Property Investment Seminar Witney Blanket Hall Wednesday 12 th October 2016
Property Update Brendan Kay Martin & Co Funding Your Investment Laura Lamb The Mortgage Company Maximising Your Returns Darren Green The M Group Legal Update Agenda Geoffrey Cotterill Everyman Legal
Property Update Brendan Kay MARLA
An Agents View ~ What Does it all Mean? Buy to Let Regulated Non Regulated Let to Buy Holiday Lets Ltd Company BTL
2016 ~ What on Earth Happened? SDLT Brexit Interest Rates Mortgage Relief
Looking Ahead ~ 2017 and Beyond Lower capital growth Low interest rates The "Article 50" effect BRENTAL? Multi-generational living Parent landlords Increasingly onerous legislation Focus on PRS / sentiment
Sales Update Oxfordshire 32% above the national average but West Oxon below county average Still not building enough (7% last 12 months) OX28 301,788 average price (last 12 months) Non Regulated Let to Buy Holiday Lets Ltd Company BTL Witney flats up 29% on 12 months previously
Number of Properties For Sale Falls across the board except 3-bed houses (+22%)
Rental Update ONS +2.6% England +3.5% South-East
Last 5 Years - 200,000 BTL Asset Class Average yield @ 4.8% p.a 9,600 p.a./ 48, 000 over 5 years Average Witney property +40% (Capital appreciation 80,000) BTL Total = 328,000 Savings @ 2.5 % 221,184 (interest reinvested)
Stay Local BTL Be Smart Rent Reviews Stay Competitive Know Your Market Balanced Portfolio? Re-mortgage
Stay Current Aug 19 th - No drop off in instruction level (RSPA) Aug 25 th - Rents grew 2.4% in year to July (ONS) Aug 31 st - Number of properties to let up (ARLA) Sept 1 st - House prices up 5.6% (Nationwide) Oct 4 th - BTL activity down 58% (BBC)
And Finally 'Property is better bet' than a pension says Bank of England economist, Andy Haldane. As long as we continue not to build anything like as many houses in this country as we need to... we will see what we ve had for the better part of a generation, which is house prices relentlessly heading north.
Buy to Let Regulated Non Regulated Let to Buy Holiday Lets Ltd Company BTL
Property Investment Seminar Buy to let Mortgages Laura Lamb
Agenda Buy to let criteria Different Types of Mortgages Types of Repayment Upfront purchase costs What s happened in 2016 What are we predicting for 2017
Buy to Let Criteria Rent calculation Dictated via the lender depending on rental income and loan to value. Mortgage balance x 5.5% divided by 12 + 25% so on 150k purchase the rent would need to be 920 per month minimum. This is set to become tighter under new FCA rules. Affordability Generally income of 25k or more Proof that the applicant can live on their income and won t be reliant on surplus BTL income. Homeowner preferable Deposit In Oxfordshire at least 25% due to the required rental covers. Age After 70 it becomes very difficult to apply for a BTL mortgage
Types of BTL Student lets and HMO (house of multiple occupancy) Restricted number of lenders Generally only available to experienced landlords and home owners. DSS (department for social security) /Council Lets Let to Buy Normal Buy to let Tempting for perceived guaranteed rent as tenant receiving housing benefit Statistically much more likely to need to evict a DSS tenant More likely to need to repossess Lenders don t like it because the leases tend to be longer and lenders prefer short term AST s Stamp duty increase on the PURCHASE! Some lenders don t lend to first time landlords Always regulated Regulated or non regulated
Limited Company BTL Products are generally specific for LTD company BTL which means rates are normally higher but generally they work out as only slightly more expensive than standard BTL and of course you have the benefits of the tax savings. There are around 5 lenders currently willing to consider Ltd company BTL The directors and majority shareholders will need to give personal guarantees Generally the LTD company will need to be a Special Purpose Vehicle (SPV) this is a company let up to hold property only. Becoming more popular following the recent tax changes
Fixed Types of Mortgage Deals Set monthly payment Rent fixed Easy to calculate margins Tracker Rates are set to stay low Some flexibility
Types of Repayment Capital repayment Interest only Pay the capital balance down End up with an unencumbered property Good if you own one or two buy to lets and are planning to use them as a pension Generally don t generate any income monthly Just pay interest Capital growth Normally some monthly income surplus Can overpay
Purchase Costs Valuation costs 500 Lender booking fee - 1000-2000 average Solicitor costs Stamp Duty rates - Normal vs BTL 0-125K 3% vs 0% 125k 250k 5% vs 2% 250k 950k 8% vs 5% 950k 1.5 Mil 13% vs 10% Extra 3% on all BTL,LTB, Second homes 250,000 house first purchase or home switch = 2500 2 nd property or BTL= 10,000
Rate examples 75% loan to value 2year deal 2.29% with a 1000 fee 5 year 2.62% with a 1000 fee 65% loan to value 2 year deal 1.79% with a 800 fee 5 year deal 2.49% with a 1000 fee
3% Stamp duty charge 2016 in Review Regulated BTL products introduced Tougher rental requirements and assessment More products available now than we have seen since before the housing market crash with lower rates and fees for BTL, the number of deals available was recently reported to be in excess of 23,000.
Projections for 2017 Tighter rental cover requirements will continue to be imposed by lenders. Income tax changes More regulation around the sale of BTL products. We believe we will see an improvement in the longer term 3-5 year fixed rates as rates are set to stay low. Significantly less Let to buy applications being processed which in turn should lead to higher rents for landlords.
Maximising your returns Darren Green, BA(Hons), FCCA
Keep on right side of HMRC Notify HMRC Complete tax return each year Keep suitable records letting agents help Know what type of property you are letting Unfurnished Furnished Holiday let Commercial
What taxes will I have to pay Income tax at 20%,40% or 45% - based on rent receivable No National Insurance Stamp duty land tax on purchases Capital Gains Tax on disposals (18%/28% for residential properties rather than 10%/20%)
What expenses can I offset? Letting agents fees Maintenance and repairs Buildings and contents Insurance Interest and finance costs (more on this later!) Accountancy fees Utility bills (if paid by landlord) Ground rent, services charges (if paid by Landlord) Gardening, cleaning etc Legal fees if short term let Other direct costs of letting the property telephone, advertising Pre letting expenditure (if not materially enhancing property value)
The changing landscape Changes from April 2016 Increased SDLT Removal of the Wear & Tear Allowance Increase in rent a room relief Changes from July 2016 Potential for property sales to be taxed at income tax rates rather than CGT rates (could be as much as 47% rather than 28%) Changes from April 2017 Tax relief on mortgage interest.
Interest changes from April 2017 Reduction phased in over 4 years from April 2017:- 16/17 17/18 18/19 19/20 20/21 % of interest allowed as a deduction 100% 75% 50% 25% 0% % of interest given as 20% relief N/A 25% 50% 75% 100% Effective interest deduction will be:- 100% 80% 60% 40% 20% Beware also the Stealth tax Basic rate payers into Higher rate tax payers and Higher rate into Additional rate payers Restriction in child benefit / Tax credits Increased student loan repayments Will have greatest impact on higher rate tax payers, highly geared landlords and particularly those with large portfolios
Some examples Example 1: Higher rate tax payer - Low geared, single property 2016/17 2020/21 Rent 7,200 7,200 Repairs ( 1,000) ( 1,000) Interest ( 2,500) - Net profit for tax purposes 3,700 6,200 Tax at 40% 1,480 2,480 Interest relief at 20% of 2500 - ( 500) Total Tax liability 1,480 1,980 After tax income 2,220 profit 1,720 profit STILL PROFITABLE
Some examples Example 2: Higher rate tax payer - High geared, single property 2016/17 2020/21 Rent 7,200 7,200 Repairs ( 1,000) ( 1,000) Interest ( 5,000) - Net profit for tax purposes 1,200 6,200 Tax at 40% 480 2,480 Interest relief at 20% of 5000 - ( 1,000) Total Tax liability 480 1,480 After tax income 720 profit ( 280 loss) NO LONGER PROFITABLE!
Some examples Example 3: Basic rate tax payer with other income 2016/17 2020/21 Other income 38,000 38,000 Rent 8,500 8,500 Interest cost ( 4,000) - Total income 42,500 46,500 Personal allowance ( 11,000) ( 11,000) Net profit for tax purposes 31,500 35,500 Tax at 20% 6,300 6,400 Tax at 40% - 1,400 Interest relief at 20% of 4,000 - ( 800) Total Tax liability 6,300 7,000 EXTRA 700 of tax due to being pushed into Higher rate!
Some examples Example 4: Substantial property portfolio (jointly owned) 2016/17 2020/21 Rent 600,000 600,000 Repairs and other costs ( 200,000) ( 200,000) Interest cost ( 350,000) - Total income 50,000 400,000 Personal allowance x 2 ( 22,000) Net profit for tax purposes 28,000 400,000 Tax at 20% 5,600 12,800 Tax at 40% - 94,400 Tax at 45% - 45,000 Interest relief at 20% of 350,000 - ( 70,000) Total Tax liability 5,600 82,200 After tax income 44,400 ( 32,200 loss) NO LONGER A SUSTAINABLE PROPERTY BUSINESS!
Is there a silver bullet to all this? No but consider. Transfer property into Spouses / Civil partner if Tenants in Common then can alter split Increase profitability Higher rents Protect rents Lower costs Lower interest rates now & going forward! Review borrowing arrangements Best rates / Can borrowing be restructured i.e. business / Commercial property borrowing? Incorporation..
Advantages Incorporation? Interest still tax deductible in full If profits retained in company then only tax is at Company rate (currently 20%, 19% from April 2017 and 18% from April 2020), rather than income tax rates (20%,40% or 45%) Flexibility on remuneration i.e. salary / dividends Disadvantages Existing properties - Possible CGT and Stamp Duty on Transfer to Limited company Tax on Dividends increased by 7.5% (except first 5000) Administrative costs of company Funding Double taxation
Will CGT and SDLT always apply to a transfer? SEEK ADVICE OF OWN TAX ADVISER OR ASK US TO REVIEW BUT CGT may not payable if running a property business SDLT Business is transferred in exchange for shares in Limited company Significant activities and reasonable time spent in management (This is key!) Seek to profit and ran as a business Can be reduced to the same level as Commercial property (4%) if 6 or more separate dwellings transferred SDLT may not be payable if the property business is ran as a commercial partnership» Partnership agreement» Partnership return, bank account, accounts» Partners held out as such to outside world i.e. stationery, advertising» Invoices, agreements etc in name of partnership
Action plan? Review property portfolio and assess those properties most affected i.e. high borrowing Review borrowing and try and reduce either by lower rates (Speak with Laura), paying down debt or restructuring, perhaps consider how any separate business or commercial property is financed Make sure you are generating best rental income (Speak with Brendan) Are you claiming for all costs you could? If spouse / civil partner is a lower rate tax payer then consider property ownership percentages Speak to your accountant (or us) as to whether incorporation would work for you Don t let the tax tail wag the commercial dog!!!
Buy To Let - Legal Update Geoffrey Cotterill
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