Sell, incorporate, get a job or all three?

Sell, incorporate, get a job or all three?

9:50 AM, 29th September 2022, About 2 months ago 19

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My wife and I have nearly £2,000,000 on fixed-rate mortgages that are due to expire in January 2023 – YIKES!

The LTV across our portfolio is somewhere between 40% and 50% and in recent years our rental income has been apportioned at around 33% finance costs, 33% other expenses and 33% profits.

We have calculated that if interest rates hit 7%+ by January we could be into negative cashflow territory.

Our sole income has come from property rentals for nearly 10 years now, but it is starting to look like one or both of us might need to get a job.

I read Mark Alexander’s latest article with interest yesterday and we have since booked a Property118 Tax Planning consultation for two weeks time to discuss our options. Incorporating our business and subsequently selling a few properties to de-leverage certainly appears to make good sense. Time will tell. In the meantime, I would be interested to read comments from other Property118 Members on what their plans are, especially if they find themselves in the same position as us.

Thanks in Advance

The Duttons



Comments

Jason

10:19 AM, 29th September 2022, About 2 months ago

If i was in your position, I would sell enough properties to pay off the debt, then wait it out until rates start to drop. It makes no sense to me to pay higher interest than my nett yield (i.e. if your paying 7% interest and your nett yield is 6%, then it makes no sense to leverage).

Ann Shaw

10:31 AM, 29th September 2022, About 2 months ago

Hi The Duttons,

Even though you have good LTV's, having just found out that a couple of lenders are now asking for EPC A and B for their best five-year fixed rates deals, I would check what your EPC's are for remortgaging purposes.

If you get a job, s24 will hit you hard - Osborne and Cameron stitched us up good and proper here.

Also, with the eradication of s21 looming, I personally would sell the ones which are not EPC A, B or C (if any are in your case).

Laura Delow

10:32 AM, 29th September 2022, About 2 months ago

Dependent on the lenders your £2m mortgage borrowing is with, whilst you decide what to do (sell/keep, part & part, incorporate, get a job) I suggest you urgently call your existing lenders to find out how far in advance of Jan 2023 you can secure a product transfer based on todays available rates to kick in when your existing fixes end. With Barclays/Woolwich & a handful of others you can secure a new rate up to 150 days ahead of expiry & most other lenders are 90-120 days. If before your product transfer kicks in Jan 2023, you decide to sell, you can always cancel the product transfer from going ahead at no cost as long as you've asked to add the new product fee to the mortgage & haven't paid this upfront. At least in this way it gives you 3-4 months breathing space to decide what to do & if you decide not to sell, at least you'd have secured a rate from today's available range & not waited until Jan 2023 when they're expected to be higher.

Justin Lee

10:50 AM, 29th September 2022, About 2 months ago

We are in a similar situation with 3M of mortgage and overall loan to value at 55%. We have incorporated some of it and are selling a minimum of 4 personally owned properties. This would mean break even is at a base rate of about 7%. Basically sell what you need to survive, but remember long term the more property you have the greater the capital gain in a very high capital gain period over the next 10 years. A difficult balance. Good luck.

Mark Alexander - Founder of Property118

11:04 AM, 29th September 2022, About 2 months ago

Reply to the comment left by Justin Lee at 29/09/2022 - 10:50
I am concerned for you. If you didn’t incorporate a “whole business” you may not be eligible for ‘incorporation relief’.

Did you have two separate property rental businesses? Perhaps in different ownership structures?

David Smith

11:56 AM, 29th September 2022, About 2 months ago

I personally think Section 24 will be repealed.

As others have mentioned that if you are around break even across your portfolio when interest rates go to possible 7% then if you sell you will not benefit from the Capital growth in the future but it does also depend on your age.

Lock into new mortgage deals now which will give you six months thinking time and consider paying early redemption fees to be able to switch to the new deals.

angela

12:04 PM, 29th September 2022, About 2 months ago

spent last seven years paying off mortgages, hate debt with a passion, so not worried about rate rises, Iam concerned about future legislation on EPC etc and feel the time will come when i will have to evict long term tenants as it will be impossible to get the house/flat to required standard, so there are more people in the pool trying to rent, the legislators need to stop listening to whoever and realise their policies are creating problems, yes deal with the rogue landlords, but dont tar all with same brush. 40% reduction of rental stock in 3 years, says it all

Mark Alexander - Founder of Property118

12:08 PM, 29th September 2022, About 2 months ago

Reply to the comment left by David Smith at 29/09/2022 - 11:56
Hi David

Less than a fortnight ago, Ben Beadle from the NRLA shared a discussion he had had with Liz Truss about the possibilities of repealing Section 24, and that did offer at least a glimmer of hope.

However, following what has been described as the "Kami Kwasi economics" of the mini-budget, due to the unfunded tax breaks offered without a supporting OBR report, and the ensuing crash of the value of the pound, I think it is highly likely that a repeal of S24 has completely fallen off the radar.

There are actually three issues currently at play for many landlords, Section 24 is only one of them.

The other two are cashflow due to higher interest rates and CGT if landlords were to sell in order to de-leverage. A repeal of Section 24 would not solve these problems. I accept it would go some way to help reduce the taxation for unincorporated landlords with significant finance costs if they are higher rate tax-payers, but aside from that incorporation followed by sales and de-leveraging now appears to be the only logical solution for a huge section of the PRS. Wouldn’t you agree?

Please see my article on this topic from earlier this week >>> https://www.property118.com/why-should-landlords-incorporate-before-selling-some-properties-and-paying-off-remaining-mortgages/

Robert

14:00 PM, 29th September 2022, About 2 months ago

Reply to the comment left by Mark Alexander - Founder of Property118 at 29/09/2022 - 12:08
Surely if they are making a loss or breaking even, they would be standard rate taxpayers and therefore Section 24 wouldn't apply anymore?

Grumpy Doug

14:38 PM, 29th September 2022, About 2 months ago

Reply to the comment left by Robert at 29/09/2022 - 14:00
Robert. S24 is a fiendishly nasty tax. It's easy to be running at a "loss" and then get stung by a load of extra tax because of the effective replacement of full interest relief by a 20% credit. Too many factors at play, including whether you already have other income streams. I believe Mark and the team at 118 posted a spreadsheet that allows you to calculate your liability.

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