Jemma Forte: Hello and welcome to today’s edition of Property Question Time with me, Jemma Forte. This is the show where you get to ask your property-related questions to our industry experts. And today we have a fabulous lineup. Let me introduce you.
First up, we have Stefano Lucatello, Senior Partner of Kobalt Law, international property lawyers. And then we have Mary-Anne Bowring, the Founding Director of the Ringley group. Welcome along. And Paul Mahoney, a regular on the show, MD of Nova Financial Group. Hello.
Right, welcome one and all. I think we should kick off straight away. And Stefano, I’ve got a question for you, if I may be so bold. So here it is. “I looked into remortgaging my two French mortgages last year, but the hassle just wasn’t worth it. What about getting a UK mortgage for a house in France? Is this easier?”
Stefano L: No.
Jemma Forte: I was going to say, is that even possible?
Stefano L: It’s possible, but it’s not as easy as you might think. I don’t think, unless there’s something particular with this client, this particular person, that it’s that difficult to remortgage. There are many, many international brokers in the United Kingdom now. They are associated with international brokers. Some are associated with banks. And if you go into one of the big international banks that deals with France in the United Kingdom, you’ll find that they’re very amenable, and the process isn’t that difficult at all.
The problem you’ll find with remortgaging French property in this case with an English bank, is that the English bank will have a problem with the valuation and how to go about the valuations. They will not be very happy to rely upon a foreign valuer to do their job for them, because they have different criteria abroad to the criteria that are used by an English bank when it values or comes to a realization of the value of a property here in United Kingdom.
So the answer to the question is, I would go back, I would revisit the matter and I would choose a friendly broker who is in England who is versed with French property and who can make the job easy for you.
Jemma Forte: Yeah. But perhaps they’re trying to sort of sort it out themselves, which I’d imagine would be a minefield.
Stefano L: It’s not the area that you should be sorting something out yourself. You should be going to a broker who is an honest person, who is in the job and reputable and knows what they’re doing and has got lots of years experience and can bridge the gap between the United Kingdom and France and tell you what’s what and where and how to go about it.
Jemma Forte: Okay. Although I quite like the sort of an English valuer, sort of doing a day trip-
Stefano L: Well, there are many-
Jemma Forte: … on the ferry.
Stefano L: Jemma, there are many English valuers now, and RICS members who have, for a better choice of life, decided to spend either all their time in France and have taken their qualifications over to France and are therefore doing English valuations or French valuations and reports on property. They are the sorts of people you should be … or he should be … going to see.
Jemma Forte: Okay. That’s interesting. I don’t know what you mean by better quality of life though. We’ve got it all here. We’ve got the climate. We’ve got the amazing … you know, the governments all going really.
Stefano L: Absolutely. Brexit and all that, yeah.
Jemma Forte: It’s wonderful. Right. Mary-Anne, first question for you. This person says, “My partner and I are first-time buyers and we’re looking to buy a particular house but have found out it’s not freehold but is on a lease. It’s an end-of-terrace cottage and we’re unsure how old the property is. We’re unsure how long is left on the lease and we’re set to find out within the next few days after the surveyors have gone in. Does buying a house on a lease have any problems? And especially when we come to selling the house, does the value go down as the lease gets shorter?”
Mary-Anne B: Yes and yes is the short answer. Just to sort of elaborate on that. Yes. Any lease, the value will go down as the lease gets shorter. The real challenge here is, is that most houses are not freehold. So buying a house that is freehold will be less attractive to you. That’s why they’re having reservations and any seller in the future.
So it’s important to find out why it’s not freehold. There are certain restrictions in the country as to properties that cannot be freehold, for example, if you’re on Crown land.
Jemma Forte: Okay. What’s Crown land?
Mary-Anne B: Effectively owned by the Queen.
Jemma Forte: Right.
Mary-Anne B: So that’s typical perhaps from the properties around Regent’s Park in London. That would apply to a lot of them.
Jemma Forte: That’s interesting.
Mary-Anne B: And there’s also been a lot of publicity going through House of Commons with the Taylor Wimpey scam. So that scam … well, I don’t know if scam’s the right word … but that has been where they’ve been selling.
Stefano L: Allegedly.
Mary-Anne B: Allegedly, yes.
Jemma Forte: Yes, of course I’ve heard about all those, yeah.
Mary-Anne B: So that’s where houses have sold leasehold in order to make the developer more money and the ground rent starts off quite low-
Jemma Forte: And then it’s been going up and up.
Mary-Anne B: … but it’s been doubling every 10 years or so. So the ground rent can be getting very high very quickly. So if the lease is not short and has a very low ground rent and isn’t on Crown land, then in theory you would do better to get the seller to try to claim a lease extension if it needs to be longer or do some work first
Jemma Forte: Can you turn a property from leasehold to freehold?
Mary-Anne B: Yes.
Jemma Forte: Could you legally do that?
Mary-Anne B: Yes.
Jemma Forte: Okay.
Mary-Anne B: Yeah, there are procedures down that, set out in the 1967 Act. It’s quite complicated, but the value or the cost of that relates to the ground rent and how long there are left on the lease. So they are the two main questions.
Jemma Forte: Yeah, yeah. Interesting.
Mary-Anne B: I’d be suspicious.
Jemma Forte: Yeah, and I guess the person who’s selling, the vendor, is going to have this problem with anybody so maybe they might accommodate a bit and be flexible.
Mary-Anne B: Well we don’t know all the facts. This house might be cheaper pro rata than others, but first of all, try to fall in love with a freehold house. If you can’t, then you need to ask quite a lot of questions because your reservations are going to be repeated by, let’s say nine out of 10 buyers, and if the market to resell it is only one in 10 buyers, that will affect the price and it will also affect the time it takes to realize your sale.
Jemma Forte: Okay. Right. So there you go. You’re probably right to feel a bit wary. Thank you. Okay, Paul, one for you. This person says, “With all the changes recently in the buy-to-let market such as the Section 24 Stamp Duty and Mortgage Serviceability, is buy-to-let still a worthwhile investment?”
Paul Mahoney: That’s a good question, and it’s a very common question at the moment. The answer to the question is kind of in two parts I suppose, because all those changes do kind of negatively affect a fairly specific type of property.
Jemma Forte: Okay.
Paul Mahoney: And that’s high-value, low-yield properties. If you look at Section 24, which for anybody who’s a higher rate tax payer, it means that they’ll be paying more tax. If they have a mortgage on their property, there’s less to deduct, so there’ll be more tax payable, effectively, in most cases.
The stamp duty changes, obviously that most affects high-value property because you already have the thresholds of high-value properties, you pay more tax. And then you have the Mortgage Serviceability, which refers to the way that lenders look at how much they’ll lend you based upon the rent that a property generates.
So if you are generating a high rent, it does mitigate the effects of all of those changes. And if you’re buying properties or you own properties that are lower value, it does somewhat mitigate the effects also. So if we look at that geographically, areas that it’s most affecting is London and the Southeast, where property values are … well, yields haven’t kept up with property values the way that they’ve risen over the past 10, 20 years. So yields are quite low and property values are quite high relatively.
So that makes it difficult to justify a buy-to-let investment into that type of property and puts a lot of people into a difficult situation where they hold a portfolio of those types of properties as to whether to maintain that portfolio or whether to start changing things. It’s causing quite a strong shift away.
Jemma Forte: Yeah, I was going to say. What is the ripple effect so far, that you’ve seen, from these changes?
Paul Mahoney: Yes. So the ripple effect is it’s causing a strong shift away from that type of property in those sorts of locations. Moreso to areas like the Midlands and the Northwest. Still sort of major cities like Birmingham, Manchester, Liverpool. You know, people still want to invest in locations with depth. But areas where property values are a fraction and yield are significantly higher.
So it’s still much easier when you run the numbers to justify those investments. And also with all the driving factors so far as, you know, the net migration in the UK, employment growth, therefore population growth, in all those cities, they also stack up.
Jemma Forte: So driving things away from London a bit.
Paul Mahoney: What we’re seeing, is a lot of people who used to be very London-focused, and now opening their minds a little bit and looking at other things and considering areas that might be better for them.
Jemma Forte: So overall for the whole of the UK, that’s probably quite a positive thing.
Paul Mahoney: It spreads the-
Jemma Forte: It spreads the wealth out a bit.
Paul Mahoney: … focus a bit more, yeah.
Jemma Forte: Wonderful. Okay. Well thank you so much. Really informative. Right. In the show we also like to really plunder our experts for information and come up with some golden nuggets. So has anybody got a little tip or property industry expert golden nugget for me?
Mary-Anne B: Just to reminder perhaps to all landlords out there, that this April, this tax year, there’s been a change to housing benefit rules again, which means single people under 30, are no longer entitled to anything more than a single room allowance. So if you have a single person under 30 renting an entire flat, it is likely their benefit is going to be capped significantly. And of course the valuation industry, the charter surveyors, know this as well. So it may well affect valuation risk, if you’re remortgaging.
Jemma Forte: Right. So with bits of legislation like this, do they … ’cause I hadn’t heard about that for instance. And maybe that’s because it doesn’t affect me. Apart from anything else, I’m not under 30.
Mary-Anne B: Well, it’s not been well publicized because it’s not a very popular policy for the government.
Jemma Forte: This is what I was going to say. So do these bits of legislation, just suddenly impact people and they’re like, “Oh what’s this? What’s this?” And they literally just have to live it to find out? Or will they get some, you know, would they have got some kind of warning?
Mary-Anne B: Well the councils will give directive to the Housing Benefit Offices. The Housing Benefit Offices will be geared up to cut benefits and the rest of the world will find out when their bank balances has have less money in it. That tends to be the way.
Paul Mahoney: I think landlords often find out retrospectively. We were just speaking about Section 24, which is due to affect some people quite significantly. And there was a survey done recently that said that 40% of landlords didn’t even know what it was.
Jemma Forte: Really? That’s interesting.
Paul Mahoney: And it actually started to come into effect this year. So I think you’re quite right. They will figure out what it is when they do their tax return this year.
Jemma Forte: It’s never good news, is it? Okay. So yeah, you basically send, your accountant just informs you this is the new …
Stefano L: Well, the revenue received will go down. Revenue affects value. Or it’s going to affect the choice of who the landlord will want to rent to. Perhaps they need to ask more questions. Two people looking at a flat. “Is your girlfriend actually going to be living with you? If you’re both on housing benefit or not.” Or are they going to be deemed to be a single person?
Jemma Forte: And I think, you know, with regard to going back to your question about buy-to-let, we can all probably remember the time when it would have been difficult not to make money on a buy-to-let. You know, 20 years ago and things have changed considerably, but it looks like there are positives to come out of that situation as well.
Paul Mahoney: Yeah. I think all of these changes, it really sort of reverts back to the value of advice. As you said just there, in the past was a lot more easy to do things on your own and to do quite well. Things are a lot more complex now, so there’s a big difference between doing the right thing for you and your goals and doing the wrong thing for you and your goals. So seeking out that advice and making sure you’re doing the best possible thing for you is very important.
Jemma Forte: Okay. So always consult experts and watch this show and then you find out everything. Okay. That’s it for Part One. We will see you after this short break.
Welcome back to Part Two of Property Question Time with me, Jemma Forte. I’ve got my lovely trio here still of course. We’ve got Paul Mahoney, Mary-Ann Bowring and Stefano Lucatello.
Okay. Paul. I believe you might have a golden nugget for us.
Paul Mahoney: Yeah. Well just to link back to the Section 24 chat. There’s a lot of misconceptions around it and I believe that’s because of the way it’s written. Effectively it says that, “As of 2025, buy-to-let mortgages will no longer be tax-deductible.” And that’s pretty clear in the way it’s written. However, you do receive a tax credit at 20%. Which effectively means that if you’re a basic-rate tax payer … so your employment income, your property income, any other source of income is less than £45,000 per annum, therefore being a basic-rate tax payer and you receive the 20% tax credit … your tax position doesn’t actually change at all.
So a lot of people think they’re going to be impacted by section 24 and they’re not. The tax position won’t actually change, but there’s also an opportunity that creates. We find that a lot of people who invest in property as a couple and one person in that couple will be earning a lot more than the other. It’s pretty common. And perhaps one is earning £100,000 and the other is earning nothing or very close to nothing.
If that income is diverted to the lower-income earners name, that is one way of getting around the negative impacts of Section 24. It’s certainly worth seeking personal tax advice on that. But it’s something that a lot of people aren’t really aware of it in our experience. So worth looking at, so far as avoiding some fairly negative impacts potentially for a lot of people.
Jemma Forte: Yeah, I mean, yes. It might be that a lot of property is suddenly on the market come 2020.
Paul Mahoney: Essentially. And look, that maybe that could be through misconception and there might be ways around it for certain people’s situations.
Jemma Forte: Yeah, I think one thing that’s clear is, for most people these situations are so complex, you have to get advice. You can’t take anything for granted or you get yourself into a real old pickle, as my mum would say.
Right. Stefano, and I’ve got another question for you please. This person says, “I am a UK resident and I’ve already bought one property in France and I would now like to buy the house next door. This time I’d like to buy it in the name of my limited company and my wife and I are sole owners of the company so as to make use of my company funds without having to take an extra dividend. My UK accountant says, this isn’t a problem, however, I don’t want to trigger any red tape or tax inquiries or tax returns in anything. Can you advise please whether buying in the company name in France might create a problem?”
Stefano L: Yes.
Jemma Forte: I love it. Right, we’ll just leave that there then.
Stefano L: Right Jemma, it’s a big question. It’s an exam question. It’s got all sorts of bits and pieces in it. So for the purposes of answering this question, I’ll take it that the company’s English, the husband and wife own it?
Jemma Forte: Yes.
Stefano L: The property is French, we know that. They want to buy the property next door. The first answer is, “Yes, it would cause a problem to buy a French property with an English company.” Why? Because foreign companies in any jurisdiction … as we do, whether it’s an English company or a foreign company buying a property in England … are treated negatively. So there would be an annual tax to pay for it being a foreign company or it being in a foreign company ownership.
So the best way … Strangely enough, I’ve got a case at the moment which is the same sort of thing. So we have an English company which is buying a property abroad. The best way to deal with this would be for this couple to actually set up an SCI which is a Societe Civile Immobiliere. An SCI is a special purpose vehicle, which is only for the holding of a property which does not have any commercial use to it.
So you’re holding it and the aim of it is to avoid succession tax in the family. So you’ve usually got husband and wife, maybe two, three, four kids. You put them all into the pot, they all become shareholders in this SCI, this French company. And what you can do, having created the SCI is for the English company to lend the money to the SCI with which to buy the French property.
There can then be a loan agreement between the English company and the French company, which is good for accountancy purposes and deduction of tax purposes because a loan is always better than actually any other sort of transfer of money. It will be a reduction in taxation for one company and there can be … there doesn’t necessarily have to be … repayment of that loan. It can be a deferred loan. So that’s the best way to deal with it. The best way for them is to create the SCI, invest in the French property, with the SCI having a loan from the English company.
Jemma Forte: Wow. I hope you were listening to that and also I’d imagine now our viewer’s got the pause and just rewind and write all that down. That’s really valuable advice and the kind of thing that exactly you learn on this show. I’d have had no idea. Thank you. Complicated. Did you follow?
Stefano L: I’ll be testing you at the end.
Jemma Forte: Yeah. He’ll be testing me at the end. But yeah, I mean obviously this person’s got a lot of business knowledge and nous. You know, they’ve got their own company, they’re obviously doing well enough to have these properties in France. But it is interesting. You think, “Oh, should I do this? Should I do that?” And the fact that you know instantly.
Stefano L: Well, the client I’m dealing with at the moment have £650,000 of dividend-able income that he can actually use. So instead of using it per se, he’s actually lent it from the English company to the French company and he gets a benefit at both ends then.
Jemma Forte: There you go. There’s always some way round these things. Thank you.
Okay. Mary-Anne, this is a good question. It’s quite easy. “What are the common things that I should look out for in buying a leasehold property?”
Mary-Anne B: Easy to read or easy to answer?
Jemma Forte: Easy to read. And that’s a should.
Mary-Anne B: Okay. Well, I mean a lease is a complicated document. It is a contract. It cements an agreement between the parties. Now the thing that most people don’t really cotton on to, is the lease was created when the flat was created. So you actually buy the residue of what is left of the lease. So you don’t, you don’t get the opportunity to renegotiate any clauses in it. So therefore you need a good solicitor to advise you as to what it says.
So key things to look out for are, what is the ground rent? ‘Cause that’s something that you probably haven’t thought about or budgeted for.
Jemma Forte: Yeah. And that’s an annual fee isn’t it?
Mary-Anne B: Yeah, it’s basically for the land that the building sits on. So you have to pay that to the freeholder. So what is that ground rent and when would it increase? In the old days it would normally double every 33 years, but there have been some awkward leases written where the ground rent can rise in relation to the value of the property. And in property prices rising that can be huge.
You also need to understand what service charge and liabilities you’re going to have to pay towards. And then of course, the covenants. So the covenants are purely promises, one party to another. So, “I promise not to play music after 12 o’clock at night,” and the freeholder promises not to come on-
Jemma Forte: I can’t promise that.
Mary-Anne B: Okay. The freeholder promises not to interfere with my right to peacefully enjoy the premises, for example.
Jemma Forte: Right. Okay. I don’t remember that bit when I used to have a flat and actually I did have a neighbor that was rather noisy [crosstalk 00:19:42].
Mary-Anne B: In a rental flat, the covenants are not as long and as complicated, but those sorts of covenants will apply.
Jemma Forte: I was only joking actually. I think that kind of thing, it should be made, you know, a promise. A legal promise.
Mary-Anne B: Well there have to be rules to govern how to live communally, otherwise disputes would be rife. But the most important ones really are the repairing covenants to make sure there is a provision to repair. There will be leases that don’t add up to 100% perhaps so somebody’s not paying. There’ll be leases that don’t say who has to paint or decorate the windows. So are we going to wait until they fall out? There can be all sorts of problems with leases. Leases that give you a right to occupy your demise, but not to walk over the common parts to get to your demise.
Jemma Forte: I’ve always thought that leases fundamentally don’t make sense, in a way. Do you know what I mean? Like, I’ve always thought that it’s something that should be revised completely. Because it’s this thing where, 99 years and then it gets to 40 years. That’s still 40 years. And it’s like, “No, it’s got to be up this end.” So it’s sort of a constant problem isn’t it?
Mary-Anne B: It is. But since 1993, there’s a right to extend your lease. And that’s a statutory right so long as you’ve lived there for two years.
Jemma Forte: Okay. Well, that helps.
Mary-Anne B: And then you only pay 50%, or you share in the enhanced value. And your ground rent gets canceled to a peppercorn which effectively never gets collected. So it’s quite a swift and established industry for extending your lease to make it longer. And it becomes a problem at around … well, 80 years is the time you have to start paying marriage value, so it gets significantly more expensive after that. And according to the RICS valuers at 70 years, it becomes a valuation problem. Or they’re going to start to reduce your valuation because the lease is deemed to be short.
Paul Mahoney: And therefore a mortgage problem as well.
Stefano L: You can’t get a mortgage if it’s less than 60 years.
Jemma Forte: Yeah, so you might as well … I don’t know. This is what … 70 years is 70 years. It’s a long time and yet it means nothing. It’s always seemed quite clunky to me.
Mary-Anne B: You’d want to be buying a lease that’s really more than 85 years if you’re moving in and know that you’ve got to get on with extending it before it goes to 80.
Stefano L: So one extra thing you could do, Jemma, is if you’re about to buy a property … because you don’t have the right to extend the lease unless you’ve been in there for two years … you could actually ask the vendor, the outgoing vendor, to apply, presuming that he or she has actually lived there for two or more years … and then that benefit of the lease extension can be assigned to you, which means you can get the benefit of it and you can progress to complete the extension of the lease.
Jemma Forte: It takes responsibility away and puts it on the vendor.
Stefano L: Well, you can’t do it unless you’ve been there for two years.
Jemma Forte: Yeah. Okay.
Mary-Anne B: But also be careful because if they haven’t negotiated the price, you will potentially take on an unknown contract without a price agreed and you’ll be liable for the legal fees of the freeholder if you pull out and don’t go forward. So it’s about-
Jemma Forte: It’s a short question with a very large, complicated answer, actually.
Mary-Anne B: I think we’ve slightly gone away from the question just to expose some lease problems really, but perhaps that helps to-
Jemma Forte: No, it’s great, yeah. Things to look out for, so yeah, all really relevant. Thank you.
Okay. This one’s for Paul. This person says, “I run a successful IT business and I’ve got a spare £200,000 in my limited company. I don’t want to take it out for tax reasons, but it’s sitting there doing nothing. Can I invest it in buy-to-let property?”
Paul Mahoney: Good question. Yes, you can. And it’s a fairly common strategy, an increasingly common strategy. Moreso given the recent changes in the market around Section 24, which have been a fairly common theme. But so far as taking that money, there’s a few things you can do with it. You could invest it through your current operating company. One of the downsides of doing that is some lenders don’t like it. They don’t like lending to a company that’s operating in another way because that other business activity could impact upon the property.
But what a lot of people are doing is lending money from their operational company to a special purpose vehicle, and by doing so, you get the benefits of that loan. You know, you can pay yourself a nominal interest rate, and then also take the money back if you want to, tax-free.
But anyway, that moves the money from the operation company, so in this case, that £200,000 pounds. You could move that into a special purpose vehicle and invest that into buy-to-let property. And you could split that up however you wanted to. You could split it into two lots of £100,000 and buy two £300,000 properties. With the shift in the market toward people investing through limited companies now, there has been a massive increase in the amount of buy-to-let mortgages available for limited companies.
Some stats on that. Before they announced Section 24, only about 5% of new mortgage applications were for limited companies. And the final quarter of last year, about 70% were. So massive change in the market there. You know, lenders are opportunistic. They see this shift and they offer more products and they try to be more competitive. So the rates have come down significantly. They’re very much coming in line with what’s on offer for individuals.
So it is, yes, it’s a very viable option to invest through a limited company and that would help this person better utilize that money. But again, seek advice, make sure you do it the right way. Make sure the structure is correct and make sure you’re buying the right properties for you and your goals.
Jemma Forte: Excellent stuff. Right. Thank you so much. It’s been an absolute hot bed of info, brilliant tips and information. So thank you so much to my experts, Paul Mahoney, Mary-Anne Bowring and Stefano Lucatello. I love saying his name. It’s so nice and thank you very much for watching of course.
Tune in next time to Property Question Time if you’ve got any questions that you’re desperate to know the answer to, then of course you can get in touch. Info@property-tv.co.uk. Or of course, visit our website, all the Ws, and then it’s the same, property-tv.co.uk. My name’s Jemma Forte. See you next time.