Is holding your buy-to-let property in a “Hybrid Structure” the way to go?

As of the 6th April 2017, Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their profits. Instead, they will receive a basic rate reduction from their income tax liability for their finance costs.

What does this mean for my profit?

It’s difficult to say how much more tax would be due as the reduction in mortgage interest and wear and tear allowances come to bear, but it will certainly be a hit for higher-rate tax payers. If you don’t have a mortgage or if you’re a lower rate payer, good news: you will not be affected at all.

So what are my options if I’m a higher rate taxpayer?

We recently attended an interesting talk by Tony Gimple from Less Tax For Landlords, who said, in practical terms, landlords now have four options – including holding your property in a “Hybrid Structure”. We’ve listed the options he gave for you below – and also included some FAQs at the end of the article.

  1. Sell up

The first option is to sell up and either invest your money elsewhere, save it or spend it. Yes you will have to take the Capital Gains Tax hit and mortgage penalties (if there are any), but if you are thinking of retiring anyway this could be an option.

This isn’t something that the majority of landlords will want to do right now however, as though the market is suffering a post-Brexit slump, property is still a very good bet. As we recently blogged, when compared to other asset classes, property is definitely the best vehicle for achieving wealth.

  1. Make a positive decision to do nothing

Option two is to do nothing. This will be a default decision for the majority – which is absolutely fine so long as you have explored the different options available to you and are aware of how you’ll be affected by the new tax changes.

This option will most likely mean however that your tax bill is increased and your disposable income is decreased, but it will not severely affect those with only one or two properties.

  1. Incorporate

The much touted “only way to get over Section 24”: sell your personally held investment property or properties to a limited company which you own.

Tony made it crystal clear that he doesn’t think that full incorporation, or incorporating temporarily through a Limited Liability Partnership is the best move, and we’ll explain why in the next couple of sections.

Likewise, he said that trusts are also not an effective solution, and their use for property is far more limited that it used to be. They are over-complex, especially when it comes to mortgage flexibility and inheritance tax mitigation, and generally not the best option for landlords.

What’s Section 162 Incorporation Relief?

Section 162 incorporation is available to help negate the requirement to pay Capital Gains Tax or Stamp Duty when transferring existing personally held investment properties into a limited company. You can only claim S162 if you’re ‘working in the business’, or as Tony put it, dealing with tenants and toilets yourself!

The pitfalls…

However, Tony went on to say that there are more downfalls than pros to incorporating.

Companies are great if you’re selling the whole company, as the buyer doesn’t pay stamp duty on the individual assets, only on the shares at 0.5%. If you’re disposing of individual properties, you’ve still got to pay the equivalent of Capital Gains Tax, but in this case it will be Corporation Tax which is slightly lower. A negative is that you may require the lender’s consent to use your loan account, and if they lose their lending appetite, you’ll need a new company and a new lender for every new property!

The big problem with limited companies however is getting your money out. In fact, Tony said it’s virtually impossible to take the money out of a company without paying tax at every turn, which often results in double taxation – Corporation Tax, Dividend Tax, Income Tax, National Insurance – and if it’s an investment company, 100% subject to Inheritance Tax.

  1. The Hybrid

The final option Tony gave was “The Hybrid”, which he described as ‘truly running your portfolio as a property business whilst at the same time reducing tax leakage to the legal minimum.’

This option means holding your current or future investment properties through a Personal Ownership / Limited Liability Partnership (LLP) and Limited Company mix – a recognised corporate structure.

Tony said that owning investment property this way generally offers the most balanced solution as it allows you to legally separate ownership from enjoyment from control via multiple legal personalities, so as to minimise tax insofar as the law allows and keep as much profit and legally possible. You also will not suffer the loss of mortgage interest relief or wear and tear allowances, plus tax from your property income at 20% maximum.

There were a few questions from the floor:

If I go down the hybrid route do I have to tell Land Registry?

“No – because there’s no change of title. You don’t even need to tell the lenders as there’s no fundamental breach of mortgage conditions – the lending remains in your name. We’re not using beneficial interest company trusts, it’s perfectly acceptable.”

When it comes to LLP, how do you differentiate between distribution profit and return of capital?

“It’s what you decide to call it. With LLPs or a partnerships generally, you’re allowed to once a year say we’ll distribute profit, or this year we’ll return capital. It’s up to you. The law allows you to call it either, just one will pay tax on it and one you won’t. Sometimes you will want to pay tax on it. Why? Because in two years’ time when I want to build that house and borrow a million and a half quid in my name, I’ve got to show a lender a SA302 to say that I can afford it and that it’s my money not my businesses.”

Would you have to pay Capital Gains Tax or Stamp Duty?

“In broad terms, CGT and SDLT would only arise if there were a change of title, i.e. the owner (Bill Bloggs) transfers the ownership to another legal personality (Bill Bloggs Property Holdings Limited).  As in the case of hybrid arrangements there is no change in title (Bill Bloggs still owns them), CGT and SDLT events do not occur.”

So what should you do?

Unfortunately, there’s not one right answer. If you’ve got one or a couple of properties and you’re a higher rate taxpayer, you’re going to feel a little sting from the new tax changes. But is it probably not worth getting into something complex. Instead, a better idea may be to cut your interest costs by re-mortgaging and getting an up to date rental valuation on your property. Your lender will therefore have to recalculate your LTV, and a lower LTV generally ensures a better interest rate and a larger selection of lenders.

If however you are a seasoned landlord or you want to make a positive decision to run a highly tax-efficient, professional property business, then Tony suggested you may need to start looking at how you’re going to structure it.

We strongly advise you seek independent professional tax advice before getting involved in any schemes or structures.

This Article is courtesy of Portico London Estate Agents

How will Article 50 affect London’s property market?

Mark Lawrinson, Regional Sales Director of Portico London estate agents, has spoken out about the possible effects of Brexit on the London housing market, saying, “I don’t think the triggering of Article 50 will affect the property market directly from yesterdays announcement. In one sense it removes the uncertainty surrounding when Britain’s withdrawal process from the EU will start, but in another way it will create economic uncertainty until we know what deal we will strike and therefore what Brexit actually means for our country.

Mark continues, “Brexit will no doubt mean a turbulent two years for the London and UK market as we begin to hear what negotiations and proposed deals are being put forward for our exit of Europe and the single market. I think we will see a continued slowdown or lethargic London market when it comes to sales volumes, and as we reported toward the end of last year, transaction volumes across London are already more than half of what they were before the 2008 crash.

London has a significant part to play in businesses who trade and operate across Europe and the world, and a buoyant property market relies on the UK’s economic health. If Brexit negotiations go well this could cause further price growth as the economy grows and we see the nation’s confidence lifted, but equally, if a good deal isn’t reached then the international companies who operate here or look to relocate here might change their minds, reducing the number of residents who live in the capital and again further reducing the transaction levels, which could ultimately lead to price decreases.”

It’s therefore important that you make property decisions based on your personal situation and what you want to do, rather than gambling on how the market will play out.

Robert Nichols, Portico’s Managing Director, makes an important point, stating, “Right now we may experience some uncertainty, but as the negotiations progress, we will regain some much needed stability into the housing market, as people realise that the effects of Brexit are not catastrophic and go on with their lives. We’ll hopefully see transaction levels increase as a result, which are currently dangerously low and affecting price growth across the capital.

He continues, “Yesterday’s events are likely to have a much more profound effect on foreign investment however, with the weakening pound expected to fuel demand from overseas buyers and investors.”

Many are also speculating that yesterday’s events will mean that the Bank of England will be hesitant to increase their interest rates, in spite of the recent inflation increase. This will it will remain cheaper than ever to borrow and get on to the property ladder.

Many are also speculating that today’s events will mean that the Bank of England will be hesitant to increase their interest rates, in spite of the recent inflation increase. This will it will remain cheaper than ever to borrow and get on to the property ladder.

Article kindly provided by Portico, who are a residential estate agent with offices throughout London, specialising in flats and properties to rent and for sale. For landlords, they offer a range of unique packages which include monthly fees, a rental guarantee, complimentary maintenance between tenancies and assistance with tax return. For property sellers, they offer a dedicated property concierge and a complimentary interior styling service.

Please call 020 7428 5310 if Portico can assist you and your property portfolio.

10 THINGS TO KEEP IN MIND BEFORE BUYING PROPERTY POST BREXIT

Don’t let the Brexit doom and gloom discourage you, Mark Lawrinson, Regional Director of Portico London estate agents has revealed the key factors you need to consider to make a sound property investment this year:

1)      Keep an eye out for big infrastructure projects
Even in a weak or unstable market, areas undergoing infrastructure investment are likely to still experience growth in terms of both rental yield and capital gains. Look at areas being transformed along both the Night Tube and Crossrail line to identify long-term investment prospects. For example – Forest Gate, Farringdon and Whitechapel are areas geared up for regeneration and a rise in property prices thanks to Crossrail.

2)      Look at the high street as an indicator of an area
The high street is a great indictor of the demographic of an area, and whether the area is in decline or has growth potential. Some of the factors you should consider include – have there been many changes recently? Are shops closing down with no sign of opening or are they closing with new names moving in? Is money being spent by the council to smarten it up?

3)      Are there good schools in the area?
Another great barometer to judge prospects of an area is the schools in the vicinity. You may not be thinking of starting a family yet and if you’re an investor schools probably aren’t on your list, but London’s population is growing fast and good schools are becoming harder and harder to come by. Therefore, having one in your area is a big bonus. People both rent and buy in these catchments to get their children into a good school, getting you a good return on your investment.

4)      A house should be a home
If buying a property to live in, remember it’s a home first and foremost – and an investment second. If you plan to live in the property long-term then you should be shielded from bumps in the market. As the market in London has shown time and time again, it’s super resilient, so what may happen in the next two years could be insignificant to you if you are still there for 10.

5)      Shop around for mortgage deals
To make a sound investment decision, you need a broker who has access to the entire market. Some brokers operate on a panel and hence may say they are getting you the best deal – but remember that is only the best deal from their panel. With lending criteria changing daily, it’s advisable to shop around. That rings true even for investors who have used the same lender or broker for years!

6)      Choose a good solicitor
This may sound obvious but cheap solicitors will inevitably cost you more. This is probably one of the single biggest purchases of your life so paying for the right advice is crucial. With a market that’s changing daily, avoiding delays with the right legal aid could be the difference between concluding the transaction or not.

7)      Choose the right estate agent
In a tough market it’s more important than ever to choose a local agent who knows their area inside out, and who will get you the best result both as a buyer or seller. An agent who just instructs and advertises your property and waits for the calls will struggle in tougher markets. A proactive agent who knows their buyers can match the right person to your home, and uses past experience to price your house right. With a ‘no-sale, no-fee’ policy, high street agents now have as much a vested interest in the transaction as both the seller and buyer. Find out how much your property is currently worth with Portico’s Instant Valuation tool.

8)      Create a two-year plan and a five-year plan
Most investors would take a two-year fix on mortgages but with the lending criteria getting tighter for investors, some of the better deals in terms of loan to value can be found at a five-year fix. No one knows what will happen to the property market in the next two years, so plan for what will happen if circumstances go out of your control. For example – if you plan to exit or re-mortgage at that stage you also need to plan for what it will mean if you can’t do either of those.

9)      Look for ways to add value to your property
From basic redecoration to new kitchens and even structural work such as loft extensions, adding value to your property will make your home a better investment. If you see your family growing or want a capital growth not market-dependant then you need to look at innovative ways to add value to your property.

10)  Be clear on your requirements
We all want a sprawling staircase in the house and a swimming pool in the backyard, but you need to be realistic with your actual needs. The big ‘C’ (compromise!) is a word most try and avoid but is something we all need to make. The sooner you are able to accept you will need to make a compromise and understand what those compromises are the easier your search will be.

landlord-blogger

The UK decides to vote “Leave” but what now for UK Property

The dust has settled over the weekend and we have had time to adjust to the decision to “Leave” the European Union. Whether you voted to “Remain” or whether you voted to “Leave”, we are now facing a long period of uncertainty that will have a major impact on many of the personal decisions we make moving forward.

It would seem from the articles that we have read over the weekend that although we have made a decision as a country, it is actually how things will affect us personally that are concerning most people, which is ironic being that many people voted “Leave” for non-personal reasons.

From the viewpoint of the Landlord in the UK, we are facing a huge period of uncertainty as far as the housing markets are concerned and because no country has ever left the European Union, it is difficult for anyone to actually predict what will happen to property prices or the buy-to-let markets.

However, we do know that in the hours following the announcement that we would be leaving the European Union, shares in Housebuilder’s (Persimmon, Barrett and Berkeley) dropped by more than 20%, so does this mean that the housing market will fall dramatically?

Only time will tell, but Miles Shipside, Rightmove’s director and housing market analyst, stated: “Markets typically dislike uncertainty” and being as that is what the UK now faces it, it seems highly probable that house prices could lower as we pass through the two year period of uncertainty.

As for the Buy-to-Let sector, if property prices fall then investors can enjoy the benefits of purchasing property at lower prices, but given the recent changes in Stamp Duty, it may not be as simple as it would have been prior to the stamp duty increase. So yet again we face uncertainty as to how things will play out and we will just have to play the waiting game!

For more information on how the Property Markets will be affected click here