawbrook Bank and compiled by the Centre for Economics and Business Research (CEBR) assesses the state of the current commercial property market

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Shelter’s call to adopt Scottish indefinite tenancies model criticised

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Responding to a report published today by Shelter which calls for England to adopt Scotland’s model of indefinite tenancies in the private rented sector, David Smith, Policy Director for the Residential Landlords Association said: “Shelter fails to recognise key differences between England and Scotland.

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Taxation and mortgage rates weigh on incorporation decision

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Buy-to-Let Taxation:

Announced in the Summer Budget of 2015, and first introduced
on 6th April 2017, the Section 24 tax amendment represented a sea change in
buy-to-let taxation.

It meant the amount of mortgage interest relief landlords
receive for residential property finance costs would be restricted to the basic
rate of tax. The changes are being phased in tax relief on mortgage interest
payments eliminated on an annual 25% reduction until April 2020, when the
relief will be zero, replaced by a basic rate (20%) tax credit.

Since April 1, 2016, there is another tax consideration when
buying a property to let. There is a 3% surcharge on stamp duty which adds several
thousand pounds to the cost of an average rental property purchase when bought
by an individual as opposed to a company.

Section 24 applies to landlords who are UK residents with
residential rental properties, regardless of location. Also non-UK resident
landlords with residential rentals based in the UK, partnerships and trusts owning
residential rental properties are affected. It is a particularly onerous tax on
high rate taxpayers, many of whom will struggle to show a profit after 2020 if
they have substantial mortgage funding.

The perceived Government objectives of introducing the Section
24 tax ruling would be (1) to reduce the number of ‘accidental’ landlords
operating and professionalise the UK letting market, and (2) to stem the
buy-to-let borrowing bonanza and encourage home ownership, thereby helping
first time buyers onto the housing ladder.

It is though the Government wants to encouraging more professional
landlords (including build-to-let and portfolio landlords), driving out the
rouges and improving the stability and profitability of the sector “to the
benefit of landlords and tenants�.

One way larger landlords can achieved this is by operating
as a limited company, thereby avoiding the Section 24 rules.

However, there are pros and cons for operating as a
small-scale owner or as incorporated landlords, and the benefits of either
depend on many factors including the size of the operation, whether the
business is a new one or an existing portfolio, and the personal circumstances
of the owners.

Before making any
changes to the ownership structure of a property investment business landlords
should seek professional tax advice.

Buy-to-let mortgage deals are now more readily available for
companies, since the Advent of Section 24, but they carry an interest rate
premium.

Writing for the Sunday
Times James Coney says that landlords who borrow to buy a property through
a limited company will pay “substantially higher mortgage rates� compared to
those who take out a mortgage as an individual.

Cony quotes individual buy-to-let mortgage rates being available
as low as 1.81% on a two-year fixed rate offered by the Post Office, whereas a
comparable deal when buying as a limited company is around 2.99% with Nationwide’s
Mortgage Works. In both cases the deals are based on a 25% deposit and a set-up
fee of £995.

Securing a mortgage for a new company with no trading record
can sometimes be problematic without being backed with a personal guarantees,
and transferring an existing property into a company tax shelter may involve
capital gains and stamp duty liabilities.

David Hollingworth of brokers London & Country is quoted
in the Sunday Times article as
saying:  

“For landlords with maybe one or two properties who are not
thinking of adding to their portfolios, starting a company is not really being
considered. Where we are seeing it is with landlords who have a number of
properties already and are looking to expand. However, there are substantial
costs. It is vital to get tax advice before taking any steps.�

Other mortgage deals currently available include:

3.15% two-year fix deal from Ipswich Building Society, with
a 20% deposit and a £1,149 fee.

2.16% deal with a 40% deposit from Virgin Money, fixed for
five years, and a £995 fee.

Company deals to compare:

Paragon offer a company deal at 3.45% fixed for two years, a
20% deposit and a fee of 0.5% of the sum borrowed.

Brokers are finding that the small-scale landlords with perhaps
one or two properties are resisting incorporations, whereas those with many
properties are embracing the idea.

A company is subject to corporation tax as opposed to
individual income tax rates (20%, 40% or 45%). Corporation tax rates are lower currently
at 19% and 17% from April next. However, withdrawing money from the limited
company then incurs further taxation on the individual and dividend tax relief
has been reduced (April 2018) from £5,000 of dividends per year tax-free, to £2,000.
 

Paul Falvey of advisers BDO told the Sunday Times journalist: “Tax alone is rarely a good enough reason
for holding property through a company,�

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