Shona Lindsay: Hello, and welcome to Property Question Time. I’m Shona Lindsay, and I’m joined today by three experts here in the studio. Let me introduce you to them without further ado. First of all to Tony Gimple, who is the Founding Director of Less Tax for Landlords. Next we have Paul Mahoney, who is the Managing Director of Nova Financial Group. And finally, Simon Zutshi, author of international bestseller Property Magic, and the Founding Director of Property Investors Network.
We’ve got loads to get through gentlemen, so I shall crack on with the first question for you, Tony, if I may? In your experience, just how aware are landlords about Section 24?
Tony Gimple: They’re not, at least they’re aware of the words, but not what it means.
Shona Lindsay: Right.
Tony Gimple: There was a recent report published, showing that broadly speaking, only half of landlords are even aware of Section 24, let alone what it means in real terms. There’s been a lot of press, a lot of hyperbole, but it’s only this year, or in fact, January ’19, that the people are gonna finally wake up to what it is and what it’s going to do, or not for them.
Shona Lindsay: Because they’re gonna feel it for the first time?
Tony Gimple: They are gonna feel it. And what Dr. Johnson said, “The prospect of imminent death concentrates the mind wonderfully.”
Shona Lindsay: Indeed.
Tony Gimple: It’s just part of the human condition. We’re lazy by nature, we do as little as we can in order to survive, and it’s only when something changes in the environment that we’re motivated enough to get up and do it. Section 24, the removal or capping effectively, the amount of relief you can get against mortgage interest payments is going to hurt.
It will easily push a basic rate tax pay into higher rate and a higher rate tax paying into advance rate. What’s even less understood is once you get over a hundred thousand pounds a year income, which is not a huge amount in the Southeast particularly, and certainly not in the landlords’ sense generally, you lose you’re personal allowances.
Shona Lindsay: Right. That’s a double whammy
Tony Gimple: So between a hundred and a hundred and twenty, to a hundred and twenty three thousand is effectively taxed at 60%. And if you’ve got kids, you’ll lose child allowance. So Section 24 alone can push you over. Really important that landlords stop being accidental, wake up to the fact, learn, take joined-up professional advice, and workout how to take advantage of this opportunity. A lot of people will think that Section 24 is not an opportunity but it is.
Shona Lindsay: In what way?
Tony Gimple: Well, because the truly accidental landlords will no longer want to be in the space, nature abhors a vacuum, and if you can recycle capital, if you’ve got access to further borrowing, then you’ll be able to grow a professional property business.
Shona Lindsay: Right, okay.
Paul Mahoney: Can I just talk about that on the flip side of the coin? I think pretty good what Tony said there as far as the lack of awareness for Section 24 and how it’s going to affect people to the negative. Certainly something I found as well is the over-awareness of basic rate tax payers thinking they’re going to be affected by Section 24.
Shona Lindsay: Yes.
Paul Mahoney: So something that I find in all of my talks where people are really surprised is that if your property income plus your employment income is less than 45 grand, you won’t be affected by Section 24 at all. And that creates an opportunity for diverting income to a lower income partners’ name. Because lots of people are couples, and generally one person will be earning a high income, one will be earning a low income. If you can divert 44 grand to a lower income persons’ name, again, no effect. And that’s a way of avoiding or dealing with section 24. If for example you’re in a couple, and you’ve both got 44 grand income from property, you simply won’t be affected. And I find that surprises a lot of people.
Shona Lindsay: Yeah, that surprised me. Brain’s ticking.
Simon Zutshi: I think it’s really important to get individual advice in that, because everyone’s different, obviously, and I agree with everything that’s just been said. But I think a lot of people who might also think that they’re okay, below the limit, but because the tax is calculated in a different way, it’s not just about what we make, you can actually get pushed up with no extra increase or any because it’s calculated. So it’s really wroth understanding it, getting individual advice to make sure you understand what you can do.
Shona Lindsay: So Paul, I have a question for you that actually leads on from that. This is a viewer here who says, “A lot of my buy-to-let mortgages are coming to the end of their term, but my mortgage broker is saying that because of something called Section 24 and the new PRA buy-to-let rules, lenders are asking to see a business plan as well as wanting to know about all my other mortgages and not just the ones that I want new deals for. He also reckons that it will be easier to get mortgages as a limited company, but I’ve heard that I’ll have to remortgage all of my properties and not just the ones’ whose terms have expired. That’s sounds very expensive to me and what should I do?”
Paul Mahoney: Okay. There’s two sections to that question, so I’ll cover the first section first with regards to the change of the way that lenders look at portfolio landlords. So that came into effect late last year with regards to anybody who has four buy-to-lets or more, is now considered a portfolio landlord.
And that means when you remortgage one property, the lender looks at your whole portfolio. I think that’s quite a sensible change to be honest, because you could have ten properties that are bleeding and you’re losing money and you buy one good one, but those ten could quite easily bring down that one good one. So it’s quite sensible. It means that you need to make sure that your whole portfolio works. Now there are some extra requirements, you do need a cashflow analysis and a business plan. Different lenders have interpreted that in different ways. It’s not necessarily that complicated, it’s just a little bit of extra information. So long as this persons’ portfolio stacks up and it’s worth keeping effectively, there’s not too much involved to make that okay, to make that work. So I’d say assess that first, definitely.
The second part of the question, they said their advisor has said they might be better off in a limited company. It’s probably outside of the scope of the mortgage advisor firstly. But secondly you can’t just remortgage into a limited company. You’d effectively have to sell your portfolio to the limited company.
Shona Lindsay: So is there a stamp duty?
Paul Mahoney: Stamp duty, capital gains, tax, and remortgage costs. That’s a costly exercise. What a lot of people are doing, if they do decide that the limited company option is better for them, is using that from there on in and not necessarily moving their whole portfolio in.
Shona Lindsay: So that goes to another part of the question where they said, “Well, I’ve been told I’d have to do that with all my properties.” And that’s not necessarily true then?
Paul Mahoney: You don’t have to do anything. You definitely don’t have to. If you moved one, then you don’t have to move ten in. Or if you keep investing, keep building your portfolio and put one in, you don’t have to move the other ten in. There’s a range of areas of advice you should get before doing that.
Shona Lindsay: And as you quite rightly said, the independent mortgage advisor may not actually be the right person to give the information about taxation. I think that’s possibly where you were gonna come in, Tony.
Tony Gimple: What is hidden with that question is something called Section 162 in corporation relief. That’s where you can transfer a personally held portfolio into a limited company without paying stamp duty, and effectively rolling over, holding over capital gains tax. But you can no longer advance clearance for Section 162 in corporation relief and it could be up to two years before you find out whether, or not you actually get it.
If you are moving your existing portfolio into a stand-alone limited company and wish to claim Section 162 in corporation relief, it is all or nothing.
Shona Lindsay: So then you would have to put all of your properties in at that point?
Tony Gimple: Yes, you can’t try one and do another one next year.
Shona Lindsay: And see if it works?
Tony Gimple: No. And as Paul absolutely rightly says, it’s a horribly expensive business. The value of your time, the remortgage, redemption penalties, et cetera, et cetera, et cetera.
Shona Lindsay: Okay. But definitely something that people need really, really good advice on here. Yeah, absolutely.
Paul Mahoney: Yeah, I wouldn’t say you wouldn’t revert straight to moving your properties into a limited company because of the portfolio landlord changes. One isn’t really linked to the other. But they are two things that landlords are having to deal with at the moment.
Shona Lindsay: Okay, thank you gentlemen. That’s great. I’ve got a question for you, Simon. It’s quite a long one, but I’ll rattle through it.
“My partner owns a three-bedroom buy-to-let property. She has a large buy-to-let mortgage on it of four hundred thousand pounds, which is serviced easily by the rent. She has a large amount of equity in this flat, well over 50%. The local authority have now decided that it will need an additional HMO license as there are three unrelated people staying in it.
The sharers are on a single assured short-hold tenancy agreement, but the local authority tells me that that makes no difference. The mortgage on this property is on a fixed rate until May 2020, but I’m reading that mortgages for HMOs will be more difficult to get, we won’t be able to borrow as much with one, even possibly not enough for a full remortgage, and that rates are worse.
Would lenders see this as an HMO because of the licensing, or as it will be sharers in one flat with a single AST, will they not see it as one? We’re actually planning on borrowing more money after the fixed term was up, because we want to pay for some home improvements on our own house that we’re moving to. But with the changes and stress-testing, mortgage relief, and now this, we’re thinking that selling might be a better option.”
Simon Zutshi: Yes.
Shona Lindsay: Yes, sell?
Simon Zutshi: Yes. Well, okay. So I generally don’t like selling property because you have to pay capital gains tax, there’s costs of selling, and then you got to redistribute the money elsewhere, you could buy more, there’s more costs. But having said all of that, the great principle about property is as the value goes up, historically you’d been able to remortgage, take more money out, and put money into your own house or buy another property. And that’s the way many people had built their portfolios over time.
But with the new stress-testing and all the things that are coming in, if they can’t release the money, that money is then tied up. I like to look at what’s called cost of equity. So one of them is just the return of investment money first buyer, that equity tied up at how much of return you’re getting on that, and would it maybe be better. And without knowing all the details, but if there’s at least 50% equity there and she’s worried about not being able to re-increase the mortgage to much more, that’s a lot of money tied up. And it might be better to sell it to pay the tax and redistribute that. And maybe lower value property,-
Shona Lindsay: Smaller properties.
Simon Zutshi: Maybe different parts of the country if you’ve got a good power team who can manage it for you to get much better cashflow, much better return on investment. So I encourage all investors to every so often look at their portfolio and identify which of those properties are maybe not performing as well as they could do. Could they take the money out? At the end of the day we’re investors, we want to get the best return on our investment we possibly can. It sounds like that might not be the case.
Shona Lindsay: Do something more positive with your money.
Simon Zutshi: Absolutely. In regards to the question about the HMO, yeah. Three or more people, doesn’t matter if it’s one single AST, that is a HMO and some councils will require additional licensing for those. You might argue they’re just raising revenue, but there it is, you’ve got to comply with the regulations. And so if they say that’s what it needs, that’s what it needs. Therefor you’d need to put fire doors in, [inaudible 00:12:29] smoke alarm, apply for your license. So there are extra costs of holding that property anyway, which also needs to get put into the-
Shona Lindsay: She needs to weigh it up to that as well, yeah.
Simon Zutshi: Absolutely. If the mortgage is fixed until May 2020, there’ll be a redemption penalty there, so that’s another cost to have to consider if they do indeed decide to sell. But with all that cash, what could they do?
Shona Lindsay: What can you do with it, yeah?
Simon Zutshi: They could spend the money on their own home, they could buy some better properties, whether to their own name or decide to a company, again, they need to take individual advice about that.
Shona Lindsay: Brilliant, thank you gentlemen. So that’s all we’ve got time for in this half of the program, but do join us after the break for more questions for our experts here in the studio.
Welcome back to Property Question Time. I’m Shona Lindsay and I’m joined to day in the studio by Tony Gimple, Paul Mahoney and Simon Zutshi.
Simon Zutshi: Hi.
Shona Lindsay: So gentlemen, we’ll crack on with our next lot of questions. For you Tony, “What is meant by running a professional property business and what does it actually mean to maximize the commercial benefits of doing so?”
Tony Gimple: Interesting question. I suppose if you took property out of it, it almost becomes a long question. What is running a professional business? Landlords have all suffered the same accidents. We all bought another property, shacked up, got married, had a spare one, inherited one, and suddenly we’ve become landlords. In fact some of the biggest landlords in the country started out purely by accident. Has the spare cash, saw something cheap, say, “Okay, I’ll buy that,” and they’re now rich beyond the dreams of avarice. But it’s a business. The fact that it’s bricks and mortar, is no different from a TV studio, or a hotel, or the corner shop. And you have to apply the same rigor and standards as you would to any other.
So put it in simple terms, you have a sum of capital. How would you invest that capital? What safety measures would you want in place? What return on investment? How much shall I leave for [inaudible 00:14:45]? What will the tax position be? How am I going to get my money out? Is it short-term or is it for the longterm? Is it for future generations?
So running a professional property business is actually doing no more than any other proper business would do, whether it’s a sole trader, simple partnership, limited liability, mixed partnership, limited company, or PLC, it’s still a business. And a business owner exists to make a profit and 95% of businesses are 95% the same. They’re taking a raw material or an intellectual property to which you add value and hopefully make a profit on the terms. So that’s what a professional property business is.
Shona Lindsay: And so they’ve asked about what it actually means to maximize the commercial benefits of doing so.
Tony Gimple: It’s being treated like any other business.
Shona Lindsay: Any other business.
Tony Gimple: Yeah. People get all out of shape about tax. You only pay tax-
Shona Lindsay: If you make some money.
Tony Gimple: Correct. Yeah, it does help. The two are intimately linked.
Shona Lindsay: Yeah.
Tony Gimple: So maximizing the commercial benefits of running a professional property business, is making sure you’re first getting the returns and then secondly being treated as any other business would. What’s that American political quote, “If it looks like a duck, sounds like a duck, quacks like a duck, then it is a duck.” And why should being a landlord be any different from any other business.
So if you behave the same way and do exactly what the government wants you to do, hence why all of these changes were introduced to professionalize the sector, then you are maximizing the commercial benefits. But always seek joined-up advice from people who specialize in the area. Unlike the corner shop running a property portfolio is not a simple tax return. It’s complex business.
Shona Lindsay: Especially not nowadays.
Tony Gimple: Especially not nowadays.
Shona Lindsay: Thank you very much. I’m gonna move onto Paul now, if I may. This viewer is inquiring on behalf of their son who is a U.K. citizen, but who’s been living overseas for the last ten years. He’s now thinking of moving back to the U.K.
Their question is, “What are the chances of him getting a buy-to-let mortgage whilst abroad to provide a home when they move back to the U.K. He’d be looking to spend around two hundred and twenty to three hundred thousand pounds on the property and would have approximately seventy to ninety thousand pounds as a deposit. Also, if it was possible to purchase that property, what would be the position with stamp duty being a buy-to-let but also a first time buyer?”
Paul Mahoney: Okay, good question. So given this person is a U.K. citizen but living overseas, they’d be considered an expat. The expat mortgage market is an interesting one in that it’s growing substantially. There is a lot more expat mortgages available today than there was just a few years ago. And I suppose that probably being driven by globalization. More people are working abroad. His ability to get an expat mortgage would very much depend on his financial position, because although we spoke before about buy-to-let mortgages are not so much being about the individual, for an expat it is equally about the individual.
Shona Lindsay: Because we don’t have the information in the country about them, is that why?
Paul Mahoney: Well, I suppose somewhat. The lender will still have security over the property in the U.K. but they generally do want to have a certain level of income and tick some boxes. It’s similar to all the boxes you’d have to tick for a standard residential mortgage. I suppose generally, expats that are working abroad, are earning a bit more money on average I would say. So hopefully he does tick those boxes and he would be able to do that. He’s buying a place to move into at some point in the future, but of course to make it work as a buy-to-let, he’d also need to make sure it works as an investment. The yields will need to stack up.
The loan-to-value, so my understanding is that the average maximum for expat mortgages is more like 65% rather than 75. Again the average maximum being where lenders will lend at a cost-effective rate. So based upon 70 to 90, that would just get into the price point that he’s mentioning. So he may, if he’s going to the upper end of that price, well he may need to add some extra cash.
And then lastly on the stamp duty question, given that he’s a first time buyer, he wouldn’t pay the 3% stamp duty premium. Because a common misconception there is that it’s for buy-to-let properties, but it’s not. It’s for subsequent property purchases. So you don’t pay it on your first purchase, regardless of whether it’s a buy-to-let or a home. However, he would pay stamp duty on the usual stamp duty rates or scales. So under a hundred and twenty five thousand he wouldn’t pay anything, 125 to 250 I think it’s 2%, 250 to 500 I think it’s 3% or thereabout. And it would just be on the usual scales.
Shona Lindsay: But not on that blanket 3% that he’s worried about?
Paul Mahoney: He wouldn’t get the extra premium on top of that for that first purchase.
Shona Lindsay: Great. Thank you very much. And a question for you-
Simon Zutshi: Just one other comment on that, if he’s getting a buy-to-let mortgage now, that’s fine when he’s not here, but if he was then to move into that, he would have to change it to a residential mortgage in the future. Just be aware of that. So be careful of tying himself in for long periods, it might have a redemption penalty, so understanding time scales are quite important there.
Shona Lindsay: Mm-hmm (affirmative).
Paul Mahoney: Yeah, so it’s actually a really good point and it just made me think of another one also. There are lenders that will allow you to get an expat mortgage as a residential property, even if you’re not living there.
Shona Lindsay: And would automatically allow you to have tenants there, even though-
Paul Mahoney: They may not let you let it out though, so that’s a consideration. Depending on when he’s planning to move back, to sort of tick both of those boxes, both of the buy-to-let or the initial purchase, and then the ability to move back in, that might be the better option for him. Or just to go for the buy-to-let and then remortgage when he gets back.
Shona Lindsay: Yes, okay.
Tony Gimple: Alternatively, he can kill two birds with one stone. Because we were talking about yields and capital values, instead of buying one large place in town, buy a number of them in somewhere like County Durham or wherever where you’ve got much lower capital values, but much higher yields that one of them is home and has got an income building up-
Shona Lindsay: And the rest is [crosstalk 00:21:32] as the income.
Tony Gimple: For when he decides to come back. So let’s find out what he wants first-
Shona Lindsay: And give him lots of food for thought I should think. Lovely, okay. So let’s have a question for you, Simon, if we may.
“Before investing in a second property for the first time, I’m trying to figure out which areas I shouldn’t consider investing in. It seems that some show very little or no growth and others claim amazing returns in the future. Can the panel,” well you Simon, “can you advise?”
Simon Zutshi: So I think it’s very important to understand what’s their reason for investing in the first place. Some people invest because they want to make cashflow now, some people invest because they’re investing for the future and they want a legacy to leave to their family and the kids or a pension for themselves. So the area will determine the return you might get and potentially the growth. It always used to be the case that in the South you might have higher capital growth but not such a good yield, and in the North, you might get a better yield, return your money, but not such good growth.
And often people will diversify their portfolio to get a combination of the two. But just because one area has performed very well in the past, doesn’t mean it’s gonna continue. In fact, you might say that because it has grown, you’re gonna have less growth there, and an area that hasn’t grown previously, might be about to come up.
Shona Lindsay: It’s got room to, yes.
Simon Zutshi: Exactly. So it’s really hard to say, “Well, this will be a good area for that.” Because history is no guarantee of the future. I think it really comes down to thinking about, “Okay, what does this person want to achieve?” And I would suggest, always, I’d consider the area in which they live or which they work first of all.
Shona Lindsay: Because they have a local knowledge of it?
Simon Zutshi: Exactly. They’re gonna know which are the better areas, which are not such good areas. And that’s always a place to start. Now it might not stack up financially in that particular area. So going out maybe 45 minutes-drive from where they live or work, there probably may be somewhere that maybe works better.
But also if they’re not actually wanting to manage the property and look after themselves, which I would highly recommend if you want to create as passive as much income as you possibly can, there’s no such thing as truly passive, but if you want to be hands off, I would suggest what you want to do is think about, “Can I buy somewhere where I know someone I can rely on and trust can manage it for me?” Then it doesn’t have to be where you live and you can open up the whole U.K. as long as you have that reliable power team in the area.
Shona Lindsay: Fantastic, thank you. Well, thank you gentlemen. That’s all we’ve actually got time for this episode. We could probably talk about this forever. But don’t forget, if you do have any questions for our expert panel, do please go onto the website, which is www.property-tv.co.uk or you can send us a direct email on email@example.com
So thank you again to my wonderful guests. See you all soon. I’m Shona Lindsay and we’ll see you on the next episode. Bye-bye.