I Am A Property Developer – Ask Me Anything!

For any readers of this advice column who don't understand the terms being used by Stuart, "flipping" simply means buying, renovating and selling a property as soon as possible, to minimise debt costs and use your available capital efficiently. Builders have been doing this for generations, so I don't know why it needs any special terminology. If any developer tried to sell me a renovated house and said they were "flipping" it, I'd also be pretty discouraged: it sounds too close to flippant and slapdash for my liking.

Anyway, the "six month rule" means a ruling by the Council for Mortgage Lenders (CML) that mortgage lenders should not make a loan to buyers when the seller has owned the property for less than six months. The stated reasons for this were:
1) To stop instant remortgaging, which in some cases creates overexposure for lenders and less real commitment from buyers.
2) To prevent money laundering/ tax evasion by the sale at undervalue of properties and subsequent resale at market value.
3) To prevent lenders being accused of selling repossessed properties at below market value and being open to claims from former borrowers.

However, many residential lenders will still lend within 6 months if the seller's solicitor declares that the seller is a professional property developer and that they have seen evidence of the renovation works that have been carried out. Lenders will then assess their willingness to lend on a case by case basis. The solicitor should also provide assurances and evidence that the preceding purchase by the developer was an arms-length transaction, so not purchased from a family member, business partners or a related limited company. It would also be wise to have a valuation of the renovated property done by an independent RICS-registered surveyor on behalf of the developer and their mortgage lender before the property is put on the market - this is to demonstrate that the property is being sold at fair value.

Mark Alexander posted a substantial comment in 2012 on this "six-month rule" at http://www.property118.com/remortage-within-six-months/31856.

Another method for a developer to turn his capital around faster is to structure the renovation as an "assisted sale" or a Joint Venture with the original seller of the property. Basically the work is done in-between exchange and completion, with the original seller sharing in part of the project's profits, in return for the property never actually entering into the full ownership of the developer. Instead the sale part-completes, you do the renovation, and a new buyer is found, with the proceeds going to the original owner and the developer in pre-agreed proportions. The 6-month rule does not come into play because the ultimate sale as far as the ultimate mortgage lender is concerned is between the original seller (who's probably owned the property for years) and their client; the developer is just an intermediary who's fixed up the property and improved its value.

More information at http://philmartinproperty.blogspot.co.uk/2014/07/flipping-houses-property-refurbishment.html.

So my advice to you Stuart is:
- set up a limited company, with shareholdings reflecting the capital invested by each shareholder
- buy your renovation project with a buy-to-let mortgage in your name (you will struggle to get a loan in the name of the company as it's new)
- sign a witnessed Declaration of Trust that you own the property on behalf of the company
- put all transactions relating to the house through the company's books. Any money spent by you personally on stamp duty etc can be treated as a Director's Loan, to be repaid later from profits.
- do your renovation
- sell within six months if you can; your solicitor just needs to see evidence that you have done the works, are properly set up as a development company with your co-investors, and that your purchase was an arms-length one.
- pay off the BTL loan
- and repeat. You can make your capital go even further if you use the option agreement approach, as the company won't be lumbered with holding actual properties on its books, paying stamp duty and so on: all you have to pay for is the actual renovation work, with no need to raise extra capital for a deposit or a mortgage. Of course the issue is how to find a willing original seller. someone prepared to live in chaos while their house is being renovated, or to live in temporary rented accommodation until the improved property is ready to sell.

I have a question for anyone that can help!! We took out a tenancy on the 1st may 2015 ending on the 31st October 2015. We wanted to stay in the house long term. At the beginning of October we were served a section 21 notice to leave the property by the end of November 3015. We have found a property and want to leave at the end of our fixed term October the 31st. I have told the letting agent straight away. Our tenancy agreement states we have to give two months notice to leave but that is not possible due to already having been served a section 21 notice. Will we still have to pay for November even though it's after the end of our fixed term. We can possibly give the notice they asked for in our contracts as they want us out before. Can someone please advise Thankyou

Hi Tony,

I recently purchased a flat - big refurb, my initial plan was a refurb then btl but the recent tax change has made me reconsider.

I purchased the property in cash 115k, the property lends itself to converting to two separate flats, it's over two floors. Conversion and new lease costs will be around 40k.

The freeholder has agreed, I have an architect producing drawings.

Being a higher rate tax payer, I believe i would have to pay 40% as basically I now intend to flip it.

What options do I have, could I put the property into a limited company, when I eventually sell pay myself back the initial purchase cost and keep the profit in the company - paying 20% tax?

Reply to the comment left by "Michael Kirk" at "18/10/2015 - 21:28":

Hi Michael

I know your question was to Tony but for what it's worth, I think transferring to a company on the basis you have outlined is very sensible, especially given the numbers involved in this particular transaction, IE no stamp duty
.

Reply to the comment left by "Karen Hoer" at "18/10/2015 - 12:06":

Hi Karen,

These pages are for property development-related questions; will you please re-post on the main Property118 website?

HI Michael,

I agree with Mark: put the development through a limited company with you as the sole director. Your initial £115K + costs including stamp duty will be a personal loan to the company, repayable when you wish; you can charge the company interest if you like, though of course it will be taxable, unless you haven't used up your annual £1000 tax-free allowance for savings interest.

You don't need to transfer the property into the company's name: as suggested in earlier postings above, you can sign a Declaration of Trust through your solicitor, stating that you purchased the property on behalf of the limited company. You are allowed to buy the property before starting the company, though there may be a time limit on this: you are basically regarded by the HMRC as purchasing pre-trading stock for the company.

I recommend talking with an accountant with experience of this kind of arrangement. I suspect that if you set up the company, do a single development, then sell and wind up the company (and worse, then make a habit of this), you will be regarded as a property speculator and taxed quite differently from a normal commercial enterprise. Your accountant may advise that you need to show some continuing trading activity over more than a year. It may be insufficient to buy, develop, rent for a couple of years, then sell, as renting is regarded as investment and not a proper trading activity: I've been told that on average at least 50% of your turnover over a 2-3 year period needs to be development related for you to qualify as a trading business, as opposed to an investment one, which is taxed more harshly.

You will also need to consider how to get your rent and development profits out. From April 2016 dividends will suffer from double taxation: once with 20% corporation tax inside the company, then again at 32.5% in dividend tax if you are a higher-rate taxpayer. You may wish to look at spreading your shareholding over several related people, so each of them can receive dividends and benefit from the £5000 p.a. tax-free sum that will be available for dividends. Another option is to extract profits by paying a small salary to yourself and a related person, so you can claim the £3000 annual exemption from Employers NIC. A further option is for the company to make a large contribution to your SIPP pension. You won't get 40% back as you would with a personal pension contribution, but you will save 20% corporation tax as the salaries and the pension contribution will both reduce the company's taxable profits.

Alternatively if you plan to keep the properties and rent them out, whilst doing a little renovation work to keep the company ticking over, you can sell the company as a going concern after a few years and benefit from Entrepreneur's Relief, assuming it hasn't been removed by the Chancellor.

Reply to the comment left by "Tony Atkins" at "19/10/2015 - 15:32":

Thanks guys, really useful advice.

I plan to keep the money in the company until I am no longer a high rate tax payer. Getting the initial equity out in a few years will help pay off a couple of btl I have.

Hi Tony

I'd be very grateful for your help. I am in the middle of a house renovation, changing from two flats to three. I am trying to raise a small amount to finish off (£70,000 against final value of £900,000). The solicitor for the lender, Commercial Acceptances, is insisting that the insurance is in joint names (owner and lender) and also has a 'mortgagee's non-invalidation clause' added. This effectively provides that the insurer will still pay out to the lender even if the insurance is invalidated by some act, omission etc of the owner. Our insurer won't touch it for an unoccupied building, and the broker can't find anyone else who will either. Have you come across this at all?

Sorry Penelope, I've not encountered this. A Google search on "mortgagee non-invalidation clause" threw up these two interesting hits which summarise the situation: see http://www.bakertilly.co.uk/publications/demanding-insurance-requirements-from-lenders.aspx and http://www.inhouselawyer.co.uk/index.php/insurance/7488-insurance-is-a-valuable-asset.

Your insurer is effectively being asked to provide two insurance polices: one for you and another for the lender, in case the lender's interests are prejudiced by you failing to disclose something that invalidates your insurance, or by your negligent action which cause the insurer to dispute your claim. Your lender wants to be actively protected as an equal interested party in the event of a claim, not be simply your debtor who is then severely impacted if you make a mistake and have your insurance claim refused, leaving you unable to repay your debt.

This has been going on since 2012 according to Baker Tilly: do you need to try another broker, perhaps with more experience of finance insurance for developers working on unoccupied buildings?

You could try posting your query on the general Property118 board, as your problem may have ramifications for landlords generally who are having substantial development work done on their empty buildings. There are also contributing members with greater experience of the insurance industry than I have.

You might also like to contact a developer like Nicole Bremner at Property Tribes (http://www.propertytribes.com/member.php?action=profile&uid=12854). She appears to be constantly tearing up old London buildings and converting them into flats, using development finance, so she must have encountered this sort of issue and have an appropriately-skilled insurance broker.

Tony, thank you very much. I'll follow up on all those suggestions. Very grateful.