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Extent of landlord exodus to limited companies revealed

Landlords are increasingly transferring properties to limited companies to navigate tax changes in the buy-to-let market, according to lender data.

Figures from Shawbrook Bank showed the proportion of buy-to-let mortgages completed by individual landlords had fallen from 68 per cent in the first half of 2015, to 34 per cent in the same period of 2018.

Meanwhile the proportion being completed by limited companies had doubled from 32 per cent to 64 per cent in the same period.

The buy-to-let market grew rapidly after the financial crisis but tax changes and the introduction of stricter affordability testing meant there was steep fall in the number of buy-to-let mortgages.

The introduction of an additional 3 per cent stamp duty surcharge in April 2016 was closely followed by the abolition of mortgage interest tax relief for landlords, to be phased down to a 20 per cent flat rate in 2020, further pushing the limits of landlord profitability.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules.

Shawbrook Bank has said the reduction in mortgage interest tax relief had led to an increased professionalisation among landlords, with those in a private limited company able to treat interest payments as business expenses to be offset against profits.

Gavin Seaholme, head of sales at Shawbrook Bank, said the buy-to-let figures showed individual landlords were moving across to limited companies but warned this may not always be suitable.

He said: “Firstly, borrowing through a limited company structure is generally more expensive than for an individual, offsetting some of the expected tax savings.

“Secondly, for private landlords with existing portfolios it can be very costly to actually transfer the properties into limited company ownership due to capital gains tax which is due upon the sale and stamp duty due when the newly set up company purchase the properties.

“Together these one-off payments can leave a significant dent in the finances of buy-to-let investors, which makes careful planning necessary.”

Mr Seaholme said the more favourable option could be to convert or create a limited company to continue on the property journey, subject to the correct tax and planning advice.

In its assessment of the buy-to-let market in July, Shawbrook Bank predicted demand for buy-to-let mortgages would fall further over the coming years and expected many landlords to only feel the true impact of changes next year when filing their tax returns for 2017-2018.

Stuart Gregory, adviser and managing director at Lentune Mortgage Consultancy, said since the amendments to taxation for landlords were announced he had seen a big downturn in enquiries for buy-to-let purchases.

He said: “Those we have received have been related to limited company buy-to-let, which does indicate a shift of opinion.

“However, the biggest issue will be as, and when, the landlords’ accountants raise the onward issue of the new taxation – we fully expect to see some more existing landlords to thin out their portfolios, which will of course increase the property supply potentially for first-time buyers.”

But Andrew Turner, chief executive at buy-to-let broker Commercial Trust, has advised to ignore the “doom-mongers” and stressed the buy-to-let market was thriving.

He said: “It was inevitable that tax changes, which could potentially suppress profitability in the short term, would impact upon the perceived desirability of buy to let investment.”

The changes were expected to be most keenly felt by those with fewer properties, Mr Turner said, because adjusting would be a more painful process for new investors or those with less experience.

He added: “However, the simple fact is that buy-to-let remains a solid investment option, with strong potential for an attractive and profitable return on capital invested.

“Investors should not be deterred – demand for rental housing is stronger than ever, the cost of
debt remains relatively cheap and the housing shortage is likely to continue. Even so, any investment decision requires care and expertise.

“The real story has really not been about buy-to-let becoming unattractive as an investment option.”

Source: FT Adviser

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Buy-to-let remains solid investment

Buy-to-let remains a solid investment with demand for rental housing stronger than ever, Andrew Turner, chief executive at specialist buy-to-let broker Commercial Trust, has argued.

He said that it was inevitable that tax changes, which could potentially suppress profitability in the short-term, would impact upon the perceived desirability of buy-to-let.

Turner said: “The expectation was that this would be most keenly felt by those with fewer properties, because adjusting to the changes would be a more painful process for new investors or those with less experience.

“However, the simple fact is that buy-to-let remains a solid investment option, with strong potential for an attractive and profitable return on capital invested.

“Investors should not be deterred from buy-to-let. Demand for rental housing is stronger than ever, the cost of debt remains relatively cheap and the housing shortage is likely to continue. Even so, any investment decision requires care and expertise.

“Many headlines have focused on one and two property investors who have left the market because they have found it difficult to adjust. The real story has really not been about buy to let becoming unattractive as an investment option.”

Data from UK Finance indicated an evolution in buy-to-let, rather than a mass exodus.

Jackie Bennett, director of mortgages at UK Finance, revealed in November that forecasts for 2018 buy-to-let purchase activity were likely to fall about £3bn short of expectations.

She said: “This is undoubtedly the impact of various tax, regulatory and legislative changes that have happened to landlords in the buy-to-let sector.”

However, Bennett went on to add that buy-to-let remortgaging exceeded forecasts for 2018, with lending likely to reach £27bn, representing a £3bn surplus on what was anticipated.

Turner added: “The market continues to grow and in Q2 2018 increased by 6% over 2017 levels. UK Finance statistics revealed that much of this growth was in remortgages, which grew by 15%, while purchases dipped by about 12%.

“In early August 2018, the Bank of England decided to increase rates by 0.25%. Although there has been limited market reaction so far, I expect to see market rates increase, because margins are wafer thin.

“The Bank of England has said as much itself, with repeated messages that rates are anticipated to rise gradually over the long-term.

“Landlords have responded to this and there has been significant interest in fixed rates, useful to guard against rate rises.

“Investors are likely to continue to do this as their renewal dates come up and therefore I’m sure the remortgage market for buy-to-let will remain buoyant over the coming months.”

Source: Mortgage Introducer

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Mortgage lending for buy-to-let home buyers falls by nearly a fifth year-on-year

Mortgage lending for buy-to-let house purchases fell by around a fifth annually in September as the market remains subdued, a trade association has reported.

Lending to first-time buyers and home movers was also down compared with a year earlier – while re-mortgaging plateaued, UK Finance said.

Some 5,200 new buy-to-let home purchase mortgages were handed out in September, marking an 18.8% decrease on the same month a year earlier.

There were 29,400 new first-time buyer mortgages completed in September, 4.5% fewer than in the same month a year earlier.

And a further 29,400 new home mover mortgages were completed – 8.4% down compared with September 2017.

Meanwhile, 35,600 new home owner re-mortgages were completed in September, edging down 0.6% on the same month a year earlier.

And there were 12,300 new buy-to-let remortgages completed, slightly down by 0.8% on September 2018.

Buy-to-let investors have faced various tax changes in recent years, including a stamp duty hike on the purchase of second homes.

Jackie Bennett, director of mortgages at UK Finance, said re-mortgaging for both residential and buy-to-let properties has levelled out after a period of strong growth.

She said: “This reflects the number of fixed-rate loans reaching maturity.”

Ms Bennett continued: “Buy-to-let home purchases have eased again in September, suggesting lending in this market remains subdued as a result of recent tax, regulatory and legislative changes.

“Demand for house purchases for both first-time buyers and home movers has also lessened, as affordability constraints continue to bear down on consumer demand for new loans particularly in London and the South East.”

Jeremy Leaf, a north London estate agent and a former residential chairman of the Royal Institution of Chartered Surveyors (Rics), said: “Buy-to-let investors are still not returning to the market or buying for the first time in sufficient quantities to provide support at the bottom end of the market and first-time buyers are not taking up the slack.

“The result is a bit of a standoff until clearer political and economic direction becomes apparent.”

Source: Yahoo Finance UK

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Attention buy-to-let landlords! You could boost your returns with this simple trick

Over the past few decades, buy-to-let investing has generated a tremendous amount of wealth for investors.

According to the Office for National Statistics, over the past 10 years, the average house price in the UK has grown at a compound annual rate of 3.1% from £168,000 to £228,000. Including an average annual rental yield of 5%, this indicates that the average buy-to-let investor has seen a yearly return of 8.1% since October 2008.

These are just estimates based on averages. The actual return achieved by individual investors will vary greatly because there are so many different factors to consider here like mortgage rates, maintenance costs and taxes.

The end of buy-to-let

My figures show that after including the impact of the government’s recent tax changes and slowing home price growth, buy-to-let investors getting into the market today will be lucky to walk away with an annual rental yield of 3.4%, excluding mortgage costs. Capital growth is also likely to be much lower over the next decade than it has been during the prior one. All in all, I estimate buy-to-let investing could produce a 6% annual return for investors getting into the market today.

A return of 6% per annum does not seem like much, especially as this does not include mortgage costs or the cost of property maintenance. But never fear, if you are worried about this low level of return, there is one simple trick you can employ to improve your investment returns.

Diversify, diversify, diversify

The way I see it, the biggest problem with buy-to-let investing is diversification. If you only own one or two properties, it won’t take much for your returns to evaporate. A property sitting empty for a few months or a broken boiler could eliminate a year’s worth of rental profits.

The solution to this problem is to increase diversification, but for most investors, this option is not available. Adding an extra five properties to your portfolio at today’s prices would cost around £1.1m (on average).

With this being the case, I believe the best solution to the diversification problem is to invest rental profits in equities. If you invest your income from rental properties into the stock market, you can achieve diversification and an extra passive income stream, that requires almost no extra work on your part.

Over the past decade, the FTSE 250 has produced an average annual return for investors in the high single-digits. Buy-to-let investing has matched this return since 2008, however, with returns set to fall going forward, I believe the FTSE 250 will outperform property. And, because you can own a FTSE 250 tracker fund inside an ISA, you don’t have to worry about the impact of tax (or changes to the tax regime) on returns.

Overall, if you want to improve your returns from buy-to-let investing, diversifying into equities could be the best decision you will make, I believe.

Source: Yahoo Finance UK

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Is buy-to-let property a better investment than stocks?

Buy-to-let property has historically been a very popular for British investors. And in the past, they’ve generally done well from BTL, profiting from both house price appreciation and solid rental yields.

But is investing in a buy-to-let property a better idea than investing in the stock market? Right now, I’m not so sure. Here’s a look at four reasons stocks beat BTL as an investment in the current market environment.

Higher income

With UK property prices having soared in value over the last decade, the rental yields on offer from BTL properties are generally quite low at present. This is because rent prices haven’t kept up with property prices. While it’s still possible to find hot spots that do offer high rental yields if you do your research, the average nationwide rental yield is just 3.6% at the moment, according to insurance specialist Direct Line.

With stocks, you can potentially pick up a yield that’s significantly higher than that with much less effort. As I detailed here, it’s not that hard to put together a simple blue-chip portfolio that yields around 6% at present. Furthermore, if you invest within an ISA, that income will be tax-free. A 6% yield tax-free for doing nothing? That a no-brainer to me.

Less hassle

Another key advantage that stock market investing has over BTL property is that it’s significantly less hassle. With stocks, you can invest in a portfolio and then leave it to work for you. Essentially, you’re letting company management do all the hard work while you spend your time doing what you enjoy.

However, with BTL property there’s a whole lot of things that need to be taken care of. For example, you need to ensure that your property is always tenanted (with good tenants). If your property is without tenants for a few months, or your tenants don’t pay the rent, you may have to fork out the mortgage payments yourself. You also need to make sure all repairs are sorted out promptly. And don’t forget all the new BTL regulations that is making life more stressful for landlords, such as minimum energy ratings. In short, BTL is a lot of effort.

More liquidity

Another benefit of stocks is the liquidity that they offer. If you want to take some profits off the table and free up cash, you can. Hit the sell button and your money will be in your bank account within days. The same can’t be said for property. You can’t just sell one bedroom, can you? If you do want to sell your property, you’re looking at a lengthy process and a load of fees.

Better diversification

Lastly, stocks allow you to spread your money out more effectively than property does. With a BTL property, you’re putting all your eggs in one basket. What happens if UK property prices tank as a result of Brexit? In contrast, with stocks, you can invest in many different companies, sectors and geographical regions, and this can help lower your investment risk.

Buy-to-let property has been a good investment in the past, but with low yields on offer at present and new regulations making life more difficult for landlords, the asset class is losing appeal. In my view, a long-term investment in the stock market could be a better idea.

Source: Yahoo Finance UK

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Ireland is Europe’s buy-to-let hotspot

Ireland is Europe’s buy-to-let hotspot for the third year running with an average rental return of 7.69%, the annual European Buy-To-Let League Table from WorldFirst, the international payments expert, has found.

Investors in Ireland’s property market have benefited from significant returns due in large part to reasonable property prices in comparison to soaring figures in other Western European countries. A stable euro, continued economic growth and consistent rental demand have also contributed to the country’s performance.

In Ireland while a one-bedroom city centre apartment would now set you back almost £11,000 more than it would have this time last year (+6%), average rents have risen by £127 (+11%) per month.

Jeremy Thomson-Cook, chief economist at WorldFirst said: “Buy-to-let investors looking for the best rental yields in Europe once again need look no further than Ireland, taking the crown for the third time in as many years.

“Part of the reason for Ireland’s buy-to-let success is while average house prices across the country are on the rise; they still sit some way below the country’s 2008 peak.

“What’s more, only Malta, Luxembourg and Sweden have experienced higher population growth than Ireland meaning that rental demand continues to go from strength to strength. Add these two factors together and you have a compelling overall proposition for buy-to-let investors.”

With an average rental yield of 4.67%, the UK sits at the middle of the table in 16th place –a significant improvement on its ranking last year (25th).

Strong rental demand is a significant factor in the UK’s ascent up the table. YourMove’s monthly rental tracker for England and Wales reports that average rents are 2.6% higher than a year ago.

The fall in the value of sterling since the EU referendum has impacted UK buy-to-let investors looking for opportunities abroad. Sterling currently sits approximately 17% lower than the euro in comparison to its position three years ago.

With Brexit uncertainty continuing to cast a shadow over the UK, and London in particular, WorldFirst’s research took a look at how 10 of Europe’s largest cities compare with regard to rental yield.

Dublin (pictured) ranked top of the league table (6.46%), closely followed by Amsterdam (5.33%) and Warsaw (5.15%). London (3.17%) ranked ninth out 10, with only Paris (2.89%) lagging behind.

Cyprus was the biggest climber this year – up from 9th to second place – and Belgium was one of the biggest fallers, down from 6th last year to 12th in 2018. France ranked last place, taking over from Sweden which has held the position for the last two years.

Thomson-Cook added: “While the domestic market has lost its lustre for UK landlords, our research clearly shows that opportunities remain across the European Union more widely. However, though access to this market is still good – it is anyone’s guess as to how much longer that will last.

“For any landlord taking the plunge and looking to invest abroad, while the value of the pound might make the initial purchase price less palatable than it was a few years ago, collecting rent in a different currency could really pay off – particularly if you look further afield than your high street bank for the best exchange rates to bring that income home.”

Source: Mortgage Introducer

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Buy To Let A Strong Investment For Most

The majority of buy to let investors still see buy to let as a good strong investment, with 56 per cent looking to keep or buy more rental properties.

The majority of landlords still see the sector as offering a good money making opportunity. However, there is concern that it will decline in the future with 44 per cent looking to sell. For those who are looking to leave the sector, 24 per cent are blaming falling yields. 23 per cent are concerned about tax changes and 19 per cent blame a decline in house prices.

60 per cent of landlords feel that property management had become a burden, likely because of growing regulation in the sector. 61 per cent of buy to let investors undervalued the costs that were involved.

However, some of those who are planning to sell their portfolio will remain involved in property, with 27 per cent planning to invest the money into their main property compared to a third who are thinking of re-investing in another asset class.

A significant regional divide was noted in terms of the best performing areas. Analysis from Octopus Choice revealed that typical rental properties in London cost landlords over £1,250 per annum for the first five years. While there are still hotspots such as Tower Hamlets, Barnet and Hackney, three quarters of landlords in the capital think buy to let investment will be less worthwhile in five years.

In Scotland and the East Midlands returns were more plentiful. Scottish landlords saw average annual returns of 8.8 per cent on their investment over an eight-year period, while those in the East Midlands return 8.2 per cent, making buy to let still a strong investment.

Head of Octopus Choice, Sam Handfield-Jones, said: ‘Brits still have an incessant love affair with bricks and mortar – but the hassle and cost of buy to let is a source of growing frustration, and some landlords may find that their once reliable day-to-day income is becoming harder and harder to come by. But this isn’t the case across all parts of the market, with money still to be made from the right property in the right region.’

Source: Residential Landlord

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Thousands Of Buy To Let Property Investments Sold

Almost 4,000 buy to let properties per month are being sold by property investors as part of the first recorded fall in the number of rental properties in 18 years.

New official figures from the Ministry of Housing report found that around 3,800 buy to let homes are being sold by landlords each month. This is due to changes in mortgage interest tax relief, which continue to have a negative effect on the buy to let market.

Landlords’ profits have been negatively affected by a plethora of tax and regulatory changes over the last few years. These changes range from the removal of the ‘wear and tear’ allowance for rental properties and the implementation of the 3 per cent Stamp Duty surcharge.

Chief executive of letting agent trade body ARLA Propertymark, David Cox, said: ‘The barrage of legislative changes landlords have faced over the past few years has meant the buy to let market is becoming increasingly unattractive to investors. Landlords are either hiking rents for tenants or choosing to exit the market altogether to avoid facing the increased costs incurred.’

The vast numbers of landlords leaving the buy to let market has lead to a chronic shortage of properties available to rent in certain parts of the country. The disparity is felt particularly acutely in London where rental demand is high.

CEO of Shojin Property Partners, Jatin Ondhia, commented: ‘As a result of the government’s increase in stamp duty, it is now much more costly to acquire a buy to let property. A £250,000 investment property will incur stamp duty of £10,000 compared to £2,500 for an owner occupier. Many landlords have seen their profits eroded by the increased burden of taxation and regulation. They are also facing poor buy to let yields especially in London for example, where they are between just 2-3 per cent, while nationwide the average yields are between 6-8 per cent.’

Source: Residential Landlord

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Buy-to-let mortgages through a Ltd company explained

Since April 2017, mortgage interest tax relief has reduced by 25% every tax year.

With the new changes in tax for the buy-to-let arena, investors have been looking for ways to alleviate the pressure and recoup some of the losses that they’d make under the legislation.

One such way is to put your buy-to-let mortgage through as a Ltd company.

Because Ltd companies are taxed differently; it’s thought that it’ll be more tax advantageous for them to switch to this sort of business structure.

However, if you’re looking to do this, you may have found that an inexperienced broker has turned you away.

Simply put, it’s because most high-street lenders won’t offer this sort of arrangement and stick to the standard black and white mortgages rather than getting involved with the more complex products.

And if you aren’t aware of the wider lender market, the chances are that you’ll end up borrowing money personally rather than as a Ltd company, meaning you miss out on a number of benefits.

Regardless of the size of your portfolio, there are massive tax benefits to buying your property through a Ltd company, especially if you’re on the higher tax bracket.

It can also be beneficial if you’re looking to buy property as a collective rather than two separate individuals, or if you’re wanting to distance yourself from personal liabilities if something were to go wrong.

Usually, specialist mortgage lenders are only likely to approve companies that deal solely in property, though there are a handful of lenders that will consider those trading in other areas.

BECOMING A SPECIAL PURPOSE VEHICLE…

If you’re registered as a Ltd company and only trade in rental property, then you’ll be known as a Special Purpose Vehicle (SPV) and will be classified by lenders according to the Standard Industry Classification (SIC) code that is given to your company by Companies House.

Examples of these SIC codes include:
68100 – Buying & sell own real estate
68201 – Renting & operating of housing association real estate
68209 – Other letting & operating of own or leased real estate
68320 – Management of real estate on a fee or contract basis

THE LENDERS…

Despite there being a number of main lenders that specialise in Ltd buy-to-lets, with high street lenders becoming tighter and stricter with their lending, a specialist broker will be who you need to see to access this sort of mortgage. Loan-to-values begin at 85% and vary in rates and types so the number of products, whilst limited, is still huge in depth.

WHAT IF YOU’RE ALREADY AND LTD COMPANY BUT AREN’T AN SPV?

There is still a small number of lenders who will look at buy-to-let lending to Ltd companies that trade in other areas. You will usually need a 25% deposit as a minimum, as the number of lenders is greatly restricted and they will require greater security to counteract the risk.

WHAT IF YOU’VE ONLY JUST REGISTERED AS AN LTD COMPANY?

If you’re a newly-created Ltd company, buy-to-let mortgages are still possible with a handful of lenders.

The Ltd company would need to be created when you apply and would benefit from being registered as an SPV to give you access to a wider panel of lenders and a greater chance of being approved.

As the mortgage is for a new company, there will be no trading history or track record of success that the lender can base their decision to lend on.

You will need at least two, or one if it’s a sole Ltd, directors that will have to be credit-checked to ensure that the Ltd company is creditworthy, as it won’t have a history of its own.

Because of this, lenders may ask for personal guarantees from the director(s), meaning that, if the mortgage isn’t paid, the director(s) become responsible.

The director(s)’ will also need to verify their income to establish that there is an underlying affordability.

Again, loan-to-values begin at 85% and the lenders will base your affordability on the rental yield, with your income needing to be at least 125% of your total mortgage payment.

WHAT’S THE CATCH?

Other than those that we’ve already discussed, there aren’t really any more.

There are a limited number of lenders, which means the criteria and product choice is restricted and leads to higher rates and it’s slightly more complicated to set up when compared to a standard buy-to-let.

But it can be hugely tax advantageous, and with limited liability, you won’t be forced to sell your personal assets if things don’t go to plan – unless you’ve given it as a guarantee.

HOW DO I START?

As you can see, this sort of mortgage can be a complicated process and requires a wider knowledge of the mortgage market.

It’s imperative that you speak to a whole-of-market mortgage adviser that has access to a wider panel of lenders to ensure that you have the best chance of getting your mortgage approved.

Source: Property Forum

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Three more years of decline in buy-to-let sector, forecasts bank

The buy-to-let sector is set to continue declining until 2021, says a new report, which also forecasts a further price correction in the London housing market.

The number of buy-to-let mortgage approvals for purchase dropped in 2016 by 13%, followed by a drop of 27% last year.

The new report, compiled by the Centre for Economics and Business Research for Shawbrook Bank, says there will be further falls as the sector adjusts to a raft of tax changes and new regulation.

The bank says that government policies have had a marked effect.

It expects that the market will stabilise in 2021, which will be followed by returns to growth in the following two years.

Shawbrook expects that strong tenancy demand will continue, and that supply will be underpinned by professional landlords.

The report also says that London house prices could drop further.

It says: “London has long dominated the BTL sector.

“But a flat housing market and limited capacity for rental growth in the capital means that other places in the country offer better yields to investors, especially cities with large student populations.

“Brexit adds a further layer of uncertainty: with a number of City jobs at stake, London’s housing market might be in for a further price correction.”

Source: Property Industry Eye