Paul Mahoney: 00:27 Welcome to Proper Wealth with me, Paul Mahoney. The show where we discuss all things wealth creation, including property. Joining me today is Tony Gimple, the founding director of Less Tax 4 Landlords. Welcome, Tony.
Tony Gimple: 00:39 Hi, Paul. Good to be here.
Paul Mahoney: 00:40 Thanks for joining me.
Tony Gimple: 00:41 Pleasure, mate.
Paul Mahoney: 00:41 So today, we’re talking about tax, and specifically, tax in relation to property or property investment.
Tony Gimple: 00:48 Yep.
Paul Mahoney: 00:48 There’s obviously been lots of changes lately.
Tony Gimple: 00:52 I’d say.
Paul Mahoney: 00:52 It’s an area that I’d say is of great interest, perhaps surprisingly.
Tony Gimple: 00:57 Yes. Yes.
Paul Mahoney: 00:57 Tax isn’t something that people really get all that excited about but because of all the changes, it’s quite important to understand, isn’t it?
Tony Gimple: 01:07 It’s very important. People get all worked up and out of shape about tax, whether they’re in property, landlords, immaterial. It’s part of the state protection racket. It keeps the lights on, the ability to have programs like this. It pays for healthcare, and so on. However, nobody likes paying tax, and tax collector is one of the world’s oldest insults.
Tony Gimple: 01:25 And then, when you take a look at it in terms of property, the private rental sector, PRS, has for quite a while now overtaken the public sector in providing housing. And yet, because of things like Section 24 — which I’m about to explain– increase in [inaudible 00:01:43] and so on, you’ve now got one of the most productive sectors vilified and effectively taxed on turnover, which is unlike any other business.
Paul Mahoney: 01:52 Yeah, and it certainly seems to be the general consensus that part of the reason for the changes was that landlords were an easy target, viewed as the fat cats that make the tenants’ lives difficult, which as we know, isn’t the truth.
Tony Gimple: 02:07 No.
Paul Mahoney: 02:07 And I’m sure anybody who’s interested in watching this show would agree with me there. Perhaps we start simple, and we can build from there. So I mentioned about changes. The three mains ones that I assume people want to know about would be Section 24, the treatment of mortgage interest, or but-to-let mortgage interest, the Stamp Duty changes with regards to multiple property ownership, and also the Prudential Regulatory Authority changes with regards to the way that lenders need to view mortgage serviceability.
Paul Mahoney: 02:36 So let’s start with the first one. Section 24, what is it?
Tony Gimple: 02:40 Okay. Section 24 is as you already described. It’s a way of capping the amount of mortgage interest relief that you can claim as a legitimate business expense. So by the time we get to 2021, the banksman relief will be at the basic rate tax rate, regardless of what tax rate you’re actually paying. That has very ill effect. We are seeing people who have made a decision to run businesses, contribute to the community, pay a lot of taxes, who by the time we get to 2021 their tax bills alone will exceed their profit in that year.
Paul Mahoney: 03:18 Right. Right.
Tony Gimple: 03:19 The mass effect is people are going to be driven from the market. The state is going to have to find the money. Yeah, first time buyers will get back on the ladder but that’s a very blunt instrument to solve, which was never really a problem, and it’s classical short-termism.
Paul Mahoney: 03:35 Okay. So for some people, it’s quite damning. It ruins their business model.
Tony Gimple: 03:39 Yeah. On the other hand, for some people who call themselves landlords, shouldn’t be really there in the professional sector in the first place. They’ve got one or two properties they’ve inherited. Or maybe, when they had two places when they were single, and now want to rented one out. They aren’t running a business. They’ve got a living investment, the same as you might put some money into a bond or an equity, and that’s it. It’s quite right for it to be taxed as such.
Tony Gimple: 04:05 But if you’re running a professional property business, and when we’re going to talk about the PRA, what their definition is as a portfolio landlord, four or more properties over and above your principal private residence, then the laws are, frankly, crazy.
Paul Mahoney: 04:20 Yeah. Okay. And I suppose, especially for that type of person, that’s when it becomes very important to have a very clear strategy. And as you say, view it as a business as opposed to just buying a property here and there and hoping for the best.
Tony Gimple: 04:32 Correct. Which is how a lot of people actually start. Well, for instance, we know one chap, wage slave, looks at his pension one day and thought, “Well, if I were 50 or 60 tomorrow, I couldn’t retire on that.” Just happens to turn left out of the station one day as opposed to right, started off as an accidental landlord by seeing a property and saying, “That can’t be that cheap.” And it was, and he bought it. To some 30 years later, having well over 300. Employing people, fantastic quality of housing, a real business. But he started off by having the same accident the rest of the sector did.
Paul Mahoney: 05:08 Yeah. Okay. All right. So Section 24, essentially, as you say, meaning that mortgage is only tax deductible at the basic rate of tax, regardless of your level of income?
Tony Gimple: 05:17 Yes.
Paul Mahoney: 05:17 So that’s that way, so we’ll move on from there and talk about how that might affect people as we go. We’ve also got Stamp Duty. So what were the Stamp Duty changes?
Tony Gimple: 05:29 Reflectively, George Osborne stuck 3% Stamp Duty hike on anything other than replacing your principal private residence, your own home. Everyone got all out of shape about it at the time. Stamp Duty is a really easy way of saving tax, money for nothing and your chicks for free. It goes back, well, a long, long time but it was used to fund Napoleonic wars. Window tax was an early version of the day. So the wealthier you were, that you had more windows, you decide to break them up to mitigate tax.
Tony Gimple: 06:04 Stamp Duty on the second properties … Okay. If it’s your second home, and you’re perhaps depriving somebody of somewhere to live in a local community, maybe a good thing. It makes you think twice. However, it’s a transactional tax, what comes around goes around. You just have to suck it up today, means you can’t spend as much, that’s all right. But when you sell it, it just goes through the system, it washes out.
Tony Gimple: 06:31 However, some of the latest research has shown that Stamp Duty revenues have fallen significantly since the 3% duty was stuck on. So King, in economics says, “The lower the tax, the more revenue that each [inaudible 00:06:49] collects, the healthier the economy.”
Tony Gimple: 06:52 Clearly, the additional Stamp Duty is having a bad effect.
Paul Mahoney: 06:56 Yeah. Okay. And then we spoke about the change with regards to portfolio landlords, so the Prudential Regulatory Authority late last year. So if you can just have a brief description of that.
Tony Gimple: 07:08 Okay. Well, the Prudential Regulation Authority is all about encouraging sensible, responsible, lending. Nobody wants to go back 10 years or so, we all know what happened, it was damn painful. So overall, it’s a good thing.
Tony Gimple: 07:25 Portfolio landlords, four or more properties. The real changes here are that they actually are going to be treated as a business, as if they were a commercial borrower even though they’re still doing so in their own names. There’s going to be what’s called stress testing. Just to see how much pressure they can bear if interest rates really rise.
Tony Gimple: 07:45 Now, sadly, I’m old enough to have had lot of mortgages in the late 80s and early 90s. I wish I was stress tested then because interest rates went from 3% to 15 and 16%. That really hurt.
Tony Gimple: 08:02 Another part of the new rules to make sure people make sensible lending is to look at the entire lending portfolio, not just the individual deal. Does it stack up overall? Are you over extended? Can you repay? What’s going to happen if you get voids? Dilapidations? How are you viewing risk management? What will happen, because of Section 24 — where your amount of tax rises, the amount of profit you make falls — how is that going to effect borrowing and repayment?
Tony Gimple: 08:36 So all of those are designed to more responsible borrowing, more responsible lending. So in other words, if you are owner of a business, you’d be going through this anyway.
Paul Mahoney: 08:45 Yeah. Yeah. Look, in my view, certainly the third change, the portfolio landlord changes seem sensible. Overall. Of someone’s got a portfolio of 10 properties that just don’t stack up from a yield perspective, but they’re buying one that’s great, that lender has that risk of their other 10 falling over, haven’t they?
Tony Gimple: 09:07 Yeah. Although, having said that, it’s better to have a wide base than everything concentrated into one property.
Paul Mahoney: 09:13 Of course.
Tony Gimple: 09:14 But nonetheless, you have to look at the whole thing. Your own mortgage, your own tax status, where you are in planning … What happens when things go wrong, because they do? You know? So yeah. No. Always very good things. It’s business savvy.
Paul Mahoney: 09:27 Yeah. And I think a lot of people have viewed this as a third negative thing, but I don’t think it necessarily is that. It’s just about ticking a few more boxes and making sure that, as you say, they’re going about business sensibly.
Tony Gimple: 09:38 Correct. Look, and if you’re running a professional property business, no different than when you were running any other professional business. You’d have all the numbers to hand. Going to the bank, asking for an overdraft, or any other kind of facility, they’re going to ask you for it. So as a proper business, you will have them anyway. It’s business. Suck it up. Get on with it.
Paul Mahoney: 09:58 All right. Great. So we’ve got the three main changes there, and I suppose some of our opinions on how they’re impacting things, or whether they’re sensible or not.
Paul Mahoney: 10:05 Thanks, Sunny, that’s all we’ve got time for now. Join us after the break for more discussions on Proper Wealth, with me, Paul Mahoney.
Paul Mahoney: 10:19 Welcome back to Proper Wealth, with me, Paul Mahoney. The show where we discuss all things wealth creation, including property. Today, we’re discussing tax, and how it relates to property investment. Welcome back, Tony. So before the break we spoke about some of the major changes with regards to Section 24, the Stamp Duty changes, and also the changes with regards to portfolio landlords and how that lenders are now looking at that.
Paul Mahoney: 10:42 So hopefully, we’ve got a good understanding now of what those things are. Perhaps now, we can talk about how they’re impacting the market, as well as how landlords can deal with them and still do well in the current market. So let’s start with how they’re impacting things.
Tony Gimple: 11:00 Suppose which newspaper you read [crosstalk 00:11:01] the day because you’ll see in the headlines or news report. Whether it’s [inaudible 00:11:04] or is completely independent …
Paul Mahoney: 11:05 Yeah. Of course. Yeah.
Tony Gimple: 11:05 The truth of the matter, it is having an impact. Landlords, particularly, the real accidental ones, are being forced to evaluate whether or not they should stay in the market. There are almost more first-time buyer mortgages being granted, which overall, is a good thing. Property as a home or part of a business always works.
Tony Gimple: 11:28 So the changes are starting to have an affect. And cumulatively, they will continue to have an affect. But the upside is that nature [inaudible 00:11:40] a vacuum. Anybody who is maximizing the commercial benefits of building, running, and growing a professional property business, will say, “Okay. There’s opportunity here. I’ve got access to liquidity. If got access to mortgages. I am running this as any other business. So we’re going to start to take up the slack.” And that will really professionalize the sector.
Tony Gimple: 12:02 Particularly, when licensing comes in and is to a universal standard, that will actually increase demand. But yes, the negative side, it’s forcing people out. But the other side of that coin, it’s letting other people with our own homes and the more professional landlords come back in.
Paul Mahoney: 12:20 Yeah. I think it’s the important point that you said it in jest, so far as what newspaper you read. But I think that is the important point to make in that, certainly, what I’ve seen, is a lot of people, like certain news outlets, or media outlets, scaremongering around the changes. And people not necessarily were reading these articles, or reading the headline of them, and getting scared by them. And being worried that it’s a bad market to be involved in because of these headlines.
Paul Mahoney: 12:46 But again, certainly what I found, is once you read below those headlines and actually get into the body of those types of articles, there’s often very little substance to them. Or they’re using worse-case examples.
Tony Gimple: 12:59 You mean something like Project Fear, perhaps?
Paul Mahoney: 13:02 Well, exactly. But I suppose that’s another good point is worse-case examples. You know? Of course, you’re quite right. These changes are driving people out of the market. But it’s the people that are in the situations that are being most impacted by these changes, isn’t it?
Tony Gimple: 13:16 Correct.
Paul Mahoney: 13:17 For example, Section 24, people who have highly leveraged, low-yield properties, they’re going to be hurt quite badly.
Tony Gimple: 13:24 Oh, they are. They will really suffer. Particularly, where they’ve been relying upon capital growth. And going back to the PRA changes, you can no longer borrow money just to fund your lifestyle. And if you go down the limited company route, you could even incur direct load account tax as a result of doing that. So you’re right. Highly geared, non profitable landlords are the ones who rightly should not be there. But then, if they were running any other business, they’d of been gone a long time ago because business is about the survival of the fittest.
Paul Mahoney: 13:54 Exactly. Essentially, because they’ve been speculating on the growth and been happy with that because the growth’s been happening. I suppose the opposite side of that coin, though, is landlords that have high-yielding portfolios, they will be worse off generally, than they were prior to Section 24, but can still very much be in a profitable position.
Tony Gimple: 14:15 Oh, very much so. The thing people always forget is something has to happen before you pay tax, fairly or not. You have to make a profit. Okay? No profit, no tax. All right?
Paul Mahoney: 14:26 Yeah.
Tony Gimple: 14:27 So could I live with … Oh, let’s go back to the bad old days. Could I live with a 95% wealth tax? Only if my income was sufficiently large, that the 5% I could put in my pocket allowed me to do what I wanted to do. Would I be happy about it? Mm-mm (negative).
Tony Gimple: 14:46 So work with the system. Look how to structure things the way any other business would. Be treated like a business. And whilst yes, overall, there will be transactional tax burdens, and so on. If you do it the right way, you’ll still make money, you’ll still pay taxes directly and indirectly, and the world will continue to turn.
Tony Gimple: 15:09 We’re not making any land. We’re still having children. [inaudible 00:15:13], whatever you like, there’s a housing shortage. And that’s because of poor government policy since the war.
Paul Mahoney: 15:19 Yeah. And yeah, look, that’s a great point so far as that shortage. But also, the shortage of supply, and how that’s making the shortage even worse year on year. You know? I saw some stats the other day that said that the government-set requirement for new properties per annum in the UK is 300,000 per annum.
Tony Gimple: 15:40 Oh, yeah?
Paul Mahoney: 15:40 And the average for the past 10 years has been about 150. So we’re only supplying about half of what’s needed. Now, regardless of tax, regardless of mortgages, regardless of everything. Whist having you’ve got those dynamics in a market, it’s very, very difficult to argue against prices increasing, certainly over the mid to long-term. You’ll have economic and political blips here and there, things like Section 24, things like … Whatever that may be.
Paul Mahoney: 16:08 But overall, if you’re investing wisely in the right areas where that demand is skewed, I can’t see how you can go all that wrong.
Tony Gimple: 16:16 You can’t. You’ve got to be careful about following the market too closely. Sometimes, you actually need to go in the opposite direction because there’s gold still there. You have to look back at the human condition, go back to the ancient Greeks, Romans. This is nothing new. The Romans were speculating on next year’s Egyptian rain harvest. And if they thought prices would be going up, they’d be buying more thinking they could get better yields. They’d been buying more home properties, just another variation on that. Treat it as a business. Know when to dare to be different. And be gentle about what you do.
Paul Mahoney: 16:54 Yeah. Okay. So we’ve spoken there about how Section 24, actually all three really, how they’re starting to affect the market and obviously, affecting one type of property or landlord more so than others. I’d say, in fact, in some cases, these changes are actually benefiting lower value, higher-yielding properties. Mainly, just because it’s causing a shifting trend toward those properties. For example, your average London landlord who has properties in London and is just breaking even and seeing how these changes are going to start affecting them over the coming years, are now looking to places like the Midlands, and the northwest, and the northeast areas where the yields are higher to try to rebalance their portfolio, aren’t they?
Tony Gimple: 17:42 Very much so. And balance on diversification is part of any good business structure. [inaudible 00:17:51], take my business partner Chris Bailey, he’s got 26, 27 properties, doesn’t pay more than 50,000 pounds per property for really nice, good condition homes. And he gets a 14% pre-tax yield. 14%. Capital growth, it’s wipe his face when he eventually comes to sell it, if he ever sells them. But the yield is superb. Compare that to London. What are you going to get for three, four, 500,000? You’re lucky if you’re going to get 1, 2% with the chance of capital growth.
Tony Gimple: 18:25 The last thing about income is it’s in your pocket today. Capital growth, it maybe, may have doubled or tripled in value, but you try getting the money out when you want it. Very difficult.
Tony Gimple: 18:36 Well, I suppose that leads us on to how can you deal with all of these threats? And it’s quite a hostile environment. Particularly, if you are a buy-to-let landlord. It’s politically hostile. And it’s certainly hostile from a tax perspective.
Tony Gimple: 18:54 So what are your options? One, do nothing. Yeah. Have a look at it, say, “Okay. I don’t want to do anything. I’m going to stay as I am.”
Paul Mahoney: 19:05 I suppose that depends on how much you’re going to be impacted, though, doesn’t it? If you’re going to start making a loss, it would be a bit tough to just do nothing.
Tony Gimple: 19:14 Yeah. It’s a misquote, so I moved on. So in the prospect of eminent death concentrates the mind wonderfully. If it hurts enough, you’ll do something. If you’re not that fussed about it, you’ll just take it on the chin. And for a lot of people who have got three buy-to-lets, other properties who are basic rate tax payers, they’re not going to be affected, really. They don’t need expensive advice. Increase the ranks that the maximum market will take, pay down the mortgages, lovely.
Paul Mahoney: 19:47 That’s a good point there though. Something that I found is a common misconception is that if they are the basic rate tax payer, their employment income plus their property income is less than 45 grand, that they won’t actually be affected at all.
Tony Gimple: 20:00 No.
Paul Mahoney: 20:00 So I think a lot of people read these headlines and think that everyone’s affected and that mortgage is just no longer tax deductible, but for those lower income owner … Not even lower. Just some average income earners, won’t actually be affected. So it’s important to find out whether you will be affected or not.
Tony Gimple: 20:18 Absolutely. Clearly, doing what we do, we talk to lots and lots of people. I was at a gig last night, well over 100 people there, and I would probably say less than 15% had a real problem.
Paul Mahoney: 20:36 Okay.
Tony Gimple: 20:37 All they needed to do was maximize their returns, run good properties, keep longer term tenants, pay down the mortgages. Happy days.
Paul Mahoney: 20:47 I’d say that’s relatively reassuring that that ratio of people who … Especially, I’m assuming it was a room full of landlords?
Tony Gimple: 20:53 Oh, yeah. Yeah. Yeah. Yeah. Yeah. It was. Yeah. It was run by Redbridge Council. With the NLA, with enforcement standards, tax, the whole thing. Basically, how to be a professional landlord.
Paul Mahoney: 21:07 Okay. So for those sorts of people, either they can do nothing, or there might be some simple ways that they can fix things. For example, diverting income, or that sorts of things that they could do.
Paul Mahoney: 21:18 For the people that do actually have a problem, how do they fix it?
Tony Gimple: 21:21 Okay. How do they fix it? They really have two choices. One, is they could take the populous and easy, obvious route of incorporating. Going from a natural person, Paul Mahoney, to an artificial person, Paul Mahoney Limited. That would get them over Section 24 for the moment. It’s a legitimate business expense. But it’s fraught with problems. You are now a commercial buyer. You’ve got to remortgage all of your properties. You can’t do it one at a time, it’s all or nothing.
Tony Gimple: 22:05 Particularly, if you want to win something called Section 162 Incorporation Relief. A no Stamp Duty and capital gains tax held over. And by the way, HMRC recommend that if you’re going to do that and you’re not actually working 19 hours a week in the business, you set up a partnership, or a limited liability partnership in particular, as a vehicle then to get incorporation relief. Because incorporation is only available to trading businesses and limited liability partnerships, the income is treated as trading income so therefor, that’s one of the steps.
Paul Mahoney: 22:45 So I suppose for an individual, all of that … Although I’ve heard that before, if it was the first time I was hearing it, it would be pretty complex. So seeking advice, I suppose for that person that has a problem, make sure you get the advice, and get the advice as soon as possible.
Tony Gimple: 23:00 Well, okay, the hard part is realizing you’ve got a problem. You got to admit, I don’t know what I don’t know. I maybe good at x, y, and z, but I don’t know about this. The next thing, you’ve got to make sure you talk to a specialist commercial and property accountant. Talk to a specialist estate planner. Personal estate, or business succession planning. Talk to a specialist business planner. Talk to a specialist financial advisor on all the [crosstalk 00:23:29]
Paul Mahoney: 23:29 So don’t sit on your hands. Make sure that you speak with all these specialists. Get the right advice.
Tony Gimple: 23:33 At the same time.
Paul Mahoney: 23:34 At the same time. And that it all works together.
Tony Gimple: 23:35 Correct.
Paul Mahoney: 23:36 Okay. Well that’s all we’ve got time for now. That was very informative. We found out about all the tax changes and how to deal with them. But the key to that, in the end there, is just make sure you’re getting the right advice that works for your whole financial picture.
Tony Gimple: 23:47 Absolutely. Correct. Absolutely.
Paul Mahoney: 23:49 All right. Well, thanks very much for joining us, Tony, and thank you very much for joining us, as well. Join us next time for more discussions on wealth creation including property, with me, Paul Mahoney.