237 Stotfold Landlords – Is This a Legal Tax Loop-Hole?

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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 – (i.e. 20% basic / 40% higher rate and 45% additional rate).

So, for example, let’s say we have a Stotfold 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 (2016/17), assuming no other costs or allowable items, the figures are below:

  • Annual rental income £10,800.
  • Taxable rental income would be £3,600 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 liabilities (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 Stotfold landlords who own the 237 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

 

173 Stotfold Graph

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 Stotfold 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 and in the 15 months between 1st January 2016 to 31st March 2017, 67 buy-to-let limited companies have been set up in the SG postcode alone.

If 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 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 too and this could come with exit charges.

On a more positive note, what I have seen 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.  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!

Great investment opportunity not to be missed……!

Our Satchells sales team in Stotfold are marketing this one bedroom apartment in the neighbouring town of Arlesey.  Just round the corner from the station, with an asking price of £129,950 and potential rental yield of 5% this will go quickly!

Call the Stotfold office now on 01462 733730.

 

Should the 1,155 home owning OAP’s of Stotfold be forced to downsize?

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This was a question posed to me on social media a few weeks ago, after my article about our mature members of Stotfold society and the fact many retirees feel trapped in their homes.  After working hard for many years and buying a home for themselves and their family, the children have subsequently flown the nest and now they are left to rattle round in a big house.  Many feel trapped in their big homes (hence I dubbed these Stotfold home owning mature members of our society, ‘Generation Trapped’).

Should we force OAP Stotfold homeowners to downsize?

In the original article, I suggested that we as a society should encourage, through building, tax breaks and social acceptance that it’s a good thing to downsize. But should the Government force OAP’s?

One of the biggest reasons OAP’s move home is health (or lack of it).  Looking at the statistics for Stotfold, of the 1,155 homeowners who are 65 years and older, whilst 681 of them described themselves in good or very good health, a sizeable 366 home owning OAPs described themselves as in fair health and 105 in bad or very bad health.

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9.54% of Stotfold home owning OAP’s are in poor health

If you look at the figures for the whole of Central Bedfordshire District Council (not just Stotfold), there are only 818 specialist retirement homes that one could buy (if they were in fact for sale) and 956 homes available to rent from the Council and other specialist providers (again, you would be waiting for dead man’s shoes to get your foot in the door) and many older homeowners wouldn’t feel comfortable with the idea of renting a retirement property after enjoying the security of owning their own home for most of their adult lives.

My intuition tells me the majority ‘would be’ Stotfold down-sizers could certainly afford to move but are staying put in bigger family homes because they can’t find a suitable smaller property.  The fact is there simply aren’t enough bungalows for the healthy older members of the Stotfold population and specialist retirement properties for the ones who aren’t in such good health … we need to build more appropriate houses in Stotfold.

The government’s Housing White Paper, published recently, could have solved so many problems with the UK housing market, including the issue of homing our ageing population. Instead, it ended up feeling annoyingly ambiguous. Forcing our older generation to move with such measures as a punitive taxation (say a tax on wasted bedrooms for people who are retired) would be the wrong thing to do.  Instead of the stick, maybe the Government could use the carrot tactics and offered tax breaks for down-sizers.  Who knows, but something has to happen?

Come to think about it, isn’t the word ‘downsize’ such an awful word?  I prefer to use the word ‘decent-size’ instead of ‘down-size’ as the other phrase feels like they are lowering themselves as though they are having to downgrade themselves in their retirement (and let’s be frank – no one likes to be downgraded).

The simple fact is we are living longer as a population and constantly growing with increased birth rates and immigration. So, what I would say to all the homeowners and property owning public of Stotfold is … more houses and apartments need to be built in the Stotfold area, especially more specialist retirement properties and bungalows.  The government had a golden opportunity with the White Paper and were sadly found lacking.

A message to my Stotfold property investor readers, whilst this issue gets sorted in the coming decade(s), maybe seriously consider doing up older bungalows as people will pay handsomely for them be that for sale or even rent?  Just a thought!