What a difference a year makes.
At last October’s Property Investor Show I asked a room full of people how many were aware of Section 24 and its upcoming impact on Buy-to-Let landlords. Three hands went up.
Fast forward 12 months and I ask the same question. Almost every one of the 90 strong audience has a hand in the air. What’s changed? My guess is that the first year of the tax changes, which is nothing compared to what’s still to come, has alerted the serious landlords that they need to take action.
No amount of early warnings from the likes of yours truly made an impact. It’s only when the curved ball hits them smack in the face that they are moved to action. They were at the show to learn more about what it all means, and to look for alternatives. We had a lot of serious conversations on our stand from people who own significant property portfolios in their own name and are wondering what to do.
The answer isn’t simple and it isn’t one size fits all. It depends on how much equity you have versus the level of gearing. It also depends on whether your portfolio is big enough to be a viable business. If there was any rationale in George Osborne’s addled brain when he dreamed up Section 24, it would seem to be a desire to rid the market of ‘accidental landlords’ who find themselves owning one or two buy-to-lets. When a couple move in together they have a spare property which they rent out rather than selling. When mum and dad pass away a house is inherited and treated as a source of income rather than capital.
Most tax advisors agree that you need at least 5 properties and the ability to show you are working on property related matters for around 20 hours a week to justify incorporation. That takes you from a potential 45% personal tax world into a 19% corporation tax world, not to mention escaping the punishment for leverage that personally held properties now carry. Wasn’t leverage the whole point of buy-to-let investment? By using Other People’s Money to fund 80% of the acquisition your own capital works five times harder. At the stroke of a pen, Osborne turned OPM from panacea to poison.
Tighter stress tests from Mark Carney have made it harder for landlords to refinance their existing portfolio and therefore harder to extract equity from it. That tends to force them down the route of divestment, a decision already taken by tens of thousands of private landlords. If that puts a kind of ‘mission accomplished’ smile on the face of the former Chancellor, it also leads inexorably to the law of unintended consequences.
This month’s Elite Lifestyle magazine features an article by long time Elite member and serial landlord John McKay on the homelessness starting to become apparent as private landlords exit the market. There is no stock of council houses waiting to take up the slack. The Build To Rent market is in its infancy and has anything but a ubiquitous presence across the country.
One of the few profitable niches remaining in the residential buy-to-let market has been HMOs, houses of multiple occupancy. Inevitably, the current Chancellor has spotted a revenue opportunity there and has imposed new licensing rules which will hammer the bottom line of tens of thousands more landlords. One such is our own Paul Cronin, who is reconsidering the long term future of his own HMO portfolio while being equally concerned for his tenants:
“We provide a great service to our tenants but I worry about where they are going to go if we sell up. These people are nurses, schoolteachers and engineers who can’t afford to get on the property ladder. Where will they go?”
The question is left hanging and is certainly not about to be answered by a politician or councillor eager to squeeze a few extra pounds out of these ‘idle rich’ landlords. If you own a business or property portfolio and want to find the best way forward from a tax perspective, you need to be at our next Boardroom Breakfast on Thursday 18th October when our resident expert Jeff Lermer tackles his favourite topic – Whole of Life Tax Planning. Click here to grab one of just 18 places available at the table.
Until next time.