Tag Archives: Liquidity

Barry’s story – it could have been you! Financial Advice, Landlord News, Latest Articles, Property News

Barry’s story was written by the Mark Alexander back in December 2010. It has since been updated and re-published several times. The dates, times and people are fictional but the story is based on real life events.

It’s a modern update of the classic “A Widow’s story”, this time written as a cautionary tale for landlords and their families.

Barry is 53 years old and married to Sharon. They have three teenage children; twin girls aged 15 and a 13 year old son. Barry worked as a self employed salesman in the plant hire business. Sharon had a part time secretarial job in a local school.

Barry and Sharon purchased their first investment property in 1996.

As property values have risen they have continuously remortgaged and used a proportion of the equity released as deposits to purchase additional rental properties. They also saved a proportion of the equity released for a rainy day. To accelerate the growth of their portfolio Barry and Sharon raised extra cash for deposits by remortgaging their home. The profits from Barry’s plant hire business covered the family’s commitments comfortably.

They had accumulated a portfolio of 23 properties with a combined valuation of £1,650,000, against which they had mortgages of £1,400,000.  The portfolio produces rental income of £87,000 per annum. Their rainy day fund amounted to just over £64,000. By having all of the above in place you might be forgiven for thinking that they had set themselves up with a very safe future.

On Sunday 21st December Barry had a bad day. He was on the way home that evening having just been out to fix a tenants leaking shower tray when the traffic on the M6 came to a grinding halt. Barry managed to stop his car, avoiding the lorry in front of him, but the car behind him ploughed into the back of him, wedging his car under the back of the lorry.

The emergency services managed to free Barry from the wreck and his only damage was shock, whiplash and major bruising to his legs. However, two days later Barry collapsed whilst out shopping for last minute Christmas presents. He was rushed to hospital where it was discovered that a blood clot in Barry’s leg had passed to his brain. Barry had suffered a major stroke.

He lost his speech and most of the use of one side of his body. The family were in tatters. Sharon had to give up work to care for him.

Up until having a stroke Barry had managed the property portfolio and taken care of most of the maintenance himself. Could Sharon care for her husband, her family and the management and maintenance of the property portfolio too?

They considered putting the properties on the market but soon realised that after deducting selling costs and CGT there wouldn’t be much money left over. They would also lose their income and they would be leaving their tenants in a difficult predicament too. Sharon has had to employ a lettings agent to manage the portfolio. Since then it has cost the family an average circa £3,000 a month to pay for ongoing maintenance and management.

Fortunately there has been some good news, at least financially. First, low interest rates have meant that Barry and Sharon’s mortgages have got much cheaper than when they started their property rental business. Many of their mortgages have reverted to tracker products due to their fixed rates coming to an end. They are focussing on Barry’s recovery. What will happen when interest rates go back up again though? How will the restrictions on finance cost relief for individual landlords affect them?

The real saviour for the family has been insurance. Fortunately, Barry and Sharon were astute enough to insure against these eventualities. They took out life assurance policies that pay out a regular monthly income right up to Barry’s 65th birthday. These policies were written on the basis that they also pay out in the event of a critical illness. The family are therefore confident that these provisions will see them through these troubled times and out the other side. They will then revert to plan A, which was to live off surplus rental income over and above the mortgage payments on their portfolio or to sell the properties and live off their gains.

What insurance provisions have you made for your family?

How are you investing the windfall of increased cashflow that record low interest rates have produced for your family?

Have you made similar provisions to Barry and Sharon?  If you haven’t it may not be too late, we want to help.  If you have already taken advice and put insurances into place we would like to introduce you to one of our recommended advisers to review your policies and ensure they are competitive. Most important of all, to ensure that the right person gets the right money at the right time.


Tax Treatment of Equity Loans for Buy to Let Landlords Advice, Buy to Let News, Commercial Finance, Financial Advice, Landlord News, Latest Articles, Legal, Mortgage News, Property Investment Strategies, Tax and Accountancy, Tax News, UK Property Forum for Buy to Let Landlords

I have been posting on numerous forums about the introduction of equity loans into the UK buy to let mortgage market, a common question is the tax treatment.

Equity loans do not attract interest in the normal way, there are no regular monthly payments. One UK lender, funded by USA equity house JC Flower & Co. (a leading financial services investment company with funds in excess of £5billion) has entered the UK market and others may follow. Their return on investment is earned when the loan term expires or or sale or refinance of the property, whichever is sooner. Their return is capital plus a share in capital appreciation equal to double their investment. For example, if they provide top up finance of 10% of a property value their return with be 20% of the increased capital value plus their investment when the funding is redeemed.

As you may know, I was previously a former commercial finance broker. When I was practising I was renowned for digging into complex funding, tax and legal structures to explore opportunities and threats which others may never have considered.

Note to all – I no longer provide advice and this post must not be treated as advice.

The tax treatment of the redemption of BTL equity loans will be very interesting.

Let’s use this example. Equity loans can sit over and above traditional interest bearing mortgages but for the sake of simplicity I have based the following example on equity funding only.

Property value at outset £100,000
Equity loan at outset £20,000

Property value at sale £200,000
Capital gain £100,000 (or is it and if so how is it shared? – see below)
Equity loan capital repaid £20,000
Profit on Equity loan to lender £40,000

Now does the £40,000 profit on the equity loan to the lender reduce the owners capital gain to £60,000 or is the owners gain still treated as £100,000?

The lender operating the first of these schemes has already stated they will bill their return as interest at the point of loan redemption. However, that’s not to say HMRC will see it that way, only time will tell. Therefore, my suggestion to all landlords considering this type of finance is to plan for the worst and hope for the best in terms of tax treatment. As has been proven many times, the law says you can call something pretty much whatever you like but case law or legislation will determine what it really is. Case in point, advance rent or deposit? – see Johnson vs Old

So will profits made by equity lenders need to be used to offset rental profits? If so there could be a substantial paper loss created in the year of redemption. Unused losses may be rolled forward, assuming losses are made, but such losses are only offsettable against future rental profits. No problem, in fact potentially very advantageous, IF you continue to make rental profits going forward. However, if this was your only property you may be stuffed by having to pay CGT on the full £100,000 of gain and not being able to utilise the carry forward losses. Note that rental losses can not be used to reduce other taxable income.

I can’t see HMRC allowing landlords to choose how they apply the lenders return to suit their individual circumstances, i.e. as either interest or a share of capital gain,  but we can live in hope, not that that’s a good strategy of course! If HMRC do allow a choice to be made that would be utopia from a tax planners perspective 🙂

What I would suggest to all considering equity loans is that they should plan for the worst case tax scenario and hope for the best case tax scenario. In other words, make decisions based on the worst case tax scenario and if that works then fine. Obviously there are many other aspects of the deal to consider too which is why I am an advocate of taking professional advice as opposed to taking a short sighted approach and simply jumping into deals unadvised just to save initial fees.

If you are a portfolio landlord who makes good rental profits then treating the lenders return as interest could be extremely tax advantageous if the tax regime remains as it is today. This is because income tax rates are greater than capital gains tax rates for higher rate tax payers.

Therefore, for landlords who will continue to make rental profits, post redemption of their equity loans, this is particularly attractive in my opinion. At worst, if HMRC decide to treat the lenders returns as capital gains, landlords will pay a lower CGT bill and not be able to offset interest. For a landlords with no ongoing rental profits post redemption of an equity loan, having the lenders return treated an interest charge is highly unlikely to be attractive whereas having the returns treated as capital gains will be far better for them.

If, of course, your equity loan is secured against your private home then no CGT is payable on sale anyway.

Tax Treatment of Equity Loans for Buy to Let Landlords

Tax is not the only consideration.

I have listed 11 good reasons for considering the product and 9 downsides in my main post about equity loans. That’s not to say that everybody should think equity loans are the best thing since sliced bread just because my list of pro’s and cons is 11 vs 9, it doesn’t work that way. The reasons for NOT doing something can be very different to reasons FOR doing something, they are not necessarily like for like considerations. For example, I also prefer a strategy of high gearing combined with high liquidity over a low gearing strategy because that’s what suits me and my attitude to risk. It does not mean that people who prefer a different strategy are either wrong or right, it just proves we are all different, hence we have other preferences such as careers, holidays, cars, films, food and where we live.

For further information and discussion about equity loans please CLICK HERE.


Is 100% buy to let leverage a good idea or not? Latest Articles, UK Property Forum for Buy to Let Landlords

I’m looking to do my first time buy to let by releasing c. £25,000 -£37,000 equity from my main residence and the remaining £75,000 to £113,000 on a buy-to-let mortgage to buy a 2 bed property costing c. £120,000 to £150,000. Is 100 percent buy to let leverage a good idea or not

Mark suggests always having 20% cash in the bank but that would mean delaying my purchase by 2 years.

Looking for advice on whether to get going now or keep saving?

Regards

Clod Hopper


Property Portfolio Review Spreadsheet – FREE Download Buy to Let News, Financial Advice, Landlord News, Latest Articles, Property Investment News, Property Investment Strategies, Property News

Property Portfolio Review Spreadsheet - Free DownloadOur property portfolio review spreadsheet is now available as a free download.

This property portfolio review spreadsheet calculates your rental yields net of voids, the interest rate which will make your portfolio cash neutral and the true costs of rental void periods. It is incredibly easy to use, simply fill in the boxes and the spreadsheet does everything else for you. You don’t need any IT or accountancy skills to use this spreadsheet. Continue reading Property Portfolio Review Spreadsheet – FREE Download


Insolvency compensation rules for deposit and mortgages Landlord News, Latest Articles, Property News, UK Property Forum for Buy to Let Landlords

Insolvency compensation rules for deposit and mortgagesWhat are the compensation rules when a customer has both deposits (over £85,000) and an outstanding mortgage with the same failed bank (either offset or standalone)? What happened with either B&B or Northern Rock customers in this situation?

I wrote the following letter to both Intelligent Finance and the Financial Services Compensation Scheme but they gave differing responses. Continue reading Insolvency compensation rules for deposit and mortgages


Barclays Offset mortgage customers – TAKE HEED! Landlord News, Latest Articles, Property News, UK Property Forum for Buy to Let Landlords

Barclays Offset mortgage customers - TAKE HEEDAround 1 million Woolwich and Barclays Offset customers are to be affected by the changes to their offset reserve accounts.

I am looking into the detail of this as it might well affect landlords who are using these accounts in the belief that they are a “safe haven” for their liquidity reserves. Continue reading Barclays Offset mortgage customers – TAKE HEED!


Property Portfolio Review Spreadsheet – FREE Download Landlord News, Latest Articles, Property News

Property Portfolio Review Spreadsheet - Free DownloadOur property portfolio review spreadsheet is now available as a free download.

This property portfolio review spreadsheet calculates your rental yields net of voids, the interest rate which will make your portfolio cash neutral and the true costs of rental void periods. It is incredibly easy to use, simply fill in the boxes and the spreadsheet does everything else for you. You don’t need any IT or accountancy skills to use this spreadsheet. Continue reading Property Portfolio Review Spreadsheet – FREE Download


Green Deal Finance for Landlords – will it be viable? Landlord News, Latest Articles, Property Investment Strategies, Property News, UK Property Forum for Buy to Let Landlords

Green Deal FinanceGreen Deal Finance is likely to become a major discussion topic on forums, especially as it is now being reported by Green Deal Assessors  going through training that it will cost between 7% and 8%.

At current interest rates that far more expensive than the cost of borrowing on a buy to let mortgage. Therefore, if a landlord is buying a property in need of replacement windows and a new boiler some may say that it is expensive form of funding. The counter argument of course is that borrowings funded via Green Deal Finance will in fact be paid for by tenants and subsidised by lower fuel prices .

The big question for me is whether tenants will accept that they really ought to pay the loan without asking for a reduction in rent or looking at an alternative property without a Green Deal Finance deal attached to it. Continue reading Green Deal Finance for Landlords – will it be viable?


Green Deal Referees required by Mark and Neil Landlord News, Latest Articles, Property News

The Green Deal

"It's good to be Green"

Mark and I have worked together since 2003 and have very rarely fundamentally disagreed on a subject, but the Green Deal has split us down the middle with myself being very pro and Mark against. I am writing this whilst sat at home having cavity wall and loft insulation added for free!

I am aware that under the Green Deal in January this will no longer be available as a free subsidy, but in the current economic climate I am not surprised. However I will be planning on taking advantage of the interest free loans available and having a new more efficient boiler replacement for my main residence. Continue reading Green Deal Referees required by Mark and Neil


FSA Mortgage Market Review and the PRS Buy to Let News, Landlord News, Latest Articles, Property News, Property118 News

The FSA Mortgage Market Review rules will come into effect on 26 April 2014 and I have listed the FSA’s own summary at the bottom of this article for the avoidance of factual doubt.

Will these new rules have a direct effect on Buy-to-Let?

Technically no, as Buy-to-Let is seen as a commercial loan and does not fall under FSA regulations (except where you plan to live in the property yourself in the future, or have a close family member live in the property). However what you often see with non-specialist BTL lenders is the standardisation of mortgage policy across both residential and BTL loans. Continue reading FSA Mortgage Market Review and the PRS


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