Sunday, 20 November 2016

One in four landlords selling up due to MIR changes

 A week ahead of the Autumn Statement a RLA survey revealed that a quarter of all buy-to-let landlords are selling homes as a result of Government tax changes.

The survey of more than 1,000 landlords showed that a quarter had either sold one of their properties or had one on the market as a result of the Government’s plans to change Mortgage Interest Relief, to tax them on income rather than profit.

This means many landlords on the basic rate of income tax will find themselves pushed into a higher rate despite their income not having increased.
It is tenants who are likely to lose out as a result of the changes, either losing their homes as landlords sell up or facing higher rents as landlords try to mitigate the financial impact and supply is reduced.

The RLA are making a final call for Chancellor Philip Hammond to reverse the decision on November 23rd.David Smith, RLA policy director said: “The RLA’s findings are a worrying sign of the potential trouble ahead for tenants as a result of the previous Chancellor’s tax rises.
“Any reduction in supply is going to make it more difficult for them to find a place to live and will inevitably drive rents up.
“Ahead of the Autumn Statement we are calling on the new Chancellor to consider the evidence, reverse policy and support growth in the rented sector.”

RLA research showed 68% of landlords said the changes will reduce their profitability by at least 20%, and 14% said it will reduce profits by more than 60%. A total of 36% said the removal of MIR would result in them making a loss on their investment.

The plans, which were announced by former chancellor George Osborne in 2015 are set to be phased from next year.

Saturday, 12 November 2016

Trump, Brexit & the UK’s Property Market

So far, 2016 has been a year of change; Stamp Duty, Brexit, May and Trump, to name but a few. And whether you like it or not, these changes may have an influence on the UK’s property market.

Interestingly enough, the Brexit discussion and Trump’s presidential campaign shared a lot of topics like free trade, immigration, inflation, tax and healthcare.And comparing the two events, the UK’s decision to leave the EU and Trump’s victory during the presidential election in the United States, has already been done on multiple occasions.

We, however, prefer to ask how Trump’s win will influence the UK’s property market?
First and foremost, to be able to find out more about possible consequences, it’s important to view Britain’s housing market as what it is; a small segment of the country’s macro economy.

Having defined the role property plays within the UK, it’s easier to look at Britain’s overall economy to find indicators of future developments. In a what-if scenario describing the relationship between Trump’s America and post-Brexit Britain the possible outcomes received mixed reviews.
Whilst Trump has built his whole campaign on the basics of “America First” combined with a hostile attitude towards free trade deals, he will, nevertheless, need trade partners.

What we do know is that Trump regards the North American Free Trade Agreement as the “worst deal ever”, opening up space for new deals to be made.
How exactly Trump would influence the British market is tricky to call. Broadly speaking, America’s new president is a fan of Britain. He shared his enthusiasm about the referendum results stating it’s “a great victory”, aims to build the finest golf course in the world in Scotland and took Nigel Farage on his campaign tour.

Although British politicians might feel differently about the new President-elect, with both the old and the new Prime Minister describing Trump as “wrong”, Theresa May recently published a statement congratulating him on the win.

Since, at this stage, we know so little about possible effects Trump’s election may have on the UK, City A.M asked some of the biggest investors about their reaction to the recent results.
All seven of them stated a similar point of view: knee jerk reactions won’t get us anywhere.
On top of that, investors seem to have taken some comfort from Donald Trump’s victory speech, giving the situation another positive momentum.

So whilst it currently remains rather difficult to see what influence Donald Trump’s election may have on Britain’s property market, Laith Khalaf of financial services group Hargreaves Lansdown, probably summed up the situation the best by describing the stock market’s reaction to Trump’s election: “Initial stock market reaction to the Trump victory was a short intake of breath, followed by a shrug.”

Friday, 4 November 2016

Popular buy-to-let tax loophole 'won't work', accountants warn

A controversial tax manoeuvre allowing landlords to transfer buy-to-let properties into a limited company without having to re-mortgage, has received a flood of inquiries.
Promoters of the "beneficial interest company trust" are capitalising on a trend among landlords to move existing properties into company structures.

This allows them to avoid the higher buy-to-let tax being introduced next April, which at the moment relates only to properties directly owned by individuals.
Interest in the service has leapt since the failure of an attempted judicial review which sought to overturn the tax.

Around 40 landlords have already used the loophole, promoted by law firm Cotswold Barristers. It says another 50 have inquired since the attempted judicial review, which was led by Cherie Booth QC, failed earlier this month.But experts warn that landlords could fall foul of tax avoidance laws as well as leaving themselves open to allegations of "mortgage fraud".

Image result for taxation

How does it work?

Many existing landlords are deterred from "incorporating" their properties because of the costs associated with moving them into a company.One of these is the need to remortgage, which incurs administrative costs and may mean a borrower loses an extremely favourable low tracker rate.

Landlords who own their properties themselves will have mortgages in their own name. If they move them to a company, they would have to take out a new mortgage via the company.
This may mean losing a favourable rate and moving onto a more expensive one.

The "beneneficial interest company trust" claims to allow borrowers to move their properties into a company while retaining the legal title - removing the need to remortgage.
Borrowers transfer solely the beneficial interest into the company, and keep the mortgage in their own names.

Meanwhile, income from the properties goes into the company and is taxed at the corporation tax rate, which is currently 20pc and falling, regardless of the tax band of the individual landlord.
The landlord would still potentially have to pay stamp duty and capital gains tax on incorporation, unless they are exempt. (An exemption from having to pay stamp duty exists for partnerships, and capital gains tax does not have to be paid by landlords who can show that they operate as a business.)
When the new tax regime starts to be phased in from next April, the incorporated landlord continues to pay tax on the income at corporation tax rates and is exempt from the new law.

Mark Smith, of Cotswold Barristers, who promotes the service, said: "We are suggesting that this arrangement does not affect the lender’s security because you’re not changing the legal interest.
"If the lender needed to enforce the loan, it would overreach any trust status, and the lender would still have to come after the individual."
He said that because of the tax implications it is only a suitable option for landlords with at least £1m of properties, each with mortgages worth 60 to 65pc of the property.
Cotswold charges fees of up to £14,000 depending on the size of the portfolio.

What are the problems?

Nimesh Shah, of accountant Blick Rothenberg, warned of "huge pitfalls".
He said the main issue from a tax perspective is a section of the Income Tax Act which prevents individuals from transferring an income stream into a company for tax reasons.
Mr Shah said HMRC would be looking for any sign that this was an artificial structure or tax-motivated manoeuvre.
He said: "The test is to do with why you're incorporating. Is there a commercial rationale, or is it a tax reason?
"In a normal incorporation situation everything is going in to the company. Here you're splitting the income and the ownership out, which makes it more of an issue," he said.

Mr Smith said it would not be seen as tax avoidance, because it conferred no extra benefit above those offered by any corporate structure.

On a separate issue, Mr Shah also said that property owners need to be careful with the section of the stamp duty law which apparently allows a partnership to avoid stamp duty on incorporation.
There is no set test, but the Revenue can remove the relief if it believes that the partnership has been established specifically for the purposes of avoiding the stamp duty charge.

Mortgage danger

Lawyers also warned that failing to tell your lender of a change in ownership of a property could leave you open to problems, which in the worst cases could lead to a loan being called in.
Jeremy Raj, of law firm Wedlake Bell, said: "If you're not careful you are leaving yourself open to being accused of committing mortgage fraud. If there's any major change in the ownership of a company then the lender is entitled to know."
Mr Smith said that his lawyers check the terms and conditions of any potential client's loans carefully to make sure they will not be breaking the terms of their mortgage.

The UK's two largest buy-to-let lenders, Lloyds and Nationwide, both declined to outline their position relating to the arrangement.