Tuesday, 18 July 2017

3,375 Grantham Landlords – Is This a Legal Tax Loop-Hole?

In November 2015, George Osborne disclosed plans to restrain the buy-to-let (BTL) market, implying its growing attractiveness was leaving aspiring first time buyers contesting with landlords for the restricted number of properties on the market. One of things he brought in was that tax relief on BTL mortgages would be capped, starting in April 2017. Before April 2017, a private landlord could claim tax relief from their interest on their BTL mortgage at the rate they paid income tax – (ie 20% basic /40% higher rate and 45% additional rate).

So, for example, let’s say we have a Grantham landlord, a high rate tax payer who has a BTL investment where the rent is £900 a month and the mortgage is £600 per month.  In the tax year just gone (16/17), assuming no other costs or allowable items …

·       Annual rental income £10,800.
·       Taxable rental income would be £3600 after tax relief from mortgage relief
·       Meaning they would pay £1,440 in income tax on the rental income

And assuming no other changes .. the landlord would have income tax liability’s (at the time of writing May 2017) in the tax years of ..

·       (17/18) £1,800
·       (18/19) £2,160
·       (19/20) £2,520
·       (20/21) £2,880

Landlords who are higher rate tax payers are going to have be a lot smarter with their BTL investments and ensure they are maximising their rental properties full rental capability. However,  there is another option for landlords.

The Grantham landlords who own the 3,375 Rental properties in the town could set up a Limited Company and sell their property personally to that Limited Company

In fact, looking at the Numbers from Companies House – many landlords are doing this. In the UK, there are 93,262 Buy To Let Limited Companies, and since the announcement in November 2015 – the numbers have seen a massive rise.

·       Q2 2015 /Q3 2015 – 4,193 Buy to Let Limited Companies Set Up
·       Q4 2015 / Q1 2016 – 5,403 Buy to Let Limited Companies Set Up
·       Q2 2016 / Q3 2016 – 3,007 Buy to Let Limited Companies Set Up
·       Q4 2016 / Q1 2017 – 7,149 Buy to Let Limited Companies Set Up

So, by selling their buy to let investments to their own limited company, owned 100% by them, these landlords could then offset the costs of running their BTL’s as an 'allowable expense' - effectively writing off the cost of 100% of their mortgage outgoings, wear and tear and upkeep, letting agent’s fees etc.  

I am undeniably seeing more Grantham landlords approach me for my thoughts on setting up a BTL limited company, so should you make the change to a limited company? 

In fact I have done some extensive research with companies house in the 15 months (1st January 2016 to 31st March 2017 and 1,026 Buy To Let Limited Companies have been set up in the NG postcode alone).

Well you are looking to hold your BTL investments for a long time it could be very favourable to take the short-term pain of putting your BTL’s in a limited company for a long-term gain. You see, there are huge tax advantages to swapping property ownership into a limited company but there are some big costs that go with the privilege.

As the law sees the new Limited Company as a separate entity to yourself, you are legally selling a your BTL property to your Limited Company, just like you would be selling it on the open market. Your Limited company would have to pay Stamp Duty on the purchase and if you (as an individual) made a profit from the original purchase price, there could be a capital gains tax liability of 18% to 28%. The mortgage might need to be redeemed and renegotiated (with appropriate exit charges).

On a more positive note, what I have seen though by incorporating (setting up the Limited Company) is landlords can roll up all their little buy to let mortgages into one big loan, often meaning they obtain a lower interest rate and the ability to advance new purchase capital. Finally, if the tax liability is too high to swap to a limited company, some savvy buy to let investors are leaving their existing portfolios in their personal name whilst purchasing any new investment through a limited company? Just an idea (not advice!).

It’s vital that landlords get the very best guidance and information from tax consultants with the right qualifications, experience and insurance. Whatever you do, always get the opinions from these tax consultants in writing and you shouldn't hurry into making any hasty decisions. The modifications to BTL tax relief are being progressively eased in over the next three years so there is no need to be unnerved and rush into any decisions  before finding out the specifics as they relate precisely to your personal situation, because with decent tax planning (from a tax consultant) and good rental / BTL portfolio management (which I can help you with) .. whatever you do - let’s keep you the right side of the line!

Wednesday, 12 July 2017

Council House Waiting List in Grantham Drops by 53.9% in last 11 years

Should you buy or rent a house? Buying your own home can be expensive but could save you money over the years. Renting a property through a letting agent or private landlord offers less autonomy to live by your own rules with more flexibility if you need to move.

Yet, there is a third way which many people seem to forget, yet it plays an important role in the housing of Grantham people. Collectively known as social housing, social housing is affordable housing which is let by either South Kesteven District Council or a Housing Association to those considered to be in specific need, at rents below those characteristic in the private rental market.

In Grantham, there are 3,062 social housing households, which represents 17.06% of all the households in Grantham. There are further 2,999 families in the South Kesteven District Council area on their waiting list, which is similar to what it was in the late 1990’s, its down from a peak in 2005, when it stood at 6,509 families, a drop of 53.9%


Nevertheless, this doesn't necessarily mean that more families are being supplied with their own council house or Housing Association property. Six years ago, Westminster gave local authorities the authority to limit entitlement for social housing, quite conspicuously dismissing those that did not have an association or link to the locality.

Interestingly, the rents in the social rented segment have also been growing at a faster rate than they have for private tenants. In South Kesteven District Council area, the average rent in 1998 for a council house/ housing association property was £166.41 a month, whilst today its £350.70, a rise of 211% in 19 years.

When comparing social housing rents against private rents, the stats don’t go back to the late 1990’s for private renting, so to ensure we compare like for like, we can only go back to 2005. Over the last 12 years, nationally private rents have increased by a net figure  of 19.7%, whilst social housing renting, national rents have increased by 59.1%.

So, what does this all mean for the homeowners, landlords and tenants of Grantham?

Rents in the private rental sector in Grantham will increase sharply during the next five years. Even though the council house waiting list has decreased, the number of new council and housing association properties being built is at a 70 year low. The government crusade against buy-to-let landlords together with the increased taxation and the banning of tenant fees to agents will restrict supply of private rental property, which in turn using simple supply and demand economics, will mean private rents will rise – making buy to let investment a good choice of investment vehicle again (irrespective of the increased fees and taxation laid at the door of landlords).  It will also mean property values will remain strong and stable as the number of people moving to a new house (and selling their old property) will continue to remain restricted and hence, due to lack of choice and supply, buyers will have to pay decent money for any property they wish to buy.

Interesting times ahead for the Grantham Property Market!

Sunday, 2 July 2017

Grantham First Time Buyers Mortgages taking 28.7% of their Wages

I received a very interesting letter the other day from a Grantham resident. He declared he was a Grantham homeowner, retired and mortgage free. He stated how unaffordable Grantham’s rising property prices were and that he worried how the younger generation of Grantham could ever afford to buy? He went on to ask if it was right for landlords to make money on the inability of others to buy property and if by buying a buy to let property Grantham landlords are denying the younger generation the ability to in fact buy their own home in Grantham.

Whilst doing my research for my many blog posts on the Grantham Property Market, I know a third of 25 to 30 year olds still live at home. It’s no wonder people are kicking out against buy to let landlords, as they are the greedy bad people who are cashing in on a social woe. In fact, most people believe the high increases in Grantham’s (and the rest of the UK’s) house prices is the very fact that has put owning a home outside the grasp of these younger would-be property owners.

However, the numbers tell a different story. Looking of the age of first time buyers since 1990, the statistics could seem to pour cold water on the idea that younger people are being priced out of the housing market. In 1990, when data was first published, the average age of a first time buyer was 33, today its 31.

Nevertheless, the average age doesn't tell the whole story. In the early 1990’s, 26.7% of first-time buyers were under 25, while in the last five years just 14.9% were. In the early 1990’s, 4 out of ten first time buyers were 25 to 34 years of age and now its six out of ten first time buyers.

Although, there are also indications of how un-affordable housing is the house price-to-earnings ratio has almost doubled for first-time buyers in the past 30 years. In 1983, the average Grantham home cost for a first-time buyer (or buyers in the case of joint mortgages) was the equivalent of 2.4 times their total annual earnings, whilst today, that has escalated to 4.3 times their income (although let’s not forget, it was at 4.7 times their income for Grantham first time buyers in 2007).

Again, those figures don’t tell the whole story. Back in 1983, the mortgage payments as percentage of mean take home pay for a Grantham first time buyer was 22.5%. In 1989, that had risen to 50.4%. Today, its 28.7% … and no that’s not a typo .. 28.7% is the correct figure.

So, to answer the gentleman’s questions about the younger generation of Grantham people being able to afford to buy and if it was right for landlords to make money on the inability of others to buy property? It isn’t all to do with affordability as the numbers show.

And what of the landlords? Some say the government should sort the housing problem out themselves, but according to my calculations, £18bn a year would need to be spent for the next 20 or so years to meet current demand for households. That would be the equivalent of raising income tax by 4p in the Pound. I don’t think UK tax payers would swallow that.

So, if the Government haven’t got the money… who else will house these people? Private Sector Landlords and thankfully they have taken up the slack over the last 15 years.

Some say there is a tendency to equate property ownership with national prosperity, but this isn’t necessarily the case. The youngsters of Grantham are buying houses, but buying later in life. 

Also, many Grantham youngsters are actively choosing to rent for the long term, as it gives them flexibility – something our 21st Century society craves more than ever.