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Peter Merrick
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Peter Merrick
I am a mathematician by trade and unless the author can justify these figures, they look like they have just been plucked from thin air by an extremely irresponsible person. I have never been able to see that much benefit for myself in incorporation, so maybe someone can write a serious article with some proper figures in it? 1) In terms of interest relief, this has NOT been phased out as so many are so fond of claiming. Rather, it has been gradually restricted to a 20% limit, the same as basic rate tax. So it only affects those lucky enough to be higher or additional rate taxpayers with a mortgaged BTL property. Higher rate tax can be avoided in a number of ways such as by making a gift aid donation, paying into a private pension or refurbishing a property. 2) The effect on higher rate tax payers is equivalent to increasing the interest rate by a factor of ⅓. This is because you now have to pay 80% of the interest after 20% relief instead instead of 60% after 40% relief, an increase of ⅓ in the overall cost of the interest. My last mortgage deal was 2.4% so would be equivalent to 3.2% with 40% relief (1.92% net in each case). Commercial mortgages are still significantly higher than private BTL so unless things change you will probably be better off with the lower rate than the higher level of relief. 3) Overall tax is higher with incorporation. This is because you pay 19% tax on any profits, plus tax on dividends. For a lower rate taxpayers dividends tax is 7.5%, so the total liability is 19% + 7.5% × 81% = 25.075%, vs 20% for unincorporated landlords. For higher rate payers it is 19% + 37.5% × 81% = 49.375%, vs 40% for unincorporated landlords. So unless you are just building up the business and not taking dividends then you could be worse off. 4) Businesses have to register and prepare accounts for publishing which private individuals do not have to do. The main advantages for a business seem to be: 1) You can deduct capital costs which private landlords cannot, which is useful if you are running a professionalised business where everything is bought brand new. I have an 8 year old car and buy most of my stuff from auction (pandemic willing) which means in the rare case that something gets broken it really doesn't matter. It's often better quality than new stuff as well. 2) As the property is owned by the business, you can sell the business instead of the house, thus avoiding the punitive stamp duty regime in future, or create joint ownership by issuing shares in the business 3) I think you can pass the business on to heirs and descendants as a going concern which may avoid inheritance tax. I'm sure there are plenty of people out who can add to the discussion!

From: Peter Merrick 19 January 2021 11:04 AM

Peter Merrick
The deposit replacement schemes work by making the tenant pay for an insurance in lieu of a deposit, usually at a cost of about one week's rent. This is effectively a tax on the tenancy agreement or indeed a tax on poverty for those with so little money that they can't pay upfront. If the tenant is staying several years, then it may be worthwhile For a tenant who is on a fairly short let or moving frequently, the cost of insuring each new tenancy is soon going to mount up and even exceed a traditional deposit, and this money will stay in the pockets of the scheme providers rather than being returned to the tenant at the end of each tenancy at nil or very little cost to the tenant. The only tenants who would benefit in the long term are going to be those bad tenants who would have had significant deductions at the end of the tenancy. A better and more equitable arrangement would be for the agent or landlord to have a blanket or bulk insurance scheme, the cost of which is then split between the tenants either via a small fee (if legally permitted) or paid for by the agent/landlord and recouped via a slightly higher rent. As a small landlord I have often taken a different approach. I sometimes find myself with a perfectly decent person who has been kicked out of a relationship and through no fault of they own their clothes and a few pounds in the bank are their only possessions. In this situation I can take advantage of the flexibility my position affords to allow them to pay what they can afford up front and they agree to catch up over the first few weeks, enabling me to gain a good tenant, and the tenant to have a place to stay, with no extra costs incurred other than taking a temporary risk on the tenant.

From: Peter Merrick 28 May 2019 09:31 AM

Peter Merrick
Please could someone write an article on this that does not make vague, contradictory and utterly useless statements? To quote the return on BTL for the last 10 years as evidence that it is still lucrative shows how completely ignorant the author is since tax changes only started in 2016 via SDLT for new purchases. The reduction in tax relief on finance costs only began last tax year so will have barely been noticed as yet. The full force of this is not going to be seen until the 2020-21 tax year, by which time many landlords on a mortgage in low yield areas will be facing negative cash flows in return for their time and money and risk. BTL is a completely different investment from shares and classic cars as it is about people's lives as well as making money out of what is normally a very non-volatile asset. In actual fact many landlords buy properties at below market value, often improving them prior to making them available to live in (for which they have to pay a penalty SDLT rate). By the time they have mortgaged the property at 75% of full market value, the return on capital investment may actually be incredibly high since the mortgage returns much of the capital investment back to the landlord whilst they keep the balance of rent minus running costs and tax, although this equation does not factor in the personal time costs. It would be incredibly unwise for the ordinary person to use such leverage in the volatile world of stocks and shares, as shares can rapidly fall below the value of the loan used to buy them, whereas a BTL house will normally cover the mortgage costs from the rental income and will be unlikely to drop 25% and thus go into negative equity. In short, there are many ways of handling a BTL investment. Unlike stocks and shares and other tradeable assets, the returns on BTL vary enormously depending on where and how you buy and manage the property. What is absolutely certain is that costs have gone up and tax relief has gone down, so landlords will need to be creative in how they respond rather than just seeing BTL as a traditional fairly passive income investment.

From: Peter Merrick 20 March 2019 10:08 AM

Peter Merrick
It depends on the area ... I am in the Humber Area where the yields are still ok if you play it right. I have four small HMOs and three whole property lets, hopefully getting the next one soon. I usually look for something undervalued and get most of my investment back remortgaging it later. However, I notice that the amount I can get for a room has gone up considerably if I wanted to take advantage of that. Obviously it's different in other places as most of the return is via capital growth and the rent just about covers running costs, so if there is a property downturn then these people could be in serious trouble with negative yields and negative capital growth! I think in my case I would just carry on as usual, maybe charge a little more rent, unless demand for rental property fell through the floor or the tax regime became impossibly hostile. The reduction in interest rates is quite noticeable. When I started in 2015, it was 3.6% for a 2 year fee free fix and 4% for a five year, but now it's about 3% for a 5 year which is about 25% less. If you are on higher rate tax, the effective rate for this is still only 3.6% and only one lot of agent fees in 5 years. I'm still a bit sceptical of setting up an Ltd SPV as the extra work and bureaucracy, higher interest rates and other costs of running a business may not be worth it. You may get full tax relief but you have to pay for business banking, file trading reports, and pay both corporation tax and dividend tax if you take any of the profits out. One big advantage is that if you want to sell the property as a going concern, then you just sell the (shares in the) company rather than the actual property, which continues to be owned by the company. This is vastly quicker and cheaper than transferring property, and presumably avoids future SDLT.

From: Peter Merrick 06 January 2019 21:30 PM

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