landlords Housing market first-time buyers
Marketing No Comments

Calls on govt to support landlords during coronavirus

Two landlord organisations are calling for government and mortgage lenders to introduce a package of measures to support tenants and landlords hit by the coronavirus.

Both the Residential Landlords Association and the National Landlords Association are lobbying for the government and mortgage providers to give landlords a period of grace with certain payments so they can deal with the effects of coronavirus on their finances.

In particular, the groups want a temporary scrap of the five-week wait before universal credit claimants get their first payment and for lenders to “look sympathetically” on requests by landlords for mortgage payment holidays where their income is being affected through reduced or non-payment of rent.

They have also called for the government to pause the final phase of restricting mortgage interest relief to the basic rate of income tax.

Since April 2017 tax relief on mortgage interest has been gradually phased out so that from April 2020, mortgage expenses will not be able to be deducted from rental income to reduce tax bills.

Instead, landlords will receive a tax-credit, based on 20 per cent of their mortgage interest payments.

This is less generous for higher-rate taxpayers, who effectively received 40 per cent tax relief on mortgage payments under the old rules.

In a joint statement, the RLA and the NLA said: “We are encouraging all landlords to work positively with tenants to provide support where needed throughout this difficult period.

“Landlords should be as flexible as they can to help tenants facing payment difficulties resulting from the impact of the coronavirus.”

FTAdviser reported last week (March 10) that a number of high-street lenders are allowing borrowers to defer their mortgage payments if they are affected by coronavirus.

The Royal Bank of Scotland is allowing mortgage and loan repayments to be deferred for up to three months, alongside temporary increased credit and cash withdrawal limits.

But these measures are not a blanket provision and will only apply to customers in financial difficulty.

Santander will also offer support to customers on a case-by-case basis, which includes the option to defer or reduce payments that are due.

The spreading crisis surrounding coronavirus has wiped billions off the stock markets, with the FTSE 100 dropping nearly 11 per cent on Friday (March 13) — the worst daily dip in more than 30 years.

Stock markets have been dropping across the globe since the coronavirus started to become a major issue as countries closed borders and introduced lockdowns to curb the crisis.

Prime minister Boris Johnson has urged everyone to avoid unnecessary social contacts, to work from home where possible, and to stay away from pubs and restaurants.

People in at-risk groups will be asked within days to stay home for 12 weeks.

This afternoon the chancellor is expected to announce new measures to curb the impact of the crisis on businesses.

By Amy Austin

Source: FT Adviser

coronavirus Savills coronavirus loans
Marketing No Comments

Coronavirus to increase pain for already ‘squeezed’ landlords

The coronavirus outbreak will add to the pain for landlords who already have a raft of unpleasant rule changes coming their way next month.

With many people expected to experience a drop in income because of the pandemic, it’s highly likely tenants could struggle to pay their rent.

The Residential Landlords’ Association has recommended landlords work with their tenants and allow them to delay rent payments.

It told members: “A dip in income could mean a risk of rent arrears.

“Discuss this with your tenant and be flexible where you can – whilst a minority of tenants may use the outbreak as an excuse to avoid paying rent, most will be genuine and suffering stress.

“If there hasn’t been a history of arrears or delayed payment, then it’s better to accept the situation and work with the tenant to repay any arrears when things return to normal.”

Some banks such as RBS, NatWest, TSB and HSBC have allowed customers affected by coronavirus to defer mortgage payments, however the situation for buy-to-let investors is less clear cut.

Banks have said landlords struggling to pay their mortgage because of tenants falling into arrears will be dealt with on a case-by-case basis.

This will put a squeeze on landlords just as the taxman is poised to make life even more uncomfortable for them, says Sarah Coles, personal finance analyst at Hargreaves Lansdown.

“Property was already one of the least tax efficient ways to invest your money, and cuts to tax relief from 6 April are set to make it even less rewarding.

“From the moment you pay stamp duty on your purchase, through the years of paying income tax on rent and until the day you finally pay capital gains tax on the sale, your property investments are making plenty of cash for the taxman.

“In recent years, landlords have been increasingly squeezed by tax changes, and from April, three different tax reliefs will be slashed – making life even more expensive.”

What’s changing on 6 April?

Sarah Coles explains…

Mortgage interest tax relief for higher rate taxpayers will finally reduce to the basic rate.

This has been gradually shifting since 6 April 2017. Before then, a higher rate taxpayer could have subtracted all their finance costs from the rental income before calculating the tax due.

Assuming they had no other costs they could have received rent of £10,000 and paid mortgage interest of £6,000, so would only pay tax on £4,000 – £1,600

From 6 April 2020, they’ll only get 20% relief on the £6,000, so will pay 20% on £6,000 and 40% on the remaining £4,000 – £2,800

Capital gains tax (paid at 18% for basic rate taxpayers and 28% for higher rate taxpayers on property) will have to be paid within 30 days of completion of the property sale.

It’s currently paid by self-assessment at the next available opportunity, so tax on a sale in May 2018 would have been paid in January 2020.

Landlords who previously lived in the property currently get private residence relief on the final 18 months they own the property: this will fall to nine months.

Let’s assume you bought in January 2010, lived in the property until January 2013, then rented it out and sold in January 2020. If you made a chargeable gain of £150,000, you’d pay tax on £82,500 – which for a higher rate taxpayer at 28% would be £23,100.

However, if you bought in May 2010, lived in the property until May 2013, then rented and sold in May 2020, with a chargeable gain of £150,000, you’d pay tax on £93,750 – which for a higher rate taxpayer at 28% would be £26,250.

Is property investment worth it?

Coles says: “If you’re considering property investment this crisis is a salutary lesson that interruptions in rent aren’t just a theoretical possibility –at the moment they seem to be a racing certainty.

“It’s also a reminder that it’s essential to factor tax into your considerations. The taxman’s take can make a big difference as to whether your investment will actually end up making you any money. And it can start to look even less appealing when you compare it to the fact you can invest in stocks and share.”

Written by: Joanna Faith

Source: Your Money

stamp duty landlords
Marketing No Comments

Foundation: Landlords expect further government intervention

A majority of landlords (70%) expect further government intervention in the private rental and buy-to-let sectors during 2020 according to the latest research by Foundation Home Loans.

Of those who anticipate further government action, 73% believe it is either quite, or very likely that this will mean the introduction of minimum tenancy terms.

The same number believe action is likely in the HMO and multi-unit block sector.

In addition, 72% of landlords believe individual licencing for all landlords and their properties is likely whilst 38% can envisage a rental cap for private rental properties being introduced.

The research was undertaken by BVA BDRC and carried out in January 2020, with results based on 791 online interviews.

A further 77% of landlords were not in favour of a rental cap, 12% said they may be in favour, 2% definitely supported such a measure and 9% were unsure.

When asked what action they would take should any cap on rents be introduced in the PRS, 35% said they would immediately increase all rents to the maximum rent allowable, 33% said they would consider selling some of their portfolio, 20% didn’t know, while 19% would either look at leaving the PRS or at other assets for their investment.

A tenth (10%) said they would do nothing.

Overall respondents were neutral on whether December’s general election result would be either positive or negative for them.

Over a quarter (26%) thought positive, 28% thought negative, whilst 38% thought neither.

Landlords who held more properties within their portfolios were more likely to be positive about the impact.

The issue of abolishing S21 evictions was a major concern for over half (53%) of landlords, who stated they would feel much less confident about their portfolios if this was introduced, while 30% said it would make them feel slightly less confident.

Overall, there is however a greater degree of landlord optimism than in previous iterations of the research, with the metric used to show this is up for the first time in over a year.

Jeff Knight, director of marketing at Foundation Home Loans, said: “While many landlords look like they’re taking a ‘wait and see’ approach to this government and any anticipated intervention in the PRS and/or buy-to-let market, it’s also noticeable that many believe the status quo is unlikely to hold and there will be action of some kind.

“Interestingly, landlords appear resigned to the introduction of minimum tenancy terms, further action with regards to HMOs and MUBs and individual licensing.

And while 38% think a rental cap might be likely, there is very little support for such a measure being introduced, and it will result in landlords having to take action around the rents they charge and whether they can hold onto all their properties.

“There is definitely a degree of uncertainty around what might be coming next, and I suspect many landlords are waiting for this month’s Budget before they make up their minds more fully on whether this is a government which will be more ‘friendly’ to landlords.

“Of those who think there will be intervention, 32% think stamp duty for landlords is just as likely to go up from its 3% extra charge level, as opposed to the 7% who think a cut is likely.

“In that sense, landlords appear to be bracing themselves for a Budget which may not be in their favour, rather than one which seeks to roll-back on the measures which have undoubtedly impacted on their profitability over the last few years.

“Clearly landlords do not want to see S21 evictions removed as an option for them, but at the same time there appears to be a growing level of confidence in their own businesses, especially for those who own larger numbers of properties.

“This perhaps taps into the move towards portfolio operators in the sector who can certainly benefit from strong lending options and a highly competitive mortgage market to help them meet their aims and ambitions for their businesses.”

By Jessica Nangle

Source: Mortgage Introducer

UK house prices Property prices housing market
Marketing No Comments

Landlords in the midlands most likely to increase portfolio

Landlords based in the midlands were recorded as the most likely to increase their portfolio size, a study conducted by BVA BDRC shows.

The research outlines that 24% of landlords in the East Midlands and 22% in the West Midlands plan to purchase more properties in the next 12-months.

Meanwhile, 8% of landlords in South West and 9% in Central London intend to purchase more properties within the same timeframe.

The data shows that overall, only 14% of landlords intend to purchase property, with the average preparing to buy three.

Looking at property type, 52% of those looking to expand their portfolio intend to do so by purchasing a terraced house.

This was followed by semi-detached properties at 32% and flats at 26%.

Furthermore one in four landlords are targeting HMOs, according to the research.

Nearly two thirds, 63% of landlords plan to fund their next purchase with a buy-to-let mortgage, while 17% intend to do so through releasing equity on existing properties, and 18% said they would purchase a property outright.

Richard Rowntree, managing director of mortgages of Paragon, said: “The proportion of landlords looking to purchase new property has been largely consistent over the past two years, but we are seeing regional variations and also a greater propensity for portfolio landlords to invest in property.

“Portfolio landlords have adopted a number of strategies to adapt to the tax and regulatory changes of recent years and we’re seeing trends such as these landlords buying stock from smaller-scale participants as they exit the market, or targeting higher yielding properties, such as HMOs.”

By Jake Carter

Source: Mortgage Introducer

Marketing No Comments

Majority of landlords don’t use a tax adviser

Over half of all landlords do not use the services of a tax adviser, according to research from Foundation Home Loans.

40% use one at least once a year, and 7% use one less than this. Of those that do use a tax adviser, 42% said they had been recommended one by a friend or colleague or another landlord, however only 3% said they had taken their business to an adviser recommended by their mortgage broker.

Foundation says the high number of landlords without a tax adviser presents both an opportunity and a risk for mortgage advisers, suggesting that mortgage firms should establish introducer arrangements with tax advisers. Foundation said to do otherwise might mean advisers recommended unsuitable mortgage products to landlords who did not know the full extent of their own tax situation and what options would be best for them.

The research also asked landlords to consider the cost of their buy-to-let mortgages over the duration of 2020. 40% felt their mortgage costs would increase, 47% said they felt they would stay the same, while 13% said they thought they would go down. Those landlords with bigger property portfolios – 20-plus – were more likely to say their mortgage costs would go up.

The research highlighted the further opportunity for advisory firms with more than a third of landlords saying they had not arranged their last buy-to-let mortgage through a mortgage adviser, with nearly a quarter preferring to go direct to the lender (24%). Foundation’s research did, however, suggest that those landlords with bigger portfolios were more likely to use an adviser for their purchases, with over 70% of portfolio landlords using their services.

Foundation said there was also positive news from the research in the number of landlords who said they will reduce the number of portfolios they hold – this has been falling from a figure of 26% in quarter two last year to 22% in the latest iteration of the research. The number who said they would increase the number of properties they hold in their portfolios had also risen, up to 14% from 13% in the previous quarter.

Of those landlords who said they would be adding to their portfolios over the next 12 months, 55% said they would do so through a limited company vehicle, 30% would buy as an individual, 8% said it would depend on the circumstances, 7% would buy in the name of their partner, while 5% would use other means when purchasing.

Jeff Knight, director of marketing at Foundation Home Loans, said: “Having specialist tax advice should, in our opinion, be a non-negotiable for landlords before they make any decision about what type of mortgage they need, and how they are going to own and finance their properties going forward.

“Advisory firms clearly have a role to play in this and, it is surprising to see so few landlords saying they chose their tax adviser on the basis of their adviser’s recommendation. An introductory arrangement can work for all concerned – advice firm, tax adviser and client – and should help provide clarity on the tax position and, subsequently, the mortgage advice.

“It is also interesting to hear that large numbers of landlords believe their mortgage costs are destined to rise in 2020, especially when we have such a highly-competitive mortgage market. This clearly presents a marketing opportunity for advisers to target those landlords who may be purchasing or refinancing this year because we might suggest that their clients could be pleasantly surprised by the products and rates on offer to them.

“Overall, there are clearly large numbers of landlords who are not using advisers to secure their buy-to-let mortgages – indeed, if they only go direct, then this might be why they feel their mortgage costs are likely to go up. It’s therefore vitally important that advisers put themselves in the shop window, not just for those landlords who would naturally use their services, but the many who seem more inclined not to take advice.

“We must continue to bang the drum about the need for, and the benefits of, advice especially to a borrower demographic who could gain a lot from access to specialist products in this area.”

By ROZI JONES

Source: Financial Reporter

Brokers number of landlords Buy to let mortgage lending mortgage stamp duty holiday
Marketing No Comments

Number of landlords falls to seven year low

The number of landlords in the private rental sector has fallen to a seven year low, according to Hamptons International’s monthly lettings index.

Hamptons International estimate that there were 222,570 fewer landlords in the private rental sector in 2019 than in 2017.

The number of landlords peaked at 2.88 million in 2017, but tax and regulatory changes have caused some landlords to sell up and leave the sector.

By 2019 there were 2.66 million landlords in Great Britain, 8% fewer than the 2017 peak.

This means that the number of landlords has fallen to the lowest level in seven years when there were 2.58 million landlords in Great Britain..

Despite this decline, the average landlord now owns more properties.

The average landlord in Great Britain owned 1.93 buy-to-let properties last year, the highest level since 2009 when the average landlord owned 2.02 properties.

Last year, 30% of landlords owned more than one buy-to-let property, the highest proportion on record.

This is up from 21% in 2016 when many of the tax and regulatory changes were announced and is double the proportion recorded a decade ago when 15% of landlords owned multiple buy-to-lets.

Landlords in the North East had the biggest portfolios.

The average landlord based in the North East owned 2.05 properties last year, closely followed by landlords based in Yorkshire & Humber (2.03 properties per landlord) and London (2.01 properties per landlord).

Investors in Wales and Scotland were least likely to have big buy-to-let portfolios, with the average landlord letting out 1.83 properties in each region.

Average rents for new lets rose to £998 pcm in January, up 3.6% on the same time last year.

Rents continued to increase the most in the South West (6.0%), followed by the East (4.1%) and Greater London (4.1%).

Rents rose in every region, but Wales recorded the weakest rental growth at 1.2%.

Over the past two years the rental sector has shrunk, with the number of privately rented homes falling by 156,410 since its peak in 2017.

Aneisha Beveridge, head of research at Hamptons International, said: “The number of landlords in the private rented sector has fallen to the lowest level in seven years.

“While 222,570 landlords have left the sector since 2017 due to tax and regulatory changes, those who have stayed tend to have bigger portfolios – a further sign that the sector is professionalising.

“The average landlord in Great Britain owned 1.93 properties last year, the highest level since 2009.

“Rents rose in every region across Great Britain in January to stand 3.6% higher than at the same time last year.

“The number of new homes purchased by landlords remains low, which is feeding through to fewer homes available to rent.

“This is particularly true in the South, where rents are rising the most.”

By Jessica Nangle

Source: Mortgage Introducer

Marketing No Comments

Avoiding Problems When Renting Property To Tenants

We are at the start of a new decade and many landlords are panicking. New regulations, lots of new regulations, are making renting property harder. However, so long as you take care to keep up to date and follow the rules, you should be fine.

People will always want somewhere to live, and your investment should hold its value.

Using a good letting agent is of course one way to go. However, although many agents are great, others are not, and it is often hard to tell good agents from bad. There is really no substitute to learning as much as you can yourself about the renting regulations, so you can check that your agents are doing things properly. Or so you can save money by doing things yourself.

Here is a list of some of the preliminary things you need to do before you start advertising for tenants:

1. Protect your property at the Land Registry

This is probably the most important thing of all. If you rent a property to tenants but the contact address for the property at the Land Registry is the property itself, it is easy for dishonest tenants to borrow money on the security of the property, or even sell it without your knowledge.
Find out more from the video here https://youtu.be/uX6K-HIe1ZU featuring landlord and tenant solicitor David Smith, speaking at the Landlord Law Conference.

2. Check you have permission to let

There are a number of things to consider here:

  • Does your mortgage allow renting? If you do not have a ‘buy to let’ mortgage you need to check this out.
  • Is your property leasehold? For example, are you are planning on renting out a leasehold flat? If so, you need to check the terms of your lease. Some leases forbid subletting which means that you could be at risk of forfeiting your lease if you rent to tenants.
  • Does your insurance permit you to rent out the property? You need to be careful here as if you are using the wrong type of insurance your insurance company may refuse to pay out on claims. Check out my free Insurance Mini-Course here to find out more.
  • Is your property an HMO? It will normally be an HMO if you rent to three or more sharers who are not family members. If your property is an HMO you may need to obtain an HMO license – and there are fierce penalties if you rent a licensable HMO property while it is unlicensed. Find out more in our Free HMO 101 course here.

3. Make sure your property is in a proper condition

Once you are sure that you have all the necessary permissions, you need to make sure that the property is in a fit and proper condition before advertising it to let.

Landlords now not only have to comply with the repairing obligations (set out in section 11 of the Landlord & Tenant Act 1985) but also with the new legal obligations requiring property to be ‘fit for human habitation’.

Here are some of the other checks and inspections you need to do:

  • If the property has gas you need to get it inspected by a gas installer registered with the Gas Safe Register. They will provide you with a certificate which must be handed to tenants before they move into the property
  • You will need to obtain an Energy Performance Certificate which must also be given to tenants before they rent the property. Your property must have an energy rating of not less than E.
  • You must carry out a fire risk assessment and ideally keep a record of this. Find out more in the RICS Clear Guide to Fire Safety.
  • You must install a working smoke alarm on every storey of the property which is being used for ‘living accommodation’ and a carbon monoxide alarm in every room used as living accommodation where solid fuel is used (e.g. coal fires and wood burners). These need to be tested and shown to be in good working order on the first day of the tenancy. There is government guidance here. Note that at present this is only a legal obligation in England, but landlords in Wales are advised to fit alarms also.
  • You need to carry out risk assessments for legionella disease and keep records to show that this has been done.
  • You must ensure that all furniture provided complies with the furniture regulations.

4. Ensure that you comply with Data Protection rules

This is something that is often overlooked. However, it is important and there are hefty penalties for non-compliance.

Compliance is not hard though:

  • All landlords need to register with the Information Commissioner’s Office, and
  • Ensure that tenants data is kept safely in compliance with the data protection legislation (which applies to landlords)
  • Tenants also need to be given suitable data protection notices.

Find out more about this here.

5. Make sure you keep up to date

Law, rules and regulations change. For example, parts of this article could be out of date if you are reading it months after it was first published. So, it is really important that you keep up to date with developments.

By Tessa Shepperson

Source: Residential Landlord

Landlords
Marketing No Comments

Landlords to allow pets in rented homes unless they are badly behaved

Landlords should no longer stop renters from having pets if they are well behaved, according to the government.

Currently it is almost impossible to find a rented house which will allow you to keep a dog or cat – just 7% of landlords advertise their homes as suitable for pets.

Renters often find themselves forced to give up their beloved pets to find accommodation.

But today (January 4), Housing Secretary Robert Jenrick has called on landlords to make it easier for responsible tenants to have well behaved pets in their homes.

MP Robert Jenrick announced an overhaul to the model tenant contracts earlier today, with pets at the heart.

His calls came as figures show more young people and families than ever before are renting.

He said they should be able to enjoy the happiness that a pet can bring into their lives.

The government’s model tenancy contracts for renters, which can be used as the basis of lease agreements made with tenants, will now be revised to remove restrictions on well behaved pets.

This is to ensure more landlords are catering for responsible pet owners wherever possible.

The government emphasised there should be a balance between rights for renters to keep their pets and landlords’ properties should be protected from damage.

But they said total bans on renters with pets should only be implemented where there is good reason, such as in smaller properties or flats where owning a pet could be impractical.

Housing Secretary Robert Jenrick said: “Pets bring a huge amount of joy and comfort to people’s lives, helping their owner’s through difficult times and improving their mental and physical wellbeing.

“So, it’s a shame that thousands of animal-loving tenants and their children can’t experience this because they rent their homes instead of owning property.

“So, I’m overhauling our model tenancy contract to encourage more landlords to consider opening their doors to responsible pet owners.

“And we will be listening to tenants and landlords to see what more we can do to tackle this issue in a way that is fair to both.

“This is part of this new government’s mission to improve life for tenants, recognising that more are renting and for longer in life.

“We’ve already taken action, banning unfair letting fees and capping tenancy deposits, saving tenants across England at least £240 million a year, and I will continue to take more steps to secure a better deal for renters up and down the country.”

More news for renters

The government will be bringing forward a bill to update the relationship between tenants and landlords as well as to introduce a Lifetime Deposit scheme, to make moving between properties easier and cheaper.

The government is also working to establish First Home, a new programme for first time buyers, enabling them to purchase a new build property in their local area at a 30% discount.

The national model tenancy agreement is the government’s recommended contract for landlords to use when signing on new tenants for their properties in England.

It sets out the minimum requirements and can be altered by landlords to cater for specific circumstances, tenants or properties.

A revised model tenancy agreement will be published by the government this year.

By Vicky Castle

Source: Kent Live

BTL investors Rents stamp duty Labour UK real estate portfolio Home repossessions Average UK rental yield Buyer Demand
Marketing No Comments

A third of landlords looking to grow portfolio

Although landlords are pessimistic about the economy, a third are looking to grow their portfolio, Monmouthshire Building Society has found.

Nearly half (45%) of landlords believe the economy will worsen and 53% think legislation around tenancy and eviction will get worse for landlords.

However, nearly two-thirds (71%) think demand for rental properties will increase and a fifth (20%) are considering growing their portfolios.

Holiday lets were highlighted as a growth area with 64% of new landlords having a holiday let property in their portfolio.

Dan Goulding, product development manager at Monmouthshire Building Society, said: “It’s been a difficult time for landlords recently, and our survey has highlighted that the majority don’t expect things to improve anytime soon.

“However, the survey also shows that many landlords believe there are opportunities to be found in the market, such as investing in holiday lets and diversifying their portfolios.

“At Monmouthshire Building Society we will continue to support landlords by offering a wide range of buy-to-let mortgage products, including holiday let, portfolio and limited company mortgages.”

By Michael Lloyd

Source: Mortgage Introducer

residential
Marketing No Comments

Landlords facing tax increases

One of the biggest life events to provoke a conversation about protection is when people buy a house and take out a mortgage.

This has been a constant for a long time in the UK.

Residential mortgages are a big catalyst for people taking out some form of protection cover.

Sometimes though, advisers find it a bit more difficult to position the idea of protection to landlords because the protection need is not quite as obvious.

People who purchase properties which they intend to rent out typically use buy-to-let interest only mortgages.

Often, their long term expectation is that property prices will increase and they will eventually cash in by selling them.

In the meantime, the rental income will fund the monthly mortgage payments and will also provide them with additional income.

Many landlords see the value of a property portfolio as a crucial part of their retirement planning.

However, in 2017, we saw the implementation of some new tax rules that meant over the next four years, the amount of mortgage interest which could be offset from rental profit reduces.

In this current tax year (2019/2020), landlords can offset 25 per cent of their mortgage interest from their rental profit.

From April 2020, this reduces to zero.

There is a tax credit relief available based on basic rate tax, but landlords will have to pay income tax on all of the rental income they receive meaning that many of them will pay more tax.

This new tax rule is going to change the landscape of the buy-to-let market.

How it normally works

For example, let’s say a landlord has five properties in their buy-to-let portfolio.

The properties are worth about £700,000 in total, but there are 5 lots of £100,000 interest-only mortgages, a total of £500,000.

Let’s say the interest rate on each buy-to-let mortgage is 3 per cent.

The total interest-only mortgage payments each month would be £1,249 or £14,988 each year.

Let’s say the income received on each property is £600 each month – in total this is £3,000 each month or £36,000 a year.

Clearly we can see that despite the large amount of mortgage debt and mortgage payments that need to be paid; the rental income will fund these mortgage payments and still yield a generous profit to the landlord.

A private landlord would typically complete a tax return each year and on it they would detail the income from their property portfolio and then detail all of their expenditures such as management fees and repairs, along with other expenses including the mortgage interest.

Income tax on the rental income profit is then charged at the normal rate of income tax.

But as you can guess, from April 2020, many private landlords with buy-to-let mortgages will simply pay more income tax on their rental income.

What if interest rates go up?

We know that we have been experiencing record-low interest rates for the past decade but inevitably, at some point, they are going to go up.

With this same example, let’s say the interest charged on those buy-to-let properties goes up to 6 per cent. I would imagine most people reading this would have experienced paying something close to that rate at some point in the past.

In my example scenario, the mortgage interest payments would increase to £2,501 each month or £30,012 each year.

This scenario looks a lot less attractive for a landlord.

If they can not offset interest-only mortgage payments from their rental income profit; this will result in significantly lower returns and then they will inevitably have to consider alternative options.

How will landlords adapt?

Let’s say a landlord runs their property business through a company rather than as a private venture; would these new tax changes I mentioned above apply? The answer is no.

If a company owns the property portfolio then the tax which is paid on the profit of the business is corporation tax.

At the moment, the corporation tax rate is 19 per cent but this is going to drop to 17 per cent in the next tax year (2019/2020) making the idea of holding properties within a limited company or specifically a SPV (Special Purpose Vehicle) quite attractive.

This is because a lot less tax will need to be paid which means a much greater net profit.

I must caveat that any landlords who do decide to move their private property portfolio across to a SPV would need to take proper advice because there are lots of implications to consider including stamp duty, lending criteria for new mortgages and various other considerations.

That said, at face value, it feels like these tax changes will nudge many landlords to move across to this type of model going forward.

Partners in business

Let’s look at a scenario where landlords set up a business to hold their property portfolio.

What are the protection opportunities that could arise for situations where people work together on a property venture?

Let’s say three skilled tradesmen get together with the idea of setting up a rental business.

They set up an SPV and they each invest £50k of their own money to buy their first property from an auction.

They buy the property with the cash they have pooled together with the intention of renovating it and putting it on the rental market.

Bob is a builder, Eric is an electrician and Paul is a plumber.

They do all the necessary work themselves and when the property is complete, they put it on the rental market.

The value of the property has increased, so they mortgage it and using those funds, they return to the property auctions to find their second property.

Their plan is to carry on doing this and build up their property empire.

Opportunities for Protection conversations?

What are the immediate protection opportunities up for discussion?

Control – Each partner will have a shareholding in the business to the value of how much they invested, so there is a question of how they keep control of their business if one of them dies or gets sick.

How would the surviving business owners feel if someone came into the business that they did not want to work with, because they had inherited their deceased business partner’s shares?

What if this new person has no useful skills but wants a say in how the business is being run?

Would the surviving business partners like to have control of their own destiny?

The answer to fix this problem is simple business protection.

This could be life insurance or critical illness cover, which would provide the necessary funds to allow the remaining shareholders the ability to purchase the shares of the other shareholder who might have died or been diagnosed with a critical illness.

Part of this solution would include a legal agreement which is designed to protect both parties – the business but also the family of the deceased or sick director.

Key people? – A scenario like this also suggests that all three business owners are key people.

If they perform duties which are essential to the running of the business, then sickness or death of one of them could affect profitability.

The answer to this problem is simple protection cover for each key person.

This could be life cover, critical illness cover or income protection; all of which are designed to allow the business the funds to protect their profits and perhaps bring someone into the business to perform the duties of their sick or deceased business partner.

Debts? – Another problem is those mortgages.

Simple loan protection in the shape of life cover or critical illness cover could be used to repay part or all of those debts – just like normal mortgage protection.

I also mentioned the initial funds that each partner put into the business when they set it up.

Each of those £50,000 deposits which were used to buy the first property are directors’ loans to the business.

In the event of the death of one of the business owners, how quickly would the family want that money back?

It is payable immediately, but it would be a problem if the surviving business owners did not have that kind of money available and they would not be in a position to pay it back.

Would this result in the surviving business owners needing to sell one of their properties to release equity? How will this affect things?

Future prospects

I think that over the next few years we’re going to see more landlords moving across to the SPV business model purely for tax reasons but this will open up a whole world of protection opportunities with buy-to-let landlords who have often been a tough nut to crack.

The trick for advisers is to not over complicate your process. Keep it simple and keep things clear.

Build your conversation around two key points: what is the problem and how do we fix it?

Problem: what specifically is the problem? What would happen if? What would the effect be?
Solution: what is the solution to fix this problem?
It does not need to be complicated, but this is another example of where proper financial advice is crucial for your clients.

By Vincent O’Connor

Source: FT Adviser