Welcome to the November edition of ‘How’s the Market?’ – the free monthly article focused on informing local residents about everything property related in Portsmouth and the surrounding areas. This month’s article is completely focused on buying properties and is packed with some great advice for first time buyers, those considering moving to their next home (upsizing, downsizing, relocating), and a piece from this month’s Expert Guest, Kevin Jarvis from The Bookkeeping Team (a local, innovative accountancy/book-keeping firm), talking about the most cost-effective way to purchase investment properties – whether as an individual, or the setting up of a Limited company.

The first piece of advice in this article is for First Time Buyers. This includes anybody even CONSIDERING purchasing their first home within the next 5 years.

The final date for setting up a new Help to Buy ISA is the 30th November 2019.

Even if you just book an appointment with a bank, set up the account and deposit the minimum amount (probably between £1-£10), you’ll have this account available to you when you’re finally in a position to start saving for your first home.

If you’re unfamiliar with this service, a brief explanation –

The government will add 25% of your savings (up to a maximum of £3000) to your deposit when purchasing your first home (provided the money is saved in a Help-to-Buy ISA, maximum of £200 per month deposited.) In essence, if you find a way to save £200 per month for the next 5 years, your £12,000 savings would become £15,000 towards the purchase price of a property. Not life-changing, but a helpful amount of money when it comes to paying legal fees, redecorating and furnishing your new home. You have absolutely nothing to lose by setting up the account – the money is still yours, just worth 25% more should you choose to buy a property. Use the system to your advantage!

The second piece of advice in this article is for ‘Home-Movers.’

In my job role, I find myself constantly hearing the following – ‘we want to move, but we want to find somewhere first’, ‘we’re desperate for a house in XXX but they don’t come up very often so we’ll wait until we see something we like’ or ‘I’m keen to move, but I don’t want to be homeless if I can’t find anywhere.’ On the face of it, all very valid objections from you as the client, but also potentially very costly objections. I’ve often heard it referred to as a ‘Catch 22’ (even by fellow estate agents), but this simply is not the case, as that would suggest there was no better solution either way. I’ll explain, with a couple of examples, why this mindset totally hinders you and could cost you substantial amounts of money.

Let’s say you saw the perfect property for you tomorrow, exactly what you’re looking for and you’ve decided you want to buy it. We now have a few hurdles.

The first hurdle – why would the seller wait for you to sell? What’s in it for them? They put their house on the market in order to sell it, but you’re not yet in a position to proceed so you cannot buy it. Not only this, but other people are viewing – all with different buying positions, first time buyers, cash buyers, some with properties to sell that are already on the market or with sales already agreed – and the interest is flowing. Assuming it’s the perfect property for you, it’s likely that it will also be the perfect property for somebody else, particularly in the more sought after locations/roads.

If this happens, your only option in order to MAYBE secure the seller’s patience is by ensuring that you offer the most money. You’ve completely lost control of your onward purchase because you didn’t give yourself the head-start necessary to act as a platform for your negotiation.

Provisional acceptance. Great news. You sacrificed the ability to negotiate, but the vendor has at least considered your offer and allowed you a specified amount of time to find a buyer for your home (usually a couple of weeks), in order to secure your perfect home. You’d have happily paid the amount they were asking anyway, so you’ve not really lost anything.

BUT. You’re now faced with hurdle number two. Panic selling. Instead of taking the necessary time to create an effective marketing plan, arrange professional photography, price to achieve the maximal amount of money, your plan has now become simply ‘find a buyer within two weeks’ – a plan that could potentially cause you to accept an offer considerably lower than you could have achieved with the correct preparation.

A few months ago, a client invited me round to value their home. I valued it somewhere in the region of £280,000 and agreed that marketing for £290,000 was a sensible marketing strategy in order to achieve that figure. Their plan was to relocate to an area that they weren’t too familiar with, so had booked a week off to stay in various Air B’n’B rooms whilst viewing houses in different areas. My advice: ‘Don’t fall in love with anywhere.’ They ignored that advice. I got a phone call on the Friday saying they’d had an offer accepted on a house and needed to sell theirs as quickly as possible.

Marketing on their house began on Monday (Offers in the Region of £285,000), and by Friday, three offers placed – the one which tempted them the most, £272,000 from a first time buyer.

Not only had they paid the asking price for their onward purchase, they’d potentially cost themselves £18,000 (assuming asking price was achieved) on the sale of their own property had it been marketed in a slightly different way.

My point here is that, whilst the clients were happy with the end result, they’ve potentially cost themselves a lot of money out of their net move value. When moving, if a buyer falls in love with your home, I can make them wait until you’ve found somewhere; they love your home and would like to buy it, therefore, they will wait.

On the flip side of that, I cannot make the seller of your dream wait for you to sell your home, despite the usual taglines of ‘I’ve been told my house will sell really quickly’, or ‘houses down my road sell in a week.’ The only way you can make anybody wait for you, is by offering more than somebody who is in a better position that yourself.

Sometimes even offering the highest amount of money won’t be enough either, as sellers will be attempting to sell quickly, or looking to secure an onward purchase themselves. However, in theory, if you’re not in a position to proceed immediately, you’re likely to be paying top money for the house that you’ve decided on.

It’s my job to put my clients into the best possible position, so that when they find their new home, they’re in control of their own negotiations rather than being dictated to by both sides of the transaction and can move into their new home knowing that they got a great deal on top of their dream move. I’d welcome anybody to quiz me further on this; it’s a piece of advice that I’m extremely passionate about. Feel free to contact me separately!

And the final part of the trio of great advice in this blog – very regularly, I get questioned on the best method of building a portfolio, and with the introduction of what many would consider ‘anti-landlord’ schemes (second home stamp duty, section 24), it’s important to have the correct knowledge when it comes to income. For this reason, I’m delighted to have Kevin’s input to show that property investment remains profitable for those willing to provide good quality accommodation to the high number of searching tenants. Here he is writing about the best way to manage your tax bill from investment properties –

A question often asked by those wishing to build a residential Buy-to-Let (BTL) property portfolio is whether they should purchase as an individual or through a Limited company. 

There are pros and cons to each but the answer as to which is best really depends on the buyer’s personal circumstances, so specialist advice is always recommended. However, let’s explore the key things to consider when deciding which option is best.

Before we do, let’s go back to basics and make sure we are clear on exactly what we are talking about.

The options when purchasing a residential BTL are 

– Purchase a property as an individual, partnership or trust (we will refer to this from now on as ‘individual’) 

or

– Purchase a property through a Limited company

A Limited company is an entirely separate entity which pays its own taxes and earns its own profit. 

By contrast, owning a BTL property as an individual means that any taxable profit the BTL business makes is taxable on the person.

What taxes apply in each scenario?

Limited company taxes where BTLs are concerned?

When a limited company purchases a BTL property in addition to the usual stamp duty land taxes, it will pay a residential property premium of 3% (where the property cost exceeds £40,000). The company itself will pay corporation tax (currently at 19%) on its taxable profits and provided no salary or dividends are paid by the company to the director/shareholder, they will suffer no taxes personally.

Individual taxes where BTLs are concerned?

When an individual purchases a property as a BTL, the rules on stamp duty are the same as those for limited companies listed above, however there is no corporation tax. Instead the taxable profit the BTL makes is added to their total income from other sources (salary, pension income and so on) and the tax they pay will depend on their total income (from all sources). 

If the individual decides to sell the BTL property at some point in the future they will be subject to capital gains tax at 18%/28% whereas the limited company would pay corporation tax any profit at the flat 19% rate.

As with any business, expenses are used to reduce the profit and therefore tax charge and whilst I will not go into the full detail of every allowable expense one that I will discuss is the interest restriction. 

Game changer

In short, the interest reduction, often referred to as the tenant tax or Section 24, seeks to stop higher or additional rate taxpayers from claiming relief on interest at their highest rate and instead restricts it to the basic rate. This has been described as a real game changer and is thought to be the reason for the increase in Limited company BTL ownership in recent years. 

Introduced in tax year 2017-18 it is being been phased in starting with a 25% restriction and increasing by 25% each year until 2020-21. 

This is a little tricky so let’s look at an example.

Boris owns a second property that he lets out to a family. He receives £15,000 in rent each year and has £3,000 of allowable expenses each year (management charges, accountancy fees etc.). He also pays £5,000 mortgage interest. Boris also receives £50,000 annual salary from his full time job as a civil servant. 

If Section 24 was never introduced his tax position for 2018-19 would look like this:

Salary £50,000

Property income £7,000 (£15,000 – £3,000 – £5,000) 

Total income £57,000

Less personal allowance (£11,850)

Total to be taxed £44,000

£34,500 @ 20% = £6,900

£9,500 @ 40% = £3,800

Total tax to pay: £10,700

Unfortunately for Boris the Section 24 rules mean that in his 2018-19 he will only be able to claim 50% of the mortgage interest as an allowable cost. Relief at 20% of the remainder will be claimed:

Salary £50,000

Property income £9,500 (£15,000 – £3,000 – £2,500 i.e. £5,000 x 50%)

Total income £59,500

Less personal allowance (£11,850)

Total to be taxed £47,650 

£34,500 @20% = £6,900

£13,150 @ 40% = £5,260

Total tax: £12,160 

Less relief at 20% = £500 (being £2,500 x 20%)

Total tax to pay: £11,660

With the restriction Boris is worse off by £960

Section 24 does not only have the potential to increase the amount of income tax payable, but may also push taxpayers into the higher rate tax bracket or tip them above £50,000 which is where the child benefit clawback begins.

Other (non-tax) things to consider

Mortgage fees and interest rates

More and more people are using Limited companies to purchase BTL properties and in response it seems that mortgage providers are offering more products at better rates to satisfy this increased demand. So it is no longer necessarily the case that any tax benefits that corporate purchase may bring are outweighed by terrible rates or low approval figures. 

Admittedly it is far easier to get a mortgage as an individual than as a limited company and lenders do sometimes charge additional fees to limited company BTL property purchasers however this is not a hard and fast rule.

Running costs and administration

Running a Limited company is generally more costly than operating as an individual BTL property owner. Although company directors are allowed to prepare their company accounts and corporation tax return, it is advisable to hire an accountant to deal with this. Record keeping and the deductible expenses are stricter with limited companies too.

Cashflow

As an individual, a BTL landlord may in certain circumstances be subject to the payment on account regime where in addition to the current year tax charge an additional 50% may be payable on top of this as an advance payment towards the next years’ tax bill. For a BTL landlord with a very small portfolio this can have a major effect on cashflow and is worth serious consideration. 

I already own a BTL property. Can it be transferred to a limited company?

As mentioned earlier a Limited Company is an entirely different entity to the individual it therefore cannot simply be transferred between the two. The individual must sell the property at market value and the company will then purchase it. Unfortunately, Capital Gains tax and stamp duty would apply as usual along with legal fees and valuation fees.

In conclusion, should I purchase a BTL property as individual or through a limited company? Help me make my decision?

In all honesty there are too many individual circumstances that could make purchasing a BTL through a limited company either a good, tax-effective solution or a very bad idea. 

In addition to the tax points discussed above your decision will be affected by the length of time you plan to keep the property and whether you need the monthly rental income to live on, as extracting cash from a Limited company is something that should be considered very carefully. 

If you are thinking about becoming a BTL landlord and would like help to decide if the limited company route would be best for you contact one of us at The Bookkeeping Team hello@thebookkeepingteam.co.ukand we would be happy to chat through your options.

Whilst accountancy and tax aren’t the most exciting of topics, I think Kevin has explained the process as thoroughly as possible. I know of many of my clients who will benefit from this advice and would have some questions so feel free to make contact using the email address above and one of the team will be able to assist with your personal query.

And there we have it. Three top tips for buying properties, for everyone from first time buyers to investors. I hope you take something of value from this edition; as always, thank you to Kevin from The Bookkeeping Team for your insight and knowledge. If anybody would like to feature as an Expert Guest in coming articles, please contact me direct to discuss what you can add.

Readers, please keep your questions coming in; they really do assist with finding things to write about each month.

Exciting news to be announced in the middle of the month with a Christmas competition, with a MASSIVE prize available. Make sure to like the page to be in for a chance of winning!

Have a great month.

Darrell.

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