Written By Em

In the summer 2015 Budget, the Chancellor announced changes to mortgage interest tax relief. Those changes will start to take effect from the British tax year 17/18. The change means that landlords will no longer be able to deduct all of their mortgage interest when calculating profit. Essentially, this means that landlords who own properties in their own name will be taxed on turnover and not profit.

This raises the question of whether now is the time for landlords to explore acquiring new buy-to-let properties in a limited company, where the interest costs are still allowed to be deducted from turnover before the profit is calculated. Hiten Ganatra, Managing Director at Visionary Finance, helps us explore the pros and cons of both options.

Hiten Ganatra, Managing Director of Visionary Finance

As tax rules change, there appears to be a tipping point at which it becomes more financially advantageous to acquire properties within a limited company, rather than in personal names, but it really does depend on an individual’s circumstances. Consideration needs to be given to the following areas before deciding whether or not the creation of a special purpose vehicle will be viable:

1. The current tax status of the individual, i.e lower rate tax payer or higher rate tax payer
2. Whether or not the individual has any existing buy-to-let properties
3. What future plans the individual has of growing their property portfolio
4. The mortgage options available to the individual, based on their circumstances
5. If the purchase is a long-term or short-term investment (where they may be looking to buy, keep for a few years and then sell for profit)
6. The loan amount required and deposit amount available to the individual

The outcome of the above answers will help to determine whether or not setting up a limited company is a viable option. So, what are the benefits and the challenges of investing in property through a limited company?

Benefits of ownership in a limited company:

• The mortgage interest relief is still available and will be offset against the turnover, before profit is calculated.
• The corporate wrapper allows you to keep your property income and personal income separate.
• New shareholders can be added to the company, thereby giving you the opportunity to ensure efficient tax and succession planning.
• The rental stress tests used for limited company buy-to-lets allows for more generous lending amounts, meaning individuals may be able to borrow more through their limited company than as an personal borrower.

Challenges of ownership in a limited company:

• Limited number of lending options available.
• Mortgage interest rates for limited companies are less competitive than personal mortgages.
• Lenders will require individuals to provide a personal guarantee.
• There is a cost of running and operating a limited company, which will require annual accounts and compliance of Companies House rules.
• Extraction of profits from the limited company.
• Lenders may not be willing to lend to an existing property-related limited companies that already have mortgages with other lenders, restricting options further.

Once the benefits are weighed up against the challenges, a decision can be made as to whether or not the limited company route is the right one. Due to the limited number of lenders in the marketplace that offer limited company buy-to-let mortgages, there is a lack of competition amongst lenders, resulting in the pricing of mortgage deals being less attractive. For example, the cheapest buy-to-let mortgage deal at 75% loan-to-value (LTV) in personal names is currently available at a rate of 1.84% fixed for two years and has a product fee of £1,995. Whereas the cheapest 75% LTV rate for a limited company buy-to-let is coming in at 3.19% fixed for two years, which has a product fee of 1.5% of loan amount.* The limitation in the choice of lenders has created this disparity in pricing, which should be carefully considered before deciding whether the limited company buy-to-let route will be viable.

The final consideration requires looking at the rental income which is likely to be achieved. Following the recent Prudential Regulation Authority (PRA) changes, lenders have introduced new rules for personal buy-to-let mortgages, whereby they are now assessing the individual’s tax banding before calculating the maximum they will consider lending. The same rules haven’t been applied to limited company buy-to-let mortgages, because the mortgage interest costs still remain tax deductible from the company turnover. For example, assume you are a higher rate tax payer looking to purchase a rental investment in your personal name, where the estimated rental figure is £1,400 per calendar month and the purchase price is £350,000. If we consider a simple lending formula, the maximum loan available to you could be as little as £210,000. Whereas, if you purchase through a limited company, the maximum borrowing could be as much as £262,500, giving you an extra £52,500* lending.

The team at Visionary Finance have experience and extensive knowledge of the buy-to-let market, putting them in a very strong position to provide you with informed advice. If this is something you would like to discuss further, then please contact them on 0207 100 4754.

*Mortgages rates and loan amounts are indicative and are correct at the time of printing. Please do not rely solely on these figures for your investment decision.

Among the biggest challenges facing landlords today are keeping on top of vacancy rates, eliminating evictions and collecting rent on time with minimal hassle. These are common stress factors that typically come down to good tenant choice.

But Gianluca Leone, Founder of London flatshare website myrooms.co.uk, a service that maximises rental yield for landlords by renting out rooms individually to flat sharers, works closely with both property owners and tenants and understands the lesser known causes of landlord stress.

He has the unique perspective of seeing the triggers from both sides. It’s this experience dealing with each party that has equipped him to understand the specific and often unexpected factors that keep landlords awake at night.

Photography

“With technology and social media as it is today, good quality photography is essential to getting the right tenant into the property,” says Leone. “Tenants are immediately put off by poor quality photos or, worse, a total absence of them. But getting good quality imagery of a property isn’t as easy as pulling out your smartphone and taking a few snaps.

“Property photographs need to be taken on good quality equipment, by a professional. All angles need to be covered and the property must be presented in its best possible light. One of the services that our landlords really value is that we handle all of the photography, saving them time, money and stress.”

Six Surprising Sources of Landlord Stress

Tenants with a scruffy appearance

“First impressions count, and the impression a tenant leaves on a potential landlord or their appointed property manager can have an impact on their chances of securing that property,” says Leone.

While not calling on tenants to turn up in their best suit or most demure twin-set, Gianluca believes making a bit of an effort can create a good first impression.

“When a landlord meets a dishevelled looking tenant, it can be stressful to consider letting a property to them. It raises questions about how well they’re going to care for the property.” 

Bad manners

This one works both ways. Although tenants and landlords won’t be seeing a whole lot of one another, they will have some degree of contact, and both parties will be hoping for a cordial, long-term relationship. There’s no need to be overly formal, but, as Leone explains, in a competitive market, little details can make a difference.

“Sometimes a landlord will have to choose between a number of interested tenants. While they never take these decisions lightly, who wants to lose out on a property simply because they forgot to wipe their feet on the way in?”

Loud personalities

“In my experience with landlords,” explains Leone, “they are almost all a little wary of renting their property to tenants who are generally very loud. That doesn’t just apply to the volume they play their music at either.”

“Landlords can be put off by a potential tenant if they are really loud in the way they speak or conduct themselves. Nobody likes living downstairs from a heavy-footed cupboard-banger, and landlords are cautious about receiving complaints from neighbours in this regard.”

Tip for tenants: If you’re naturally gregarious or animated, tone it down as much as you can when viewing a property.

Lack of stability

It’s a given that most landlords will value financial stability very highly in a tenant. But stability in general is quite important to a landlord too.

Leone explains: “Tenants that have a history of moving home or changing jobs every six months can seem risky to a landlord, even if there’s a reasonable explanation and they have a record of impeccable financial conduct. My advice to tenants who are frequent job or house movers is to explain this in advance to the landlord or their agent to put their mind at ease.”

Tip: If you’ve moved frequently for work or study, make a point of explaining this when viewing or applying for a property. If you don’t, the landlord or their agent may wonder about it.

Unpaid utility bills

While this may typically be the tenant’s obligation, nonpayment is highly stressful for the landlord. Afterall, it’s their name on the deeds. The last thing they want is to deal with unpaid utilities once a tenant has left the property.

One way around this is to include the bills with the rent. Leone explains the benefits: “All of our flat share clients pay rent that’s inclusive of bills and utilities. This ensures that we have full control over ensuring all bills are paid in full and on time. It’s one less thing for the landlord to worry about.

Almost half (42%) of landlords are less likely to consider letting to someone without a British passport as a result of the Government’s Right to Rent scheme, the Residential Landlords Association (RLA) reveals.

The organisation is calling for a halt to the scheme, pending a full review of its impact on tenants.

The RLA is especially concerned of the impact Right to Rent is having on the 17% of UK residents that do not have a passport.

The research, carried out by the RLA’s Private Renting Evidence Analysis and Research Lab (PEARL), found that 49% of landlords are now less likely to consider letting to someone who has permission to stay in the UK for a limited time period. With the foreign-born population almost three times as likely to be living in the private rental sector than UK-born nationals, this is creating difficulties for them in finding accommodation.

Following a recent BBC investigation that found that criminal gangs are helping undocumented immigrants to flout the law by selling them fake identity documents, there is concern that this will make landlords even more reluctant to let to overseas nationals or UK citizens without a passport, because of the criminal sanctions they face for getting things wrong.

Under the Right to Rent scheme, landlords are responsible for checking the immigration status of all prospective tenants, with the prospect of prosecution if they know or have “reasonable cause to believe” that the property they are letting is occupied by someone who does not have the right to rent in the UK.

Although, in October, the Chief Inspector of Borders and Immigration announced a new review of the Right to Rent scheme, it warned that this “will not examine any unintended consequences of Right to Rent, for example, discrimination against would-be tenants, increased homelessness, or displacement”. This is because, it said, it “does not have the capacity to conduct a meaningful examination of the unintended consequences of Right to Rent at this time”.

The Policy Director of the RLA, David Smith, comments: “This proves what we have long argued, that the Right to Rent scheme would cause difficulties for legitimate tenants who cannot easily prove their identity. Faced with the fear of criminal sanctions, many landlords are understandably playing it safe.

“Given the scale of the housing crisis, any policy that makes it harder for those legally able to access the homes they need is a travesty. It is absurd to conduct a review of the scheme without looking at all the consequences. That is why it is vital that the Home Office suspends the scheme, pending a full and detailed assessment of its impact on tenants and prospective tenants.”

Are you less likely to let to tenants without British passports?

By Ian Boden, Sales Director of LendInvest

It’s been a rollercoaster couple of years for the world of property investment, with a succession of tax and regulatory changes that investors and their brokers have had to get their heads around.

But for all of the discussions about Stamp Duty, portfolio landlords and underwriting rules, the fundamentals of property investment haven’t really shifted; the challenge is still to identify which areas tenants are going to want to rent in, and the sorts of properties which will appeal to those tenants.

That’s why we produce the LendInvest Buy-To-Let Index, to dig into the data on which areas are providing the greatest return for investors, and the underlying trends which may lead certain towns and cities to outperform.

One particularly noteworthy result from the latest index has been the improving performance of towns in the Midlands. Leicester, for example, has had an eye-catching performance, jumping 17 spots in our ranking of the best towns for property investment to break into the top ten, primarily off the back of sharp rental price growth of more than 5%. Meanwhile, Birmingham has also jumped significantly up the table, rising from 18th place overall in September’s index, to 11th in the latest index.

When you talk about property investment in the UK, it is perhaps inevitable that the discussion is dominated by the performance and prospects of the capital, or of the commuter towns that surround it.

Why Investors are Watching the Rise of the Midlands

But savvy investors have been well aware of the potential for either greater returns by pinpointing towns and cities that are still growing, and the Midlands is full of them.

Birmingham is in many ways the perfect example. It is host to a number of excellent universities, which is always a great foundation for landlords. Those universities don’t just mean a steady supply of students looking for rental accommodation, but also a substantial number of graduates who look to build their post-studies life in the area as well.

But there is much more to Birmingham than simply students and recent graduates. There has been enormous investment in the city infrastructure, to the point that huge global names are choosing to set up shop there. HSBC and Deutsche Bank, for example, have moved their core UK functions to Birmingham, while it has also proven attractive to tech and media firms.

Then there is Leicester, highlighted as one of the best cities for growth in a report by PricewaterHouseCoopers (PwC) earlier this year. This is, in large part, down to the very small levels of unemployment seen in the city – always an important factor for landlords when determining where to invest.

In fact, that PwC report is telling for the prospects of the Midlands as a whole – of the ten cities identified as the most improving when it comes to growth, Birmingham, Leicester, Wolverhampton & Walsall and Derby all feature.

Don’t forget too the enormous investment being pumped into the region via the Midlands Engine, further adding to the growth prospects of towns across the region.

The momentum building up in the Midlands is already attracting the attention of investors. In Crowe Clark Whitehill’s Property & Construction Outlook report from this year, the West Midlands was picked out by 19% of respondents as the best place for investment – easily the most popular region beyond the South East.

The great unknown of course is what Brexit may mean for the region. The truth is that, even as the date of our exit from the European Union draws ever closer, we still have very little idea about exactly what it will mean for the nation as a whole, nor for individual regions.

Nonetheless, the Midlands is filled with towns and cities with sufficiently firm foundations that they are well placed to ride out any difficulties that may lie just around the corner. Property investors looking for a solid area in which to boost their portfolio will continue to watch the Midlands closely.