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.”

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".

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.

Are sky-high rents finally running out of steam?

Rental prices have slowed to their lowest annual growth rate this year, according to HomeLet, which provides insurance for landlords.

Tenants signing up to a new rental agreement now pay an average of £910 per month, which is up 3pc on last year.

By contrast, in March, the annual rate of growth of rents was 4.5pc.

On a monthly basis, average rents across the country fell in September by 0.8pc from August, as the market was flooded with newly marketed properties bought before stamp duty was hiked by 3pc for investors.

In the last 12 months, the north-east of England and Scotland are the only places where rents have not increased.

But HomeLet said that the slowing growth in rents suggested that they may be hitting a threshold of affordability.

Landlords will also be hit by new changes to the tax system to be phased in from 2017. This will remove their ability to deduct the cost of their mortgage interest from their rental income, effectively meaning they will be taxed on turnover, not profit.

Buy-to-let tax changes | Mortgage interest relief

• From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due
• So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income
• For higher-rate taxpayers, mortgage costs above 75pc of rental income will make their BTL investments loss-making
• Mortgage interest relief will be restricted to 20pc, meaning that higher and additional-rate taxpayers will be particularly affected

Martin Totty, the chief executive of HomeLet, said that landlords were trying to keep rents within affordable levels.

He said: "Despite factors such as higher stamp duty on purchases for buy-to-let investors, and the tax changes coming in from April 2017, it would appear so far landlords have absorbed any actual or expected decreases in their yields, rather than pass this on through higher rents.”

The average monthly rent in London is £1,555, down 0.4pc in September. The cheapest rents in the country are in the north-east of England, where they average £530 per month.

Don't overlook the importance of a detailed inventory when letting a property

For landlords who have spent significant funds on getting their properties in top condition to attract tenants, the last thing they want is to see all that work undone through damage or neglect by the occupier.But, if they fail to take a proper inventory at the start of the tenancy, this is a situation landlords could find themselves in.

The Inventory is a listing of all the contents of a property and a record of the condition of each item. It’s also referred to as a “schedule of condition”. The form is designed to help monitor the condition of the items before a tenant moves in and just before a tenant leaves, so it can be made clear what damages, if any, need to be paid for.

A lack of an inventory, or one that has not been completed to the correct standard, could mean that, if the tenant does damage the property or its contents, the landlord may not be able to withhold the deposit to cover the costs.

Some landlords who let properties unfurnished mistakenly believe that they do not need to complete an inventory because there is very little that can be stolen, broken or damaged.

However, as proper inventories also include details on the condition of a property, such as cleanliness and decor, even the barest of properties should have one.

They may be able to use their landlord contents insurance to claim for lost, stolen or intentionally damaged items, but many property owners insurance policies won't pay out for accidental damage.

As such, it is perhaps no surprise that many landlords choose to use professional services to ensure that the inventory is carried out correctly.

The inventory acts as a legal contract between the tenant and landlord that shows they agree on exactly what was in a property and in what state it was in at the start of the rental period.

Therefore, it must be signed by both parties at the start of the tenancy and initialled on each page. It is highly recommended that tenant attends the check-in inspection but the tenant should also be allowed a period of time to advise you of anything they disagree with or wish to be amended so you should allow them a reasonable time to do so. 

The Property Ombudsman Code advises a period of five days for the tenant to respond with corrections however be sure that if the tenant does not sign and agree the report you have a clear audit trail that shows you have done everything to allow them the opportunity to comment.

It is also advisable to note the readings of the gas and electricity meters to avoid disputes both with the tenant and energy suppliers.

Stacey Wren of First Assist RLS said

"A true inventory is not simply a list of items in a property - it also includes a description of the condition and cleanliness at the start and finish of the tenancy, enabling one to be compared against the other with clarity and accuracy," says Ian Potter, operations manager at the organisation. It is also vital that an inventory clearly defines any terms used for describing condition and that these are used consistently and using a clear scale.

For more information on Inventories and other First Assist landlord services visit www.firstassist-rls.co.uk or call 0800 0830122

Landlords Home emergency insurance. Is it good value?

All landlords have to make a call on how they will handle the upkeep of their property with boilers topping the list of issues that give the most cause for concern. Well that’s not surprising as it can be a very expensive fix when the break down.

We have taken a good hard look at the boiler insurance market and here is what we have found.

Banks and insurers see household emergency cover as a way of making extra profit from customers. Policies can cost about £200 a year and are supposed to cover emergency problems, such as a boiler breaking down or a pipe bursting.

Experts warn that polices are riddled with exclusions, for example, most providers do not cover lime scale damage and heating controls. Some will not pay out for boiler repairs during the summer or cover boilers more than ten years old. The limits on payouts can vary wildly.

Energy providers are no better. You could find that your old boiler system doesn't meet the standards requested by your energy provider, in which case you'll probably have to pay extra – more than £100 in places – to get your heating system revamped before being offered cover.

So is insurance always the answer?

Not according to consumer group ‘Which’? The consumer group analysed the costs of cover and compared this with the average amount spent calling out engineers when needed.

While boiler breakdown cover, including an engineer's annual check-up of boilers and systems, typically costs between £150 and £200 a year, most households do not need to call out an engineer for repairs each year, according to Which?

Vera Cottrell, financial services expert at ‘Which’ states; ‘Some people may feel reassured by having a home emergency policy or boiler cover but it doesn't make sense financially’.

Over 40% of Which members have at least some type of boiler cover and most say they chose to buy cover for peace of mind or value for money. However, based purely on cost, you'd probably be better off paying for repairs on an ad hoc basis - rather than paying monthly for boiler cover.

Our annual survey of boiler owners shows that the average gas boiler has almost a 50% chance of needing a repair in its first six years - although this drops to less than 40% if you buy a boiler from the one of most reliable boiler brands. 

Which analyzed the results of their boiler reliability survey against the cost of a typical boiler-servicing contract (£183)? They found that 93% of people would be at least £50 better off in any given year if they didn't pay for a boiler-servicing contract, and instead had their boiler annually serviced by an independent repairer and paid for any repairs and faults as they happen. 

You can also cut the cost of expensive repairs by making sure you buy a boiler from a reliable brand.

Also watch out for attractive introductory prices. Many boiler cover companies quote only the cost of the first year of cover, and then as much as triple the amount they charge in the second year. Always ask the provider what the cost of its contract is beyond the first 12 months.

While boiler breakdown cover may provide you with peace of mind, you should also bear in mind that not everything will be covered by a boiler-servicing contract. A typical example is where sludge build-up occurs in your boiler. This is not covered by any of the companies Which looked at and would require a full system flush, which can cost on average more than £15

Check your policy for the following exclusions:

• ·         Boiler age - if you have an older boiler you may find not all providers will accept you as a new customer
• ·         Boiler life - existing customers should also be wary. Some providers won’t renew the cover if your boiler reaches a certain age.
• ·         Call-outs - if your boiler breaks down twice in a year, some policies won’t cover you more than this.

Four letting agent tricks that can shrink landlord returns

The rapid growth of buy-to-let has brought a range of nasty practices by letting agents that both landlords and tenants should look out for.

Landlords and industry experts have come forward to share their own experiences of letting agent rip-offs. Here are some of the agencies’ slipperiest tricks.

Are you sure your property is in good hands?

Agent trick No.1. Evicting tenants who challenge high fees

Some unscrupulous letting agents routinely evict tenants who refuse to pay certain agency fees, typically charged for amending a tenancy agreement or for reference checks.

Any “administration costs” paid by tenants go straight to the letting agent, not the landlord, so it is in the agent’s interest to charge as much as possible.

The agency can evict tenants by issuing a “notice to leave” at the end of a tenancy period, which is legal under section 21 of the Housing Act.

However this risks leaving the property empty which loses income for the landlord while still attracting liabilities such as council tax.

Landlords can reduce the chance of needless eviction by the agent by making sure their tenants know their name and contact details. Then, if anything goes awry with the agent, both parties know what is going on.

The agent is supposed to act as a go-between, so it should not ask tenants to leave without the landlord’s instructions. This is because a tenancy agreement is a contract between the tenant and landlord, so the landlord should always decide who stays in their property.

Agent trick No.2. Bungled bills and unexpected fees

Keep a meticulous record of the agent’s agreed commission on letting and managing the property, or risk being stung with unexpected fees.

An incorrect invoice, for example, almost cost buy-to-let landlord Penny Waterhouse £3,276 after her agent attempted to increase the agreed commission.

Penny, a former lawyer, asked her agent to find tenants for her £1,750-a-month home in Dulwich in return for an agreed fee of 9pc of the rent over one year.

But the invoice contained a surprise charge of 11pc over two years, more than doubling the agreed price.

“They tried to raise the fee at every opportunity, even adding a charge for maintenance which I did not ask for,” said the landlord. “I made sure to get everything in writing.”

Landlords should be meticulous in getting agreed commission and charges in writing. If you’ve lost money because of a bungled bill, you can take your case to a letting agent redress scheme.

A change to the law means that all letting agents must now be a member of one of three dispute resolution bodies, known as the Property Ombudsman, Ombudsman Services Property and the Property Redress Scheme.

Agent trick No.3. Rejecting 'perfect’ tenants

Letting agents have even been found to reject tenants who can afford to live in the property and have a track record of paying their rent on time.

Landlords risk missing out on ideal tenants by shoddy reference checking procedures, which typically cost tenants a non-refundable charge of at least £100.

In one case referred to the Property Ombudsman, an agent rejected a tenant, claiming that she had not paid one month’s rent in a previous property. In fact, the tenant had agreed with her previous landlord that her deposit would pay for the last month’s rent.

The agent “failed to thoroughly investigate the matter” and did not keep proper records.

The agent was ordered to pay £1,000 to the tenant for the distress and inconvenience caused.

Another landlord almost lost out on a chosen tenant because of a failed reference check, which did not take into account that the tenant was self-employed.

One well known referencing firm said the tenant “did not meet their salary requirements”.

However, a closer look by the landlord found that the tenant was a higher-rate taxpayer who had a two-year track record of paying comparable rent on time.

Agent trick No.4. Inflated maintenance charges

What constitutes a fair price for services outsourced to a letting agent? One landlord received a bill for £260 to replace a lavatory seat.

Adam Long owns a number of buy-to-let properties in the North West. He became so disillusioned with high fees and complex terms and conditions that he set up his own lettings company.

“Last year I received a bill from my letting agent for £260 to replace a toilet seat. Just for clarity I mean only the bit you sit directly on, not the whole thing,” he said.

“I went to see the tenant, who was irate, as it had taken the lettings company nine months to achieve. The industry is in serious need of a shake-up.”

Richard Price from the UK Association of Letting Agents agreed that costs “clearly vary from agent to agent” but that they should reflect the cost to the business.

“There are legitimate business costs that letting agents to will look to recover,” he said. “What’s important is that they are fair and transparent from the outset.”

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Where now for buy to let post Brexit?

What landlords do post Brexit could have widespread effects for homeowners and renters.

For years, politicians of all parties have clung to the vision of a nation of homeowners. Their promises have been aimed at first-time buyers, not renters. But in reality, since the financial crisis, first-time buyers have struggled to get loans. Instead, buy-to-let borrowers have become a lucrative opportunity for mortgage lenders - and an increasingly powerful force in the housing market.

In the first quarter of 2016, 21 per cent of all money lent as mortgages went to buy-to-let landlords, compared to 17 per cent to first-time buyers. Indeed, mortgage lenders interviewed by the regulators planned to lend roughly £50billion in 2016 - more than the last 2007 peak.

One reason the money has flowed into buy-to-let has been regulation. In sharp contrast to the free-for-all that preceded the financial crisis, mortgage lenders are expected to have a duty of care to customers who may be vastly inexperienced in the world of debt and finance. Tough affordability tests are now imposed on first-time buyers, and other residential mortgage borrowers.

Landlord mortgages are far less regulated. From one perspective, this makes sense. Buy-to-let landlords are businessmen and women, who take risks in pursuit of profit. But if buy-to-let lending turns out to be a house of cards, it could send shudders through the residential property and renting markets as well.

The Bank of England's latest financial stability report focuses on the risk that a shock to the buy-to-let market could amplify problems in the housing market more widely. Investors are already pulling out of property funds and house building companies. If buy-to-let lenders decide en masse it's time to cash in, house prices could fall off a cliff.

And should this happen, homeowners wouldn't be the only ones to be affected. More than 8million households in England and Wales alone are renting.

While some might take the opportunity to snap up a home of their own at a discount, the reality is that during an economic downturn, many will find themselves constrained by affordability tests, their lack of savings or even a job.

So, what of the Bank of England's consultation? It found there was a risk lenders will relax their checks on borrowers and "some lenders were already applying underwriting standards that were somewhat weaker" than the market average.

It identified buy-to-let lending was a channel through which the referendum result could rock financial stability, and it added the Financial Policy Committee "stands ready to take action".

Despite the huge part buy-to-let lending plays in the modern housing market, MPs have been surprisingly quiet on the issue. The result of this complacency could lead to huge issues for both landlords and tenants.

Only time will truly tell how Brexit will affect the buy to let market. Let’s all hope it’s not too bumpy a ride.