A Clearer View - September edition

Since the government implemented its Stamp Duty Land Tax ('SDLT') reforms in April of this year, applying an additional 3% levy to buy-to-let ('BTL') properties, many landlords are scrutinising their portfolios to ensure that their investments are maximised.

Navigating SDLT reforms, however, is a sensitive and complex manoeuvre, and often calls for expert advice. In this edition of Clearer View, we have invited the Tax Team at Price Bailey Property to share key advice for buy-to-let investors.

Company ownership for buy to let properties
Many of the country’s landlords are starting to question the fairness of the UK tax system following the introduction of tax changes in the buy-to-let market in April.

Despite the financial implications of the reforms, many landlords have not considered how they hold their interests in property and what this means for their investment. While owning property personally is simple and requires minimum fuss, for many individuals, it isn’t very tax efficient, and we are anticipating that post-tax returns on property investments could be lower under the new legislation.

Potential tax advantages
Income Tax on rental profits can be anything up to 45%, which seems a significant imbalance given that companies currently pay Corporation Tax at 20%. This already favourable rate will reduce progressively to 17% over the next four years and may even drop as low as 15% - a figure previously quoted by George Osbourne, the ex-Chancellor of the Exchequer, following the result of the EU referendum.  Therefore, if a landlord does not require rental profits on which to live, or if they are not being used to repay loan capital, establishing a private company to manage lettings portfolio starts to look attractive.

Furthermore, from 2017, loan interest will be restricted to Income Tax, but not Corporation Tax, further enhancing the appeal of the company model.

When residential properties are sold, individuals pay Capital Gains Tax (‘CGT’) of up to 28%, whereas on residential property gains, other than in limited circumstances, companies pay Corporation Tax at the lower rates mentioned above. In addition, companies are often taxed on a lower gain because they can claim an inflation allowance (known as indexation).

Shareholding and future planning
Corporate ownership allows a wide range of investors to participate as shareholders, rather than having direct interest in the properties. This also benefits Inheritance Tax planning, as assets can be passed to the next generation without having to transfer the property. For example, landlords can introduce their adult children as minority shareholders, or with generous grandparents, grandchildren can become shareholders, and dividends can be paid to them to fund school fees or other expenses, rather than grandparents paying out of their taxed revenue. Dividends can also be paid to the wider family group, which is likely to improve overall tax efficiency.

In summary, prospective and existing landlords should consider their ownership structure before making any further property purchases.

For those BTL landlords who own portfolios personally, it may be possible to move them into a new company structure; however, inadequate or poor advice could increase the risks of triggering high CGT and Stamp Duty Land Tax liabilities with no cash to settle them.

Price Bailey are a firm of chartered accountants and tax advisors who are experienced in this area, having successfully assisted clients reorganise BTL landlord property portfolios without incurring ‘dry’ CGT and SDLT charges.

Price Bailey are happy to give clients a free initial portfolio review to assess whether benefits can be had from the recent tax changes, as discussed above. Contact details can be found below.

Price Bailey Property Tax Team
Jay Sanghrajka
Partner, Head of Property
T: +44(0) 207 7382 7431
Jay.Sanghrajka@pricebailey.co.uk

Chris Hammond
Senior Tax Consulting Manager
T: +44(0) 1223 507 632
Chris.Hammond@pricebailey.co.uk

Lisa Simon, 

Partner Head of Residential Lettings

T: 020 7518 3234 

E: lisa.simon@carterjonas.co.uk

Don’t panic! There’s more to investment than Stamp Duty penalties

The property press and wider media have been full of the 3% Stamp Duty levy that comes into effect on buy-to-let and second home purchases from April 1.

The Government has finished a consultation exercise on these legislative changes but one thing that hasn’t ended is the rush from buyers who want to beat that deadline.

Investment decisions should be based on much stronger grounds than whether or not you can get ahead of a deadline to beat a hike in Stamp Duty. Frankly, it only takes investors roughly back to where they were before Chancellor George Osborne altered the way Stamp Duty was levied at a stroke during his 2014 Autumn Statement. Everyone was happy to ride with the tax before that, now they all appear to be jumping off the buy-to-let bus because the temporary respite is evaporating.

It’s doubtful now whether many conveyancers will be able to complete their task by March 31, even with superhuman effort. The week running up to the deadline also contains the Easter weekend with two Bank Holidays on top of the regular two day break.

It’s better to take a long-term view and survey how the property market has performed where you want to make your investment. There are other things to consider, too, such as affordability and the way write-down will affect offsetting some charges for things like furnishings.

In London, I have a couple of good examples of properties in Fulham, both in the same apartment block, that illustrate buy-to-let should still be worthwhile.

The sale of one flat has just completed for £855,000 - it sold for £550,000 in November 2010 so illustrates a compound growth of 9.3% year on year. Working from that base, at the same growth rate it would be worth £1.33m in another five years and even at a modest forecast of 3% compound it would achieve £991,000 over the same period.

As well as that healthy capital growth, it would let for £550-£600 per week, a valuable return of 3.34% on top of the value growth. With such uncertainty in equities, residential property makes a better home for savings than any ISA, some of which are barely making 1.5% and all of which have low investment limits, even allowing for tax on the interest. Ignoring the income, the capital growth projection at 3% equals more than five times the extra Stamp Duty, which may well be offset against future capital gains. 

A second flat, on the market now at £750,000, lets for £465pw and would have been worth circa £500,000-£525,000 five years ago. With compound 5% growth it would be worth £957,000 in five years (£869,000 at 3% compound). Again the sums of yield and capital growth more than add up.

If you believe the London market distorts the view, or just because you live elsewhere, there are other examples that illustrate the point.

For example, let’s move to the old Terrys chocolate factory in York which is being converted into apartments; the developers limited the number of buy-to-let sales so there will always be a good mix of owner occupiers and tenants. They believe it will improve the look and feel of the site as well as limiting competition for tenants and, at the same time, avoid pushing down incomes for investors.

Prices range from £180,000 to £1 million so the smaller-priced opportunities open big doors for investors.

From a buy-to-let perspective, the smaller apartments represent a very good investment – a purchase price of £180,000 will return a monthly rental of around £750 and a yield of 5% but added to that the capital growth is likely to be 3-5% per year until the development is completed. At that point, there is often a sudden jump in values as the supply of properties dries up and the site finally looks its best. In previous cases this jump has been anywhere from 5-10% as the site comes to look its best and all facilities are installed.

It’s clear that a 3% one-off panic by some investors is masking a much larger percentage opportunity. The MPC at the Bank of England has just given us a Manchester United away score line of 9-0 against raising Base Rate and some pundits are predicting it may actually fall below its historic low of 0.5% during the last seven years and won’t see a rise before 2018.

The warning here has to be that buy-to-let is a long term investment, so build into the equation the effects of an eventual rate rise when you decide on affordability. It is a business decision, even though it may be your pension driving your thoughts, and should be approached with a definite appreciation of profit and loss possibilities.

But my advice is to talk to your nearest Carter Jonas office.

Use our Stamp Duty Calculator to determine the amount of tax you would pay on a second home by clicking here.

Lisa Simon, 

Partner Head of Residential Lettings

T: 020 7518 3234 

E: lisa.simon@carterjonas.co.uk

The Autumn Market makes a welcome return

For the past 4 years we have seen a new pattern emerging in the residential sales market.

Whereas, traditionally, we used to rely on the Spring and Autumn markets being our busy selling periods, more recently January and February have become crucial to our trade. As lifestyles, demands on time and the means of contact change, the desire for immediacy gets ever stronger.  Decisions are made over Christmas family gatherings and once this desire to move becomes the focus, the house needs to be found - or sold - now! And, without a sense of urgency, desire loses its value.

Rather unnervingly, the Autumn market has been poor over the past few years.  However the mood has changed this year: August was strong and September is proving even better. The Autumn market is back!

Various events were contributing to the recent yearly cycles of strong first half, weak second half – last year it was Mark Carney’s early indication of interest rates rising.  They didn’t!  But it affected people’s thinking, nonetheless.

This Autumn, despite a very erratic stock market which could have unnerved sales, activity is strong.  We saw an over-confidence in pricing following the General Election in the Spring, but many guide prices of the time have been trimmed back and a sense of reality has returned.  We’re also comforted by a steady Government and continuing low interest rates. Lower Stamp Duty (SDLT) for anyone looking up to £925,000 is another confidence boosting factor.

Whilst those looking to buy at the top end of the market are saddled with higher SDLT, property now appears the safer haven than stocks and shares. And as oil prices continue on their downward trend, it’s unlikely the stock market will recover to any great degree soon.

As an example, just last week we agreed a sale in excess of £1,000,000 to a London buyer. Having recently sold his second home in London, he chose to re-invest in property instead of the stock market, having only visited Suffolk for a weekend.  Weighing up the choices of low interest rates on his cash funds, a volatile stock market and cyber fraud concerns, he chose a lovely Suffolk farmhouse instead. A safe choice indeed, I say!

Caroline Edwards
Partner
Residential Sales, Long Melford
T: 01787 888622
E: caroline.edwards@carterjonas.co.uk

Pulse & plus points of the early 2015 market

Once again, early year market activity has not disappointed. This is the fifth January in-a-row where the residential sales market has hit the ground running as soon as we returned to our desks.

To recap, 2014 was a year of two halves.The first six months saw strong activity right across price ranges – quite frankly, the starting gates flew open. But just as we were about to loosen the reins and push on into a full gallop, the Bank of England halted the momentum with its cautionary suggestion of an earlier increase in interest rates than predicted. Greater mortgage regulation helped slow the pace even more.

A long-term comfort to our market, however, is that Mark Carney so clearly adapts to market reactions. Latest predictions now expect the ‘new normal’ level for rates to sit at around 2-3% and, also, that the incremental increases may not start until Q4 2015 but, in all likelihood, in 2016. With low inflation, the crude oil price meltdown and weak wage growth, it looks like 0.5% may be banked upon for this present year.

The 2014 Autumn Statement announcement of stamp duty reforms was a surprise but it’s proving a good thing for the greater bulk of the market in that house purchases less than £937,500 will now face lower stamp duty charges. Above this threshold, the market is already beginning to absorb the changes and the higher cost of moving is now being consistently raised in our sales negotiations between purchasers and vendors.

The Christmas holidays are always an important decision-making time for both buyers and sellers. And, such is the pace of modern consumer demand, people seek immediacy as soon as the decision has been made to move. Hence we now advise vendors to launch to market as early as possible in the new year to, quite frankly, embrace and satisfy the “I want it now” mentality.

Marketing in the first three months of 2015 is more important than ever this year with the General Election bearing down on us on 7 May, as we anticipate a nervous pre-election lull in April. The mansion tax, or variations of it, favoured by both the Labour Party and Liberal Democrats is already having an unsettling impact on the prime markets both in and outside London. Should I put my money on it, I cannot visualise these pre-election manifesto proposals becoming post-election policies but who’s to say?...

So, the year has started with strong apres-Christmas pent-up demand, a renewed confidence in interest rates staying at 0.5% and continuing confidence in property as a non-volatile asset (unlike the recent performances of the stock market, currencies and commodities, not to mention oil). Average UK house prices are anticipated to rise by 3.5% in 2015 with ‘steady-as-she-goes’ growth over the next 5 years – some suggesting by 18%.

With the coalition government ‘consciously uncoupling’ itself into distinct blue and yellow rosette stances when it comes to views on housing market intervention, it is unlikely that the Spring Budget will see any significant policy initiatives which will have a direct impact on the housing market, such as Help to Buy or further SDLT reforms.

The only certainty about the General Election when it comes to the housing market is the date itself. So if you’re in the market for a move, we’re saying best make it now.

Caroline Edwards
Partner
Residential Sales, Long Melford
T: 01787 888622
E: caroline.edwards@carterjonas.co.uk