Shona: Welcome to property question time. I’m Shona Lindsay, and as ever I’m joined by three experts here in the studio. Let me first introduce you to Tony Gimple, who is the founder of Less Tax for Landlords. Next to Paul Mahoney, who is the managing director of Nova Financial Group.
Shona: Hi. And finally to Simon Zutshi, author of international best seller Property Magic, and founder of the Property Investors Network.
We’ve got loads to get through, so I’ll crack on first of all with a question for you, Tony, if I may. When is it right to buy and hold buy-to-let property in a limited company?
Tony: The short answer is if you don’t need the income, don’t have any children, don’t care about inheritance tax, then it might be a good idea to buy and hold property in limited company.
Tony: Because, you’re going to get taxed forty ways from Sunday by doing it. Overall, it’s a much more expensive option. Mortgage rates can be higher, less consumer protection, less choice of lenders. A lot of lenders will put a charge debenture on your balance sheet, which means you can’t really use your Director’s loan account on much else without their consent. And then, how are you going to get the money out? Yes you’ve got lower headline rights of corporation tax, 19% falling to 17%, but then you’ve got income tax, national insurance, employer’s national insurance contributions, auto enrollment. You’ve got director’s loan account tax, capital gains tax if you take the money out and put it in your pocket. Then finally, because it’s an investment company, it’s going to be fully subject to 40% inheritance tax. So it only works if you’re never going to need the income, and don’t mind your estate paying 40p in the pound thereafter, when you eventually fall off your perch.
Shona: Kind of makes it sound as though it’s not any good for anyone really. So who would want to use something like that?
Tony: I have no idea, frankly. Over the last three years we’ve probably talked to the thick end of 4000 people, and as yet we haven’t found one who owning buy-to-let properties in a limited company makes a great deal of commercial sense. If, however, you’re trading in properties, developing, flipping, then it can work out. But then you’re pricing just a normal business, as opposed to being a buy-to-let business. But the same things occur. How do you get the money out? The prime reason for using limited companies is risk management, limited liability. Particularly if you’re involved with third parties over whom you have no control, or not control of their lives. So it is a good way of reducing risk. But from a purely practical tax perspective, once it’s in, very, very difficult to get the money out. It’s also a one-way street. Particularly if you own existing portfolio and trying to move it in. Once it’s in, it’s in. Very difficult to get it out, and it would be a great cost thereafter.
Shona: Right. Gosh, that’s really interesting. Did this all come about because of the new taxation laws with buy-to-let? Did people start to look at limited companies to see whether that was a better way of not paying as much tax and losing the mortgage relief?
Tony: In effect, but it’s a classic knee-jerk reaction. At the moment, limited companies are not subject to section 24, the restriction of mortgage interest relief. That’s going to be short lived. The Exchequer is losing a hell of a lot of money, these people that are moving them into companies. The talk within the trade is that this budget, or the one after, or a future, probably post 2021 will no longer allow finance costs to be deducted for tax purposes within limited companies. It would be very easy for them to raise corporation tax for businesses that own buy-to-let properties within limited companies.
Shona: So any small window of opportunity, you think is going to go anyway.
Paul: Just a comment on that. In the final quarter of last year, over 70% of new buy-to-let mortgage applications with limited companies, so that’s nearly three quarters of the new purchase market. All of the points that Tony mentioned there that are downsides in the companies, also apply to the individual, regardless of whether it’s in a limited company or not. There are some downsides, but to say that it’s just not applicable, and you should just not think about it, I don’t think is right. You should seek advice on what the best way of doing it is.
Shona: For your circumstance.
Paul: For your personal circumstances, yeah. Depending on your circumstances, the right way of structuring things can be very different.
Shona: Yes, of course. Okay, thank you gentlemen, for both of your input there. I have got a question directly for you, Paul, though, if I may. This is a person who has just inherited, and sold a small house. They’ve decided to move into a bigger family home, and still have some funds left. So we’re thinking of using those funds to get a buy-to-let property. What do they need to consider in the financing of a new buy-to-let?
Paul: Okay. So from a finance perspective, that’s what the vast focus on that, there’s been some recent changes around the way that lenders look at buy-to-let mortgages, or the way they have to look at buy-to-let mortgages. That is, with regards to benchmark rates. So all buy-to-let lenders now they just use a benchmark rate of five and a half percent, and that needs to cover costs 125% of the time. So that gives some leeway on extra costs, and vacancy periods and things. Some lenders have gone a little bit further than that, and made it 145% of the time, but it’s important to understand, therefore, based upon what you’re buying, what the yield is going to be, and what that will allow you to borrow, because that change is obviously with regard to serviceability, that that can also affect the loan to value that you’re able to achieve on the property.
If it’s a lower yielding, higher value property, quite often you won’t be able to borrow the full 75% that you may have been able to borrow before that change. That mostly affects the high value, low yield. Or if you want to look at geographically, London and the Southeast, whereas most other areas where the yields are a bit higher aren’t too much affected by that, because they have more of the profit buffer, if you like. Or, a high yield. That’s one major thing to consider.
How much are you going to actually be able to borrow in relation to what you buy. That would depend on what they’re looking at, I suppose, and what they’re looking to achieve from it. Obviously they need to understand their options. I think where a lot of people go wrong when it comes to buy-to-let mortgages, they just go down and speak to their local bank, or the bank they’ve used for 20 years. That lender will say no, or they’ll say here’s what we do. But that’s probably only one of over a thousand products that are available in the market, and there could be a range of other products that are far more suitable to what they’re looking to do.
My advice would be to seek independent advice. Get an understanding of the full market. Another thing they need to consider is about half of the products in the market are only available to intermediaries. So your only access, even if you do go and speak with the 60 lenders in the market yourself, which you won’t-
Shona: Yes, there’s still an awful lot missing you can’t-
Paul: You could spend a whole year doing that, and you still only get access to half the products. So, spend a day speaking to an advisor instead. They then should give you more of an understanding of anything I haven’t just covered of what you need to consider in relation to your personal situation.
Shona: Great. Okay. The thing that you were talking about earlier, is that what people are starting to now call stress testing?
Shona: And that will change from area to area mainly because of the cost of different properties. So, for in the south-
Paul: Yes. It will change geographically mainly because areas work on similar values and similar yields. That isn’t necessarily linear, because some properties were much higher yielding that others. For example, a cheaper, one bedroom apartment, will usually have a higher yield than a six bedroom house, for example.
Shona: But then you might not have the capital growth on that property.
Paul: Correct. Yes. So there’s two considerations. But if we’re just looking at it from a finance perspective, that’s a very important thing for them to keep in mind. How much they’re going to involve, because that will also affect the returns on the funds they’re investing. If they have £100,000 for example, to invest, and they want to buy £400,000 property, or two £200,000 properties, then they’re going to need the full 75% loan to value. In my view, one of the major benefits of investing in property is the leverage. The fact that you can borrow fairly cheaply over the long term, with high loan to values, that’s what makes property an attractive investment. Property as a cash buy, isn’t that sexy. It’s okay, but it doesn’t give you that great of return as a cash buy. It’s the ability to quadruple your money with the leverage that gives you quite a good return on your cash without necessarily having to set the world on fire on the actual asset.
Shona: Okay. Great. Sorry.
Tony: And also with the stress testing, lenders now are obliged to have a look at the impact of section 24, particularly where you’re a high rate taxpayer having to make payments on account. That can severely affect your ability to service the debt.
Shona: Gosh, that’s really interesting because so they’re actually looking at what you might have to outlay earlier, and that would then affect … I see. That’s something that I wouldn’t have ever thought about. That’s really interesting that you bring that up.
Tony: It’s really trying times for the accidental landlord. What anybody should do, either in property or thinking of getting into property, almost for get that it is property for a second, and just treat it like any other business. If you’re going along to a bank or other lender wanting to borrow money, they will want your inside leg measurement. Experience, business plan, how you’re going to service the debt, what the tax position is. So if you’re treating it exactly the same way, you’re not going to have a problem. How you finally structure it, in your own name, via partnership, via mixed partnerships, via limited companies that’s the bit you really got to take joined up advice. Bear in mind that mortgage brokers, financial advisors typically are neither authorized, nor indemnified to give that-
Shona: To talk about tax.
Shona: Great. So, seek independent advice from lots of different-
Tony: At the same time. It’s really important everyone talks together, otherwise you’re going to get disjointed advice.
Shona: Brilliant. Thank you gentlemen.
Simon, a question for you. Does anyone know if this would count as one household or two for HMO licensing purposes? I’ve emailed the counsel, but they typically take a few days to respond. I think that’s pretty quick, actually. So I was hoping someone might know. I’m letting my terraced house to four people, on one single AST. They are two cohabiting couples. One married couple, and one living together couple. Couple one, Mr. A and Ms. B. Couple two, Mr. C and Ms. D. Mr. A, and Ms. D are first cousins. Would this be one household or two? Also, what could I ask them to prove that they are indeed related?
Simon: That’s quite a complicated question. Thanks for saving that one. Couple of things. First, what are they … I don’t really understand what this viewer is actually trying to achieve by the question. I think they my be trying to say, is this potentially a house of multiple occupation. The definition of that is, three unrelated people living in the same property. Therefore, if the two people who are potentially related, you could say that it wouldn’t count, but then there’s two others. So I think that’s still probably technically is an HMO, although it’s on one contract, that doesn’t mean … It’s about the number of people living in the property. I think that’s what they’re trying to get at. So fine having one contract, that’s no problem at all.
What I would say is that I think it’s probably worth checking with a local counsel to see how that particular counsel qualifies a licensable HMO. For most counsels, it’s five or more people, so in this case it wouldn’t be licensable, but some counsels have three or more unrelated people. It might be licensed depending on location. That’s one thing.
Secondly it certainly would need the safety requirements for an HMO, so it should have interlink smoke alarms in all the rooms. If there’s a problem, everyone’s notified. Safety is the most important criteria in a rental property.
Shona: When you say, “interlinked,” is that mains operated?
Simon: Yes. You have a control panel, they’re all interlinked wired into the mains so if something happens, the whole alarm goes in every room, and every one’s got time to get of the property. Really, really important. I think those are the main considerations, really.
If it needs an HMO license, you need to have all the fire doors and all the other regs. It’s probably worth still having a fire door between the kitchen and the living room because that’s where most fires might start. And you need a heat detector in the kitchen as well. Again, to signal any issues that might arise in the property. It’s really, really important to make sure we do everything we possibly can to protect tenants in the property.
I think that’s what the question was getting at, and I think that’s answered.
Shona: Yes, we think-
Simon: We think it probably is, yes.
Shona: Thank you. That’s all we’ve got time for, for this half of Property Question Time. Do join us after the break and we’ll have lots more questions that I expect we’ll answer for you.
Welcome back to Property Question Time. I’m Shona Lindsay, and just a reminder of who we have here today in the studio. Tony Gimple, Paul Mahoney, and Simon Zutshi. Welcome back gentlemen. So, let’s crack on with the next round of questions.
For you Tony. My accountant has just told me that my tax bill is going to increase in January, and that I’m going to have to pay 50% of next year’s tax bill, which is also increasing in advance. What can I do?
You kind of touch on this in the first half.
Tony: I did. Surprised that it’s the follow on question, in some ways. Paying tax in advance is a real killer. HMRC will assume that because you had money this year, you’re going to at least have the same next year, which is not unreasonable, because generally speaking government doesn’t like the self-employed because they’re so [inaudible 00:15:29] for tax purposes. They’re going to want to take some money on account, and you’ll be paying tax in January and July.
Don’t let the tax sale work your plan and goal when it comes to business. Work at what your goals are, and how best to achieve them. Then look at how to maximize the commercial benefits. Paying tax in advance, we’re seeing that by the time we get to June 19, about the time I’m sixty, which is a really sobering thought. Horrible. Some people will be paying more tax than their profit in that year. Then you’re going to have significant issues. Not just for them, but for their tenants, for their lenders, and for the economy as a whole. It’s just yet another example of shortsighted, knee-jerk policies, causing a bigger problem than they’re designed to solve.
I think you just got to accept the fact that, if you’re making money, and you only pay tax if you’re making money. Why would you want to lose money in business? It seems to defeat the object. You’re going to have to start making better provision. Look at how your investments are performing. Look at how the business is performing. Very, very importantly look at how you can have proper, legitimate business structures, which help you to still achieve your goals, but reduce the need to pay so much tax in advance every year. If you’re borrowing money, as we discussed earlier, lender’s going to take that into account, and it can have dire consequences across the board.
Shona: Right. Could be a massive, a massive amount of money which so many don’t have access to.
Shona: In terms of claiming it back, is that relatively easy for a self-employed landlord to do, if they don’t make the same money the following year?
Tony: It will catch up with itself eventually, but they’re really going to have seek advice from property accounting, or property tax specialists. The average GP, accountant won’t know how to do it. Only-
Tony: It is a specialist area, yes.
Simon: It’s going to cause a real issue because out of the 1.75 million landlords, I’d put money on the fact that at least a million really don’t understand the implications of this. So when January 2019 comes, it’s going to be a massive shock, and that’s going to have knock on effect on the whole market. I think lots of landlords might think about retiring, selling up early, getting rid of their property, so this government policy is going to have a huge impact on the economy as a whole. Much bigger than I think they’ve anticipated.
Shona: 2019 is going to be a big year then, isn’t it.
Simon: Interesting. An opportunity for those people that know what they’re doing. Most people are going to get slaughtered.
Tony: Which is also why, like Paul said, that 75% mortgages of our limited companies, is because people see that as the obvious and easy option. It may reduce tax today, but has a massive toll later on.
Paul: And, what all the changes, not just with the regard to section 24, but the finance change arranged before, they are placing a lot more importance on yield. The age old strategy of buying property, just breaking even for growth, doesn’t really work anymore, because that strategy could quite easily become negatively gear. You’re actually losing money on a yearly basis, whereas if you have a decent yield and a decent profit buffer, these changes don’t hurt you anywhere near as much. If you can pay a little bit of extra tax, if you can still borrow the same as before, you’re still making money. Hopeful making some growth as well. So, you’re still in the market, and you’re still doing well. It’s for those that are borderline from yield perspective that are going to really struggle.
Shona: Okay. Thank you. Thanks gentlemen.
So Paul, a direct question for you now. I want to understand the buy-to-let market … don’t we all … and what is involved in being a landlord. Can you please advise me on the following topics? Buy-to-let deposit and mortgage requirement. Letting agents fees and contracts, and what letting agents will do. The EPC and safety inspections.
Paul: Okay. That’s quite a broad question. We could talk about that all day. You could probably spend all year learning about each of those points, but I’ll cover them in brief.
So, first they asked about deposits and …
Shona: Deposits and mortgage requirements.
Paul: … and mortgage requirements. For buy-to-let the average maximum that I like to call it is 75%. What I mean by that is that’s where most lenders will lend you up to and still at a pretty decent interest rate. As soon as you go above that, the rates start to hike quite a bit. I would generally say, for most people you are better off going at that rate, than anything less because it better utilizes your money. That’s sort of loan to values.
Requirements, buy-to-let mortgages are quite different to residential mortgages in that it’s a lot more about the property that you’re buying and the yield that property will provide-
Shona: That the individual’s income.
Paul: Exactly. For example some buy-to-let lenders will almost ignore the individual. Some lenders don’t even require you to have any income. Most that will do that would require you to already have the property, or being an experienced landlord. It varies, again, depending on your situation.
If you’re a first time buyer, first time landlord, it’s going to be most restrictive, and then thereafter, once you have a home, it becomes a little bit less. Once you have a buy-to-let more than six months, it becomes a little bit less. Once you’re an experienced landlord, there’s a lot of flexibility in the buy-to-let lending market. So, it differs between lenders, and it also differs between your situation. Again, another very good reason to seek advice, based upon where you’re currently at, to determine what your options are, and what the requirements are in that area.
With regards to property management, is that the next one?
Shona: The lessee’s agents fees and their contract and what they do.
Paul: Again, they differ substantially. The fees differ quite a lot. London is expensive, generally. I’ve seen property management and lettings fees be in access of 20% in London, whereas, outside of London, you’re probably looking an average of less than 10%. Some are charging even less than that. In the single figures now. I think that’s a market that’s changing quite a lot at the moment. I think people are realizing that actually you don’t need to charge 15 or 20% to manage a property, and that the margins there have probably been too fat, and there’s some entering the market that are charging 4 or 5%.
Shona: Do you think that’s because a lot of people are actually managing their own properties and thinking, I’m not going to pay that fee?
Paul: I think perhaps there’s been a realization that the cost doesn’t justify the benefit. There’s some more budget people entering the market, which may be don’t do the same extent of services, but are a lot cheaper. There’s a range, is the answer. It does somewhat depend on where the property is, as to what you would expect to pay.
Shona: And what you’d get for that percent.
Paul: And what you’d get. There’s obviously full lettings in management, so they let the property for you and they manage the property. There’s just lettings, and there’s just management. Obviously, if you’re just using lettings, then you’d have to manage it yourself. If you’re just using management, then you have to let it yourself. The costs would differ depending on what they’re including there.
Shona: Then just quickly, they asked about EPC and safety inspections. We’ve kind of talked about some of that a little bit with the integrative fire, so what do they need to do in terms of getting and EPC?
Paul: So the obviously have to have them in place. If they’re buying new properties, they’ll usually come with those things initially, and then they need to renew them when required. Again, it will somewhat depend on the type of property that they’re buying, as to what-
Shona: The EPC every 10 years, is that right? Am I making that up?
Simon: I think it’s 10 years. If you’re selling or renting-
Shona: Gas safety inspections every year. What about something like the integrated fire thing? Is that-
Simon: You should get those retested every week. Someone should check that it works.
Shona: Wow. So even if it’s the tenant?
Simon: Well, you have someone, a responsible person checking every week.
Shona: Okay. So there is quite a lot.
Paul: Yeah. There’s a lot to learn. And it would depend on the property you’re buying, the cancel area that you’re in, what requirements are in relation to that property. Obviously, first determine what you’re buying, and then determine what the requirements might be. Probably a bit too much to cover there in one-
Shona: We’re a whole week’s worth of episodes.
Tony: Very quickly, going back to the price versus value. The percentage to a large degree is immaterial. What you have to do is borrow against what your time cost is, and how many hours it will take you to achieve the same, and if you can achieve more by paying somebody else, then regardless of what the percentage is, it makes sense to let them do it and you have more money-
Shona: Doing whatever else you do.
Tony: Correct. So that’s a value as opposed to a fixed point.
Shona: And that goes back to talking about it as thing of business and not getting emotionally involved actually categorizing where the money comes from-
Tony: And make sure you’ve got proper contracts, so make sure you deliver what you promise, and make sure they do the same thing to boot.
Shona: Brilliant. Thank you gentlemen.
Right, final question of this episode for you, Simon. Could you please explain a little how crowdsourcing helps in the property business?
Simon: That’s an interesting question. I wonder if they actually mean crowdsourcing. When I think about crowdsourcing, I think about crowdsourcing is a way of going out to the crowd, a number of people to pool resources. So, for example, sometimes people will write a book, and they’ll go out and get different people to write different chapters. Or they might have a technical project, and they look for different contractors to come and help them.
I guess, one thing you could maybe do, is you could, if you’re doing a development, a small development project you’ve gotten, you could crowd source the team to come and help you. But that’s about as far as I would see that would really stretch in that particular environment.
I wonder if they’re talking about crowd funding instead. A lot of this terminology, crowd funding, it’s all very, very new for the average person. So I think a lot of people do get terminology confused. Crowd funding is where someone might have a property project that there’s been found, put onto a platform, and then some people will come and say, “Yeah, I’d like to support that project.” In effect, you buy into that project, get some equity in the term for cash funding it. That’s different again from payer to payer lending, when someone might have a property and they will borrow money from the crowd to help fund that project in return for an interest rate. It’s a fixed return they get on that. Usually a shorter period of time. Again, it’s about trying to work out the right terminology. I think when you’re investing in property, it’s a good lesson to make sure you understand terminology, because you might be speaking to someone about something and you both have a different interpretation of what that actually means.
Shona: And you’re going to get a different answer.
Simon: Exactly. So, always clarify exactly what someone means when they ask you a question like that.
Shona: Brilliant. Thank you. Thank you gentlemen.
Well, that’s all we’ve got time for, for this episode of Property Question Time. As ever, if you have any questions to pose to our experts, please do log on to the website, www.property-tv.co.uk, or send us a direct email on firstname.lastname@example.org.
Thank you so much to our wonderful guests, to Tony Gimple, Paul Mahoney, and Simon Zutshi.
Simon: Thank you.
Shona: I’m Shona Lindsay, and we’ll see you very soon. Thanks. Bye.