Differences of opinion – What do you think?

by Mark Alexander

8:35 AM, 1st March 2020
About 8 months ago

Differences of opinion – What do you think?

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Differences of opinion – What do you think?

In the embedded video below there are a few answers given by the presenters (Mark Smith and Andrew Roberts) that I disagree with.

The first is in regards to the pricing of Limited Company Buy-to-Let mortgages vs individual Buy-to-let mortgages.

Whilst I agree that at face value there is a difference, in my experience, those lenders offering cheaper rates do not do so for Portfolio Landlords. Furthermore, lenders who do lend to Portfolio Landlords are pricing their products very similarly for both individuals and Limited Companies. However, there two major differences, and they are:-

  1. Ltd Company borrowing is much easier to arrange than ever before (more availability)
  2. maximum loan based on rental income are far more generous for Limited Company applications, because Section 24 taxation does not need to be factored into affordability and stress testing

What are your thoughts on the above? Please comment below.

The second answer I disagree with is the generic response to the question about whether to remortagge before of after incorporation. I don’t think there can be a ‘one-size-fits-all’ answer to this question, because there are several factors to be taken into consideration, such as:-

  1. Is there a ‘latent gain’ position? – Explanation HERE
  2. What is the new debt to be used for, i.e. reinvestment in the business or personal use?
  3. Is there an opportunity for a Capital Account Restructure? – Explanation HERE 

To be fair to the Presenters, I know from experience that it isn’t always easy to answer questions from the floor when you have a large audience and a camera in your face. Likewise, Tax Barristers rarely put themselves into this position and always like to consider formal advice to their clients very carefully indeed. Presentations of this nature should never be considered to be formal advice.

I have discussed these thoughts with both Mark Smith Andrew Roberts and we are very much ‘on the same page’, but what do you think about these points, particularly the financing angle?

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Comments

Mark Smith (Barrister-At-Law)

18:02 PM, 26th February 2020
About 8 months ago

What is not evident from the material on p118 and the consultations is that there is quite often a debate between one or more of the consultants and me before we arrive at a settled position. It makes all our work robust when it is thought about by several experienced heads before being rolled out.

Mark Alexander

22:13 PM, 26th February 2020
About 8 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 26/02/2020 - 18:02
Absolutely Mark, none of us can know as much as all of us.

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David

9:47 AM, 27th February 2020
About 8 months ago

There are a couple of other activities required prior to incorporation that may require professional advice and hence additional cost, namely :-

- a formal and current market valuation of the portfolio is recommended (probably desktop is sufficient) in case the valuation is challenged at a later date
- robust calculation of capital gains tax liabilities (can be complicated if PPR relief is sought on any properties) and an accurate assessment of property base costs (including capital improvements)
- remortgaging costs will be incurred if a change in lender is required post incorporation which involves further legal and lending costs to shift the property into the Ltd Co ownership

Lots of good information again from the team - many thanks

lloydbuilders@hotmail.co.uk

10:39 AM, 27th February 2020
About 8 months ago

Interesting, but in my experience Limited Company BTL mortgages are generally 1% more expensive than for individuals!

David

10:48 AM, 27th February 2020
About 8 months ago

Reply to the comment left by at 27/02/2020 - 10:39
Agreed, so it is always best to try to maintain your existing lender post incorporation provided your existing lender offers you reasonable product switch rates at the end of tie periods. I have found myself held hostage with some BTL lenders who charge high rates based on previously agreed lending criteria where the rent cannot support the new Prudential lending ratios so remortgaging is not possible without the need to inject more equity.

Andrew

10:49 AM, 27th February 2020
About 8 months ago

Reply to the comment left by David at 27/02/2020 - 09:47
You make some good points David. Within the video we do debate between 2 accountants and Mark Smith PPR relief and 3 different ideas are put forward. The summary is PPR is irrelevant if you incorporate the business.

David

11:05 AM, 27th February 2020
About 8 months ago

Reply to the comment left by Andrew at 27/02/2020 - 10:49
When I incorporated the portfolio last year, PPR was very relevant as it tipped the balance between needing to pay CGT upon incorporation or not. In addition the PPR CGT tax saving element allowed me to arrange a director's loan to the Ltd Co as a useful way of extracting future profits made by the company free of tax.

Andrew

11:10 AM, 27th February 2020
About 8 months ago

Reply to the comment left by at 27/02/2020 - 10:39
The Point Mark Alexander is making is a great point - are you comparing that to
1> a current portfolio landlord mortgage
2> a plain vanilla buy to let mortgage which only small landlords qualify for
3> a legacy buy to let product

Assuming you are a 45% tax payer and assuming we are comparing a new portfolio sole trader mortgage v a Ltd comapny mortage and they are 1% different per annum before tax

A company is eligle to relieve 100% of the interest cost against tax whereas an unincorporated landlord is restricted to 20% tax relief on the whole interest cost. So 80% of the total interest has no tax relief applied levelling the playing field assuming an apples v apples comparison

Andrew

11:14 AM, 27th February 2020
About 8 months ago

Reply to the comment left by David at 27/02/2020 - 10:48
Its not a simple one answer fits all investors.
The larger or more complex a landlords business the more thinking and calculating on the right solutions to implement is needed. I believe the Property118 team have a panel of experts who can support with this exercise

Mark Alexander

13:50 PM, 27th February 2020
About 8 months ago

Reply to the comment left by David at 27/02/2020 - 09:47
Hi David

I agree with all three points.

We recommend the HomeTrack AVM model for valuations, which cost just £19.95 each.

In regards to the costs of refinancing, that is where the Substantial Incorporation Structure comes into its own, i.e. to defer this until it becomes commercially viable or absolutely necessary due to the existing mortgage term coming to an end.

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