Jo Grimwood: Hello and welcome. I’m Jo Grimwood. This is Property Question Time, the show where you get to help create the content by posing questions to our panel of property experts. Today, I’m joined by three fabulous gentlemen who know their stuff in the property industry. We have Paul Mahoney, who is the MD of Nova Financial Group. Welcome to you, Paul. Evan Maindonald, who’s the founder and CEO of Melt Homes. Hi, Evan.
Evan Maindonald: Hi.
Jo Grimwood: Also, Tony Gimple who’s the founding director of Less Tax for Landlords. Hi, Tony. Fabulous to have your company. We are going to start with a question actually for you, Paul. Your first question is “What are the main points to consider when I consider moving into a buy-to-let?”
Paul Mahoney: Fairly broad question. There’s lots to consider, but I’ll try to bring it down into a couple of minutes. I suppose part of it depends on what you’re looking to achieve. There’s a range of different things that you can achieve from investing in buy-to-let. Depending on your goals, you should be doing different things and using different strategies, but very broadly is when it comes to selecting location, generally you want to be looking for depth. What I mean by depth is strong tenant demand and large tenant pools, a broad range of industries and therefore employment given that’s one of the main reasons that any of us live anywhere is living relatively close to work. If you have diversity in those things, then you can be relatively confident that there’ll be sustained demand regardless of the state of the economy. Facilities, amenities, infrastructure are all very important as well because again, reasons for to live there. That will generally result in better socioeconomic levels and lower vacancy rate.
Paul Mahoney: If you have confidence in the depth in all of those different factors, then you can have confidence that your property will rent well and it will sell well. If you’re looking at leverage buy-to-let, the renting side is probably the more important factor to consider because property prices will fluctuate, generally they’ll fluctuate upwards but at times they will fall. It doesn’t really matter if the price of your property falls so long as you’re not selling at that point in time. If your property’s rented though, you’re safe. If it’s not rented, then you’ve got this extra expense that you need to support, and that can result in you either losing your property or losing a portfolio of properties if you can’t afford to support that cost.
Paul Mahoney: Making sure you have depth in all of those areas will give confidence that you’re in a safe position.
Jo Grimwood: Fabulous. There’s also, I suppose the potential of housing association maybe getting them to take on your rental as that tends to be, would you say on the safer side of things for renting?
Paul Mahoney: I wouldn’t say so because generally they’ll be in areas that aren’t all that desirable. Housing associations don’t tend to operate in highly desirable areas and desirability is very important. You need to make sure that you’re attracting the right sort of person to your property and if you’re relying solely on housing association taking onboard, then you are limiting your target market there. Obviously a range of other things to consider. There’s all the changes recently in buy-to-let, so there was section 24 which refers to the tax deductibility or lack thereof of mortgage interest, stamp GD premium, and change with regards to mortgage affordability, which are all fairly complex for an individual to understand. There is a very broad range of things to get your head around when it comes to investing in buy-to-let, and it’s certainly worth seeking professional advice to do that.
Jo Grimwood: Fabulous. And make sure there’s a Waitrose nearby. Ideally.
Paul Mahoney: The Waitrose effect, yeah.
Jo Grimwood: Fabulous. Talking of section 24, we’ve actually got a question for you, Tony, pertaining to that. “With the majority of high street accountants not being able to offer any solutions to section 24 other than to incorporate and not really wanting to give advice for which they might be held liable, are there firms out there who are prepared and have insurance for, for example, to stand by the gray areas when it comes to surviving the landlord tax attacks?”
Tony Gimple: I suppose the short answer is yes. We say gray areas, there isn’t a unified tax system. You get knock-on effects where one ruling can have effect in other places. Law of unintended consequences by legislatures and tax understanding. It’s really important, whoever you go to that they have got proven experience in working in the round with tax affairs. Where something is a gray area, they need to be very sure of their facts and be able to stand buy it. That also means having in place good, quality professional indemnity insurance which would affectively put the client back to the day before they sought advice.
Jo Grimwood: Right.
Tony Gimple: That would include things like paying for fees, any refund of original fees, and fines and penalties. If you’ve got a firm which has got real experience in the market and has the indemnity insurance to back it up, then yes. There are firms out there who will cover the “gray areas.”
Jo Grimwood: Okay. That’s fabulous. Thank you. For any of our views who are watching who don’t know what we’re talking about when we’re mentioning section 24, could you actually just elaborate on that for me?
Paul Mahoney: Section 24 refers to the recent changes with regards to the way the buy-to-let mortgage interest is treated from a tax perspective. It’s quite confusing in the way that it’s written because it says that it’s being phased in and by 2020 mortgages would no longer be tax deductible. That’s the way it’s written which is very confusing because you still receive a tax credit at 20%. The effective outcome is that it’s deductible at 20%, which means for example of common misconception, if you’re a basic rate taxpayer and your employment income plus your property income is less than 45 grand, you’re not affected whatsoever. A lot of people think that they will be, but if that’s the scenario then they won’t be. For those at a higher rate taxpayers, they will be. They still are able to “affectively” deduct some mortgage interest, but it’s as a tax credit which is that 20% rather than their own tax rate which is 40%. As I say, it sounds confusing, and it is, but the effective outcome isn’t as confusing as it sounds.
Jo Grimwood: Sure.
Tony Gimple: The outcome is you will be worse off. It is a lot more complex than even that, and affectively by treating rental income gross it can significantly increase an individual tax bill. If you take a basic rate taxpayer, still in employment but with not a huge amount of rental income, before section 24 they’d have probably paid less than 6000 pounds a year in tax in total. By the time section 24 comes fully into effect, 2021, they are going to be paying double that in tax.
Jo Grimwood: Right.
Tony Gimple: Simply because tax credit or nay, how the calculation is done. For somebody who’s an advance rate taxpayer, say purely from property, they no longer have to work, they’ll see their tax bill rise to over 50,000 pounds when the changes come in.
Jo Grimwood: Right.
Tony Gimple: It can push basic rate taxpayers into higher rate tax, it can push higher rate taxpayers into advance rate tax, and on.
Evan Maindonald: The near impact really is that it makes it more expensive to own a buy-to-let property with a mortgage. If it’s unencumbered, you’re in a different situation because there was no mortgage interest to deduct in the first place. If you’re going to own buy-to-let property, it’s much more tax efficient now to own it in a limited company vehicle.
Jo Grimwood: Yes. This is something that has come up a lot actually in past programs. I think it’s definitely something to look into, isn’t it?
Evan Maindonald: Absolutely.
Jo Grimwood: Yeah.
Evan Maindonald: Yeah.
Jo Grimwood: Okay. Question for you, Evan. “I currently own flat with a longterm tenant of three years, and I’m looking to either buy a second property which I will live in or to sell the existing property and buy another to live in. I’m looking for advice on the advantages and disadvantages of each option.” Retroactive to what we were just talking about to a certain extent, isn’t it?
Evan Maindonald: Yeah. Absolutely. Let’s start with one option, which is sell your existing property-