Landlords Vs Limited Companies

Napoleon is said to have described the English as a nation of shopkeepers. If he were around today, he might describe it as a nation of small-scale landlords. In the near future, however, people might refer to the UK as a nation of corporate landlords as changes to the financial and legal landscape impact both the cost-effectiveness of being a private landlord and the level of personal risk involved.

Investment is about numbers

You buy a home to live in, but you buy an investment property to make you an income. In the most basic of terms, you work out the gross income you can generate from your property, you estimate your expenses, and you decide if the difference between these two figures leaves you with enough profit to be worth the effort involved. If circumstances change, you do your sums again and decide whether or not your investment is still worthwhile. Recent, well-publicised, changes to the tax system have the potential to be seriously detrimental to the net income generated by investment properties held by private landlords, i.e. landlords letting out property outside the framework of a limited company. The announcement of these changes led to a slew of articles both online and in mainstream publications, discussing the possible use of the so-called “landlord loophole”, i.e. the possibility of converting a property portfolio from a private holding to an asset belonging to a limited company. While this might be a good idea in theory, in reality, setting up a limited company can be an expensive and complex undertaking, so much so that small-scale landlords may find it more appropriate simply to sell up and find another investment vehicle.

Risk is also a factor

All landlords have to deal with three main forms of risk:

  • the risk of property being damaged
  • the risk of being sued for compensation for negligence
  • the risk of letting a property to a tenant without the “right to rent”

Even though the risks may be the same, how they affect landlords can be very different. While dealing with a damaged property may be the most obvious risk of being a landlord, it’s arguably the one which should cause the least degree of concern since it can usually be mitigated through a combination of tenant selection, deposits and insurance. The risk of being sued for compensation for negligence may be much smaller and again there are steps landlords can take to mitigate it (the obvious example of this being to take good care of their property), but in a world of “no win no fee” lawyers and adverts making people aware of the possibility of them claiming compensation for an accident which wasn’t their fault, the reality is that even the best landlords can find themselves on the receiving end of a claim from a tenant who has nothing to lose. If a private landlord is found negligent, they are personally liable for the damages, whereas a limited companies can only be sued to the extent of their assets. Likewise, while the “right to rent” scheme applies equally to both private and corporate landlords, the former may find it much harder to navigate the complexities of the scheme in a non-discriminatory manner.

The end for private landlords?

While it’s still relatively early days and the attraction of owning property in the UK should never be underestimated, it is fair to say that the government’s actions have the potential to push private landlords out of the market. Smaller private landlords may well just liquidate their portfolio and move on, while larger ones may become limited companies. What’s more, the government has committed to abolishing letting agent fees for tenants, which presumably means that letting agents will charge landlords instead. While, in theory, this should be a situation which is six to one and half a dozen of the other, private landlords who are already seeing their returns dwindle and their risks increase (due to the right to rent scheme) may decide that enough is enough.

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Housing Needs For The Forthcoming Year

The snap election seems to have taken many people by surprise, including, it would appear, the Prime Minister who called it. Having been deprived of her last minister for housing, Gavin Barwell, who lost his seat, she has recently appointed a replacement in the form of Alok Sharma. Given that he is the 6th housing minister to be appointed in roughly as many years (since 2010), it is an open question as to how long he will stay in post, but assuming he makes it to this time next year, what are his priorities likely to be?

Housing refurbishment

While many newspaper headlines have been devoted to the overall shortage of housing and the corresponding difficulty of “getting on the housing ladder”, the tragic events at Grenfell Tower have brutally highlighted the fact that some of the UK’s existing housing stock is in drastic need of refurbishment. What form this will take will depend on just how bad its condition is. In some cases, it may be possible simply to update and upgrade existing buildings. In other cases, the only realistic option may be to demolish the existing structure and start again.   In either case, it is very possible that the high-profile nature of the Grenfell Tower fire will mean that the refurbishment of existing properties goes to the top of the political agenda.

Home-building

The Conservative manifesto promise was to build a total of 1.5 million new homes by 2022, of which 1 million were to be delivered by 2020 (this total including houses built as a result of actions taken by the last parliament). It will be interesting to see whether or not the Conservatives will be able to make good on this pledge. The simple fact of the matter is that government support for home building is dependant upon tax revenues and the uncertainty around Brexit may make it rather difficult to forecast how many people are going to be in the UK to pay taxes, let alone how many of them will be in work and what level of tax they will pay. Added to this, there is a large question mark hanging over the availability of labour for the construction industry, which has long relied on trades people from eastern Europe, which makes it difficult to predict the cost and schedule of housing projects and that is without taking into account the fact that the weakness of Sterling may well continue for the foreseeable future and while this is good news for exporters (and inbound tourism), it is bad news for anyone who needs to import either materials or labour (or encourage labourers already in the country to stay here instead of taking their skills elsewhere). Notwithstanding all this, it is to be hoped that the government will do all it can to support home building as the UK has long suffered from a shortage of housing stock.

Improving the situation for renters

Previous housing minister Gavin Barwell pledged to ban lettings agencies charging fees to tenants. This change has yet to be implemented, although given the amount of press coverage it received, it would probably be politically-challenging for the Conservatives to reverse the decision. While this pledge was welcomed by tenants, landlords and lettings agencies commented that any fees charged to landlords would have to be passed on to tenants. Those in favour of the change, countered that this does not appear to have been the case in Scotland. This, however, is a bit of an open question. Rents have risen in Scotland since the ban on letting agent fees (to tenants) was introduced in 2012 and although a 2013 study found that only 2% of landlords raised rents specifically because of this, it is still entirely possible that the change factored into the calculations of the other 98%. Ultimately the issues in the rental market reflect overall lack of supply and the only meaningful way to address this is to improve the supply, for example by encouraging build-to-rent schemes.

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New Home Manifesto – What Does It Mean?

Annual budgets serve many purposes, one of which being to show that governments are making good on election (or other commitments). Affordable housing (or the lack thereof) has long been a political hot potato in the UK and therefore it was only to be expected that the government would take some form of action to address this in the budget.

The promises in brief

There were two key points which directly relate to housing throughout the UK. The first was the promise of a £2.5bn housing infrastructure fund, which should lead to the building of 100,000 new homes in areas of high demand. The second was the promise of £1.4bn which was specifically for the provision of 40,000 affordable homes. With regards to this second point, it’s worth noting that this pledge actually goes even further than simply providing the funds. The government has relaxed the rules around bidding for the funds, meaning that companies have more options open to them than previously. In addition to this, there was a £3.15bn funding pot provided to London for the provision of affordable homes.

The budget also contained a number of promises relating to infrastructure, which could feasibly have an impact on the property market, for example increasing transport options may make it viable for people to travel to work from places they would otherwise have been forced to overlook and similarly rolling out superfast broadband may increase the options for home/remote working, which again could have a knock-on effect on the property market.

A stick for buy-to-let, a carrot for new homes

In 2015 the government delivered two sucker punches to BTL landlords. It made changes to stamp duty so that those owning more than one property paid an increased fee and it reduced the amount of mortgage tax relief which landlords could claim. The 2016 statement left BTL landlords alone, although plans were announced to clamp down on fees charged to tenants by letting agencies, but contained the announcement that the government would be supporting house building in general and the provision of affordable homes in particular.

However with new taxes and stricter lending controls coming into force in a few months the buy to let market is not looking as promising as it once did.

The outlook for 2017 and beyond

At the moment it’s rather hard to say what effect all these changes will have in practice. First of all, the autumn statement was only a few months ago and happened right before the Christmas period which has its own set of rules (some economic sectors being frantically busy, while other go into seasonal limbo). Secondly some of the changes are yet to be enacted and in some cases, it’s unclear at what point they will be implemented. For example Philip Hammond’s promise to put the brakes on agency fees is to be implemented “as soon as possible”. Thirdly, and possibly most importantly, there is very little clarity on how these pledges are going to be implemented in practice. For example, the government has relaxed rules around bidding for funds to develop affordable housing so that, in principle, bidders could develop homes for affordable rent instead of having to offer some sort of ownership option, be it shared ownership or rent to buy. These new rules, however, have yet to be tested. In other words, at this point it’s entirely unknown whether or not bidders will consider it worth their while developing property intended purely for rent or whether their applications will be accepted if they do. It’s also unclear where the priority will be in the “high demand areas”. London would be an obvious example of a place where housing is desperately needed, but it has already been designated its own pot of affordable housing funds. Presumably the answer to these questions will be revealed in time, but the government acknowledging the importance of home building in the UK is, at least, a positive sign.

https://www.theguardian.com/housing-network/2016/nov/23/autumn-statement-2016-social-housing
http://www.homesandproperty.co.uk/property-news/autumn-statement-2016-five-ways-it-will-affect-the-property-market-a106501.html
http://www.bbc.co.uk/news/uk-politics-38075649

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Is It Time To Give The Markets A Break And Change Your Portfolio?

Over recent times, market-watching has been an educational activity for those with a strong stomach. World affairs (Brexit, the U.S. election…) have sent them plunging down only to start working their way back up again. With that in mind, here are 5 alternative investment options for those looking to give their portfolio a new year refresh, listed from the most sensible to those which are really more about having a bit of fun.

Property

Property is generally a stable investment in every sense of the phrase. This is particularly true in countries such as the UK where there is not only a high population density and an acknowledge lack of housing in general, but also a need to replace existing low-grade and/or dated housing with housing which is suitable for modern requirements. There are various ways to invest in the property market, of which buy-to-let is probably the most visible, but alternatives such as investing in property development can give your portfolio the benefit of exposure to the housing market without taxes, landlord involvement or a property to sell should you want a shorter term investment.

Peer-to-Peer Lending

Banks essentially take deposits from savers and lend them to borrowers taking a percentage for themselves along the way. Thanks to technology, peer-to-peer lending allows individuals to cut out the middle-man (or at least change their nature) so that lenders and borrowers can both get better rates. Of course, if you put money in a bank then, in principle it should be absolutely safe (although only deposits of up to £75K per bank benefit from an FSCS guarantee), whereas, as a lender, you accept the risk of default. Having said that, the role of the P2P platform is to screen borrowers and assign them risk categories, so lenders can make informed decisions.

Crowdfunding

Probably the most famous crowdfunding site of them all, at the moment, is Kickstarter, but this is unlikely to be of any great interest to investors since at this time Kickstarter explicitly forbids funders being given shares with financial value, instead they are given gifts to show appreciation. There are, however, other sites which do allow investors to receive shares. The key point to remember with this type of investment is that it tends to be high-risk/high-reward. These companies often have a serious risk of failure, in which case, there is a strong chance you will lose your money. If they succeed, however, you could be hugely rewarded.

Gold and silver coins

This is a hybrid of investing in collectables and investing in precious metals. Investing in collectables can be both fun and profitable, especially if you’re collecting something which really interests you. Precious metals have an obvious, long-term appeal. If you go for collectable coins in silver and gold then you will have the physical quantity of the precious metal, plus the chance that the coin itself will acquire collectable value or that its collectable value will increase.

Premium Bonds

If interest rates were higher, premium bonds would be a horrendous place to park your money, but at current time, savings accounts and ISAs are offering pitiful returns and current accounts are places to hold your money for easy access rather than to grow it. So even though premium bonds have the same disadvantages they have always had, namely they pay zero interest and your chances of winning anything at all, let alone any significant amount of money, put them into the category of having a flutter rather than serious savings or investment, today’s low-interest-rate environment makes these points much less significant than they used to be. So if you need somewhere to park your cash over the short term they could be a reasonable option and, you never know, somebody has to win.

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What should you consider before investing in property?

Keeping part of your wealth in property has become almost an investing axiom over the years and there are many good reasons for this. Having said that, there are generally exceptions to every rule of thumb, so here are some points to consider before you decide whether or not to invest in property.

  1. Does property investment fit into your overall financial/life goals at this precise point in time?

The idea of investing for the long term applies to a wide range of investments and it is generally critical to the success of property investment. If you are currently in an uncertain period of your life, for any reason, then it may be best to wait until you have a clearer picture of where you are now and where you are likely to be going forward before you make a commitment to any kind of property investment.

  1. Are you prepared to accept the fact that the property market moves at a relatively slow pace?

Some forms of investment, such as shares, can literally be bought and sold at the click of a mouse. Property investment is often different. Even high-quality and desirable property, which is clearly in the right area, takes time to buy and sell, if only because of all the legal boxes which need to be ticked. With other forms of investment, it can be perfectly feasible to sell one form of investment quickly so as to have funds readily available if a better opportunity presents itself. With property investment, astute investors have to be prepared to adapt a strategy which is suitable for the slower pace of the property market and either always keep funds available so as to be able to act quickly when new opportunities arise or be willing to plan changes well in advance.

  1. Is property investment actually a topic which interests you?

This may seem a strange point, since the aim of investment is to make money and, depending on the aim and strategy of the individual investor “dull” investments such as bonds and blue-chip shares can be far more appropriate than more “exciting” investments such as technology start-ups. In reality, however, successful investors need to have an understanding of their investment area(s), whatever it/they are. This means being prepared to spend time on research both prior to making the initial investment and, on an ongoing basis, to ensure that the investment(s) continue(s) to be appropriate to their needs and wants. Doing this research is likely to be much more enjoyable if property investment is something you actually find interesting.

  1. Do you want to focus on capital gains or yield?

As an investor, you might want to have both, in fact that’s perfectly understandable, but you can only make one of these your primary focus, so you need to decide which it is. If your strategy changes at a later date, then you can always adjust your investments accordingly. If you are going for capital growth, then you are likely to find yourself looking at different kinds of investment properties than those who are mainly interested in yields. For capital gains you may well find yourself looking at property in up-and-coming areas and/or property in need of substantial refurbishment or with legal challenges such as short leases. For yield, you are more likely to be looking for property in areas which meet certain criteria in terms of quality of life and which have the demographics which interest you, be that students, families, international professionals or retirees. You may also be more interested in quality new build property, since it will come in liveable condition and will also come with a builder’s guarantee, for an additional level of reassurance.

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Property investment is not about getting rich quickly

Anyone who’s tuned into daytime TV or seen an advert before a YouTube video has probably seen a self-styled property guru offering to provide you with details of the secret but simple system which allowed them to accumulate vast wealth in a short time. Hopefully most people are intelligent enough to realise that property investment is anything but a get-rich-quick scheme. Here are three reasons why this is absolutely not the case.

1 – Successful property investing takes both strategy and the real market knowledge to implement it.

Investors need to have a clear strategy for building and maintaining their property portfolio. This may be to target a particular demographic (such as students or young professionals), a particular area (such as London and its surroundings) or a particular type of property (such as desirable new build). They then need to research they chosen approach to get the information they need to make it work in practice and they need to continue their research to ensure that they keep abreast with (if not ahead of) market trends and thereby keep their portfolio in good shape.

2 – Successful property investing takes motivation and organisation

Doing proper research takes time and it is not just a one-off activity. As the old joke goes, change is the only constant in the world and successful investors in any area need to make the time to keep on top of all new developments. This means that property investors need to be able to organise their schedule so that it includes time for this research and since there are only 24 hours in each day, this can mean either sacrificing or delegating other activities. This level of commitment takes both motivation and organisation.

3 – Successful property investing generally takes a support team

Successful property investors understand the importance of human relationships and of having a good support team. From initiating a purchase transaction with the seller, be it through an estate agent or directly with a property developer, to dealing with financing organisations and letting agencies (or tenants directly), to staying on top of legal requirements and managing the financial side of property investment, property investors understand the importance of getting support from the best people and of maintaining good relationships with them. There are two people in particular that most serious property investors will want to have on their team.

The first is a good lawyer. There can be a lot of legal requirements to be met when dealing with any form of property investment. Using a good lettings agency can mitigate many of these, but it can still be very much in a landlord’s best interests to have at least some level of familiarity with the relevant laws and a source of legal advice if needed. Good lawyers can also prove invaluable when it comes to understanding the key points of leases. While leases for new-build property are generally relatively straightforward, leases for existing property, particularly older property can be much more complicated and it is very much to the buyer’s benefit to resolve any issues prior to the exchange of contracts.

The second is a good accountant. Property investment and taxation go hand in hand. Good accountants will help with statutory compliance matters such as the preparation of rental accounts, the submission of personal tax returns and the provision of representation in the event that HMRC makes an investor the subject of an enquiry. They can also offer consultancy services, such as offering guidance as to when a corporate ownership structure might be more efficient than personal ownership and also what options might be available for reducing the cost of owning and/or selling property, such as making the best use of various forms of tax relief and where it is possible to off-set costs as tax deductions.

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Commercial Property Boom

Newspaper headlines tend to give much more space to the buy-to-let residential market than the commercial property market, but over recent years the commercial property market in the UK (and other countries) has been quietly doing very well for its investors. The key question for investors is whether or not this will continue. Here are some points to consider.

  1. The stamp duty surcharge

At current time it’s rather early to say what effect, if any, the stamp duty surcharge will have on the market for buy-to-let residential property. On the one hand, it increases up-front costs to potential landlords, essentially acting as a handicap as compared to those buying property as their main home. On the other hand, it does nothing whatsoever to make it easier for potential buyers to get a mortgage. If mortgage lending is constrained, the housing market will effectively be restricted to the cash-rich, i.e. those who can afford to buy property without a mortgage or, as a minimum, those who can afford to put down hefty deposits. This will ensure demand in the rental market and so the end result of the surcharge may simply be to increase rents as landlords absorb the up-front cost and pass it on to their tenants. At the same time, some investors may prefer simply to bypass the whole issue and opt for commercial property, which is outside of this regulation.

  1. Uncertainty over further changes to residential buy-to-let

The stamp duty surcharge was nothing to do with austerity per se; it was a response to the perceived imbalance between a “younger generation” of first-time buyers and an “older generation” of cash-rich investors. Hence it is arguably best viewed not as a tax, which may be repealed if economic circumstances warrant it, but a means of trying to manage the housing market and helping to finance schemes such as the equity loan scheme for new-build property in England. The issue of young people getting onto the housing ladder is unlikely to go away any time soon and therefore it is entirely within the possibility that any government will take further action to tilt the residential housing market in favour of younger buyers and against investors. This could favour investment in commercial property.

  1. Pensions freedoms

Somewhat ironically, another hot topic is the need for individuals to save for their old age and to alleviate their need to rely on the state in general and the state pension in particular. Up until recent years, the advantage of tax relief on pensions had to be set against the constraint that most of the accumulated pension pot had to be used to buy an annuity. Now, however, pensions freedoms allow seniors the opportunity to use their pension pot as they see fit and that means that retirees who have saved diligently could end up with substantial pension pots, which could form a very good basis for property investment. Pensioners looking to stay out of the politically-sensitive area of residential buy-to-let may well prefer to look at commercial property investment instead.

  1. Increased awareness of the benefits of diversification

Successful investing is often about striking a balance between not putting all one’s eggs in one basket (formally known as diversification) and spreading investment funds too thinly with the result that the gains from successful investments are minimised due to holding a relatively small position in them. Since everybody needs a place to live, it’s a fairly safe assumption that investors will already be familiar with the residential property market and buy-to-let and are likely to investigate this area as their first port of call, but as they develop more experience they may well develop more of an interest in the commercial property market as a means to diversify their portfolio.

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Choosing The Right Way To Invest In Property

In very broad terms, there are basically three ways to invest in property in the UK. The best known is almost certainly buy to let, but there is also commercial property investment and investment in larger scale property development. While it’s certainly possible to invest across these markets, some investors prefer to specialise in one field. Each field has its own characteristics, so here is a brief rundown of the options.

Buy to Let

It’s easy to see why buy to let attracts investors. The UK is a small country with high population density and hence high demand for residential housing. In principle, a healthy rental market is a benefit to everyone, since it satisfies demand from people who need the flexibility which renting offers, particularly young adults, while providing an income to the landlords. In practice, frustration at the lack of affordable housing for those on lower incomes, particularly younger people, has seen BTL painted in a very negative light in certain sections of the media, which may make some investors uncomfortable. Others may simply look at the recent changes to mortgage tax relief and stamp duty and come to the conclusion that the figures no longer add up.

Commercial Property

Commercial property covers everything from small retail units for local businesses to major industrial complexes. Up to this point it has, generally speaking, kept a lower profile than its residential counterpart. The challenge for commercial landlords is to maximise income flow while minimising risk. Investing in properties intended for smaller companies makes it possible to spread risk, but smaller companies may lack the resources to succeed over the long term and if they do survive they may wish to move to larger premises. Investing in properties meant for larger companies can improve cash flow and reduce the impact of voids, but larger properties may be more challenging to fill if a tenant does leave. Additionally, commercial property investment is far from immune to taxation and regulation and some areas are particularly vulnerable to it. Investors looking at property for small businesses, for example, may find themselves in the same sort of situation as their buy-to-let counterparts and could find themselves being restricted as to what action they can take if tenants start to have issues with paying their rent.

Property Development

This is arguably the least contentious area of property investment, since it’s pretty much universally agreed that the UK does need to build more properties (both residential and commercial), if only to replace existing, poor-quality stock, which has ceased to be fit for purpose. While property shows may feature centuries-old properties which have been lovingly (and expensively) refurbished to make picture-perfect family homes, the reality is that these houses are exceptional and that the UK still has a substantial pool of ageing and/or low-grade properties, which are better suited to replacement than to refurbishment. Obviously the construction industry itself is covered by some degree of regulation, particularly relating to health and safety on site and the quality of the build itself, but in this context that could actually be seen as a positive since it means that the public in general and potential buyers in particular, can have confidence in the industry. This means that in terms of investing in property development, the question is purely one of investment return. The bad news is that there is no “one-size-fits-all” answer to this, each project has to be examined on its own terms and viewed in the light of the investor’s goals, their investment capital, their time frame and their perspective on risk and reward, but the rewards are certainly out there.

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Saxley Court, Horley update – Nov 15

 

The Design Team Meetings are now over, we have been able to solve many issues to reduce overall risk and prepare the project for a great start.  We are out to tender and have been able to provide our contractors with robust and comprehensive design drawings and specification to assist in an accurate price and programme.

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Our surveyors are in their final stages of negotiating Party Wall Agreements with our neighbours which will allow us to commence with the construction phase once a suitable Main Contractor has been selected.

Regards

Rick

 

 

 

 

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Phoenix House Phase 1 update – Sept 15

We have all but completed the first phase delivering 24 flats at Phoenix House, the carpet fitters are completing their works to the common parts, all have been sold except one!.  Building Control and CRL the warranty provider have been booked to visit site and sign off the scheme which will signal the end of this successful phase.  Feedback has been very positive concerning the clever layout and the high quality standard of finish and we look forward to welcoming the new owners in due course.

Typical Kitchen in the spacious open plan living layout in a One Bedroom apartment

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Light Hallway fully carpeted, the décor complementing the Oak panelled internal doors

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Well lit corridor waiting to receive carpet

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Rick Nicholls

Project Manager

Bastien Jack Ltd

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