Tag Archives: Rental Profit

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.


BTL Second Charge Mortgages / No Monthly Payments Advice, Buy to Let News, Commercial Finance Broker Blog, Financial Advice, Landlord News, Latest Articles, Mortgage News, Property Investment News, Property Investment Strategies, Property News, UK Property Forum for Buy to Let Landlords

No this is NOT a wind up, it’s 100% genuine and is important that you know how it works so that at the very least you can make an informed decision about new financing choices which until now have been unavailable to buy to let landlords.

It really is a fantastic way to improve cashflow and rental profits or increase gearing without the need to remortgage.

A very credible mortgage lender (Castle Trust) is offering second charge buy to let mortgages with no interest charges and no monthly payments based on 20% of value subject to both the first and second mortgage combined not exceeding 85% LTV on BTL deals and 80% on your own home.

You can use the money in whatever way you wish, for example:-

  1. You can use it to pay down existing mortgages
  2. You can save the money for a rainy day
  3. You can use the money to buy more property
  4. In fact, you can blow it all at the local casino if your daft enough too!

So what’s the catch?

With no monthly payments or monthly interest charged, the lender must get paid somehow. This product works with a profit share basis, in that you borrow 20% of the value of your property the lender will take 40% of any increase in value – on sale or refinance.

You will also need to obtain permission from your existing mortgage lender for a second charge to be added.

Given that your equity in the property may represent as little as 15% of the value of the property and you will receive 60% of the capital appreciation you don’t need to be Einstein to work out that it’s better to use their money than yours, especially if you use the extra money raised to purchase more properties. Remember, you will not be making any payment or incurring any interest whatsoever until you sell or refinance.

Imagine if somebody put this deal to you …. I want to buy a property, you put 20% of the money and I will put in 15% and borrow the remaining 65%. I take all the rental profit/losses and when we eventually sell the property I will get 60% of the capital appreciation and you will get 40%. Oh and by the way, I will decide when we sell, OK? You would probably say no wouldn’t you? Well if you put that deal to Castle Trust, chances are they will say yes providing you have a good credit rating. It really is that good.

Basic criteria

The loan term can be up to 30 years if the equity loan is secured against your own home, 10 years if it’s a rental property.

Your total LTV must not exceed 85% on a rental property, 80% if the loan is secured on your own home..

There are no limits on the number of properties the lender will consider lending on per borrower and their maximum loan exposure to any one client is £1 million.

The minimum advance is £10,000.

For rental properties there is no requirement to have a first mortgage.

You must be able to prove that you have been a landlord for at least six months to qualify and you also need a decent credit score.

Pros and cons?

I can see several reasons why this will be attractive to landlords and I will be using this product myself for the following reasons …

  1. Deals may not stack up on rent to ordinarily qualify for an 85% LTV mortgage but may do so on this basis
  2. It’s a relatively easy way to raise capital against the security of your existing rental portfolio or your own home
  3. Improved cashflow when compared to a conventional mortgage for a higher amount
  4. Raise money without paying off an amazing tracker or fixed rate deal arranged pre-credit crunch
  5. Avoid potentially extortionate fees associated with refinancing
  6. Increase borrowing without affecting cashflow
  7. Use of other peoples money to increase leverage and returns on capital invested
  8. Castle Trust do not legal or valuation fees to arrange finance on your own home and their arrangement fees are only 1% of the advance. Valuations on rental properties cost £195+ VAT and conveyancing costs £216. This means that total fees are likely to be significantly less than arranging a conventional remortgage.
  9. Some landlords will wish to borrow 20% LTV via Castle Trust to partially redeem their mortgage with another lender and thus benefit from improved cashflow.
  10. Some landlords will wish to utilise this product to borrow more money
  11. Some landlords will wish to mix and match, i.e. reduce existing interest bearing debt and increase overall gearing to 85% LTV

Downsides

  1. Your risk is higher than that of Castle Trust because they get paid back before you do on the basis they have second charge over the property. Therefore, if the property decreases in value then you carry the majority of the risk. However, unless you’ve come to the end of the loan term it’s up to you to decide when you sell, they have no say in it.
  2. Future remortgaging may prove more difficult
  3. No new build property, i.e. properties built in the last two years
  4. The product is only available on properties located in England and Wales (not Scotland or Northern Ireland)
  5. 40% reduction in any future capital appreciation but you do need to consider that you may well be able to use the money to make a better return elsewhere
  6. The improved cashflow, in comparison to an higher traditional mortgage, will increase taxable income. However, many will see that it’s better to pay tax on profit than to have no profit at all
  7. Early repayment charge of 5% in year one
  8. If you wish to repay the loan without selling the property then you are committed to proving Castle Trust a return equal to the greater of 2% per year for the period which the loan has run or 40% of the rise in property price
  9. You will need to contact your existing mortgage lender before progressing matters to establish whether they will allow a second charge to be taken

We have no idea how long this funding will be available for so if this is of interest we recommend you to get in quickly. BTL Further Advances No Monthly Payments

We will be arranging introductions to brokers on a panel of specialist advisers which I have personally hand picked. The role of the adviser will be to review your portfolio and provide you with bespoke advice and quotations based upon your personal circumstances.

We are also considering the demand for free of charge introductions to a non-advised mortgage packager service. However, unless you consider yourself to be a sophisticated investor and in need of no advice and associated protection we strongly recommend you to obtain professional advice from our carefully selected panel of advisers.

Obviously we want to make some money out of this too so we are charging a fee of for introductions to our panel of professional advisers. By charging for the introductions we, and the advisers we are referring to, recognise that only serious enquirers will progress matters. This is a good way to ensure that our advisers are not bogged down answering questions from time wasters and also provides a very a good reason for our recommended advisers to prioritise our referrals.

Our fee for arranging an introduction to a professional adviser, who will visit you to provide face to face advice if that is required, is £200, payable to Innovative Landlord Solutions LLP (the legal owner of Property118.com) either by credit/debit card or via PayPal. You will then be contacted within 7 days.

Professional Adviser Introduction Request Form

  • Price: £ 200.00
    Fees are non-refundable


Renting by the room – a FREE guide to maximising profits Landlord News, Latest Articles, Property News

Renting By The RoomA new ebook has been released by Spare Room and is available to download as a PDF via Property118 free of charge. It’s called “Renting by the Room – A Guide to Maximising Rental Profits”.

The media has a fascination with house prices, and together with Property Investment gurus and Estate Agents, spend a lot of time talking about the money to be made from investing in property. However, they rarely mention the single biggest factor in maximizing your return on investment – renting property by the room.

Why?

The truth is that renting by the room can bring in two or even three times the income of the same property let as a single unit. So why does it feature so rarely on property programmes or investment research reports?

Perhaps there’s a belief that this type of letting is too complex for amateur landlords to handle? Maybe they want to keep the juiciest returns for themselves? Either way, it’s high time someone challenged the status quo, and revealed why savvy property investors and landlords are getting into renting by the room.

SpareRoom’s Guide to Renting by the Room reveals:

  • The Origins of Generation Rent
  • The Growth of Flatsharing
  • The Benefits of Renting by the Room
  • Where the Demand for Shared Housing is strongest, around the UK
  • … as well as a Case Study of a Property Expert who only rents to sharers, and a Special Offer to get discounted advertising on SpareRoom.co.uk

To download your free copy, simply enter your name and email address below.

Download the FREE Guide to Renting by the room


How to create incentives for the PRS to grow Landlord News, Latest Articles, Property News

How to create incentives for the PRS to growMark Garner, a regular reader of Property118 has very kindly written in to share these thoughts on simple changes the government could make to incentivise the necessary growth of the UK’s Private Rented Sector.  

What do you think?

To increase the size of the UK PRS the Government need to change their current policy on:-

Pensions – Allow SIPP’s to purchase residential property. Isn’t it crazy that we can invest our retirement funds into high risk Caribbean resports but not into providing much needed housing in the UK?  Continue reading How to create incentives for the PRS to grow


Can landlords spread rental profits between spouses and minimise tax? Landlord News, Latest Articles, Property News, Tax & Accountancy, Tax and Accountancy, Tax News, UK Property Forum for Buy to Let Landlords

Clever ways for landlords to use up two tax allowancesOne of our readers has sent in the following email (dark blue text below) and is looking for ideas that other landlords have used to minimise tax by spreading rental profits between spouses. 

Mark Alexander has shared a few thoughts but would like to point out that he’s not a qualified tax adviser. Therefore, we have also included a contact form for you to get in touch with the accountants Mark uses. He’s also invited their landlord tax expert, Neil Barlow, to comment. Continue reading Can landlords spread rental profits between spouses and minimise tax?


Tax return looms – Readers Question Landlord News, Latest Articles, Property News, Tax & Accountancy, Tax and Accountancy

My|Deposits Deposits Protection Query - READERS QUESTIONWe have received four questions from one of our readers as the final date for submission on-line of 2011-12 tax return looms asking:

1. Are NIC’s payable on rental profits accrued by an individual, i.e not a company? I believe this is classed as unearned income and does not attract NIC’s liability.
2. Can I employ my wife to carry out the administration work for my properties? These are owned solely by me as an individual, not a business. She is a housewife.
3. If the answer to Q2. Is yes. Can I pay her up to her nil rate allowance, thereby reducing my own tax liability by that amount?
4. If I opt to do this now on my 2011-12 tax return, is this likely to incur a penalty for not registering this at the beginning of the tax year, and how much is the penalty likely to be? Continue reading Tax return looms – Readers Question


Landlords Tax Planning Strategy Landlord News, Latest Articles, Property Investment Strategies, Property News, Tax & Accountancy, Tax and Accountancy, Tax News

Landlords Tax Planning Strategy“Milking the Buy-to-Let” is a Landlords Tax Planning Strategy which is very much under utilised. The strategy applies only to married couples and Civil Partnerships and is used to offset mortgage interest against rental income, regardless of whether the amount borrowed exceeds the original purchase price and also regardless of how the proceeds of the finance are used. Continue reading Landlords Tax Planning Strategy


Should missed mortgage payments be a criminal offence? Landlord News, Latest Articles, Property News

The Banker is back, this time he’s trying to upset by hoisting us by our own petard – he’s asking the question “should missed mortgage payments be a criminal offence.”

Is his last anonymous correspondence with Property118 readers The Banker caught our attention with the title “The Property Boom of 2012” and then went on to tell us all why we are doomed. His message this time around is no more friendly either. However, I’ve published his ramblings yet again as some might feel there are some pertinent homes truths in his arrogant musings! We can also say pretty much whatever we like to an anonymous banker as he can’t possibly take legal action for defamation as he is anonymous LOL.

Continue reading Should missed mortgage payments be a criminal offence?


Taxation strategies for capital raising on a BuyToLet basis for retirement Buy to Let News, Commercial Finance, Landlord News, Latest Articles, Property Investment News, Property Investment Strategies, Property News, Tax & Accountancy, Tax and Accountancy, Tax News

It is quite rare for me to share taxation strategies here in full on my blog, especially taxation strategies for capital raising purposes which I’ve not used personally yet (but intend to). However, following an email from a reader called Mike today I will make an exception on this occasion. I love to share my strategies bit by bit but I often miss out some key elements, either to encourage further conversation or to provide enough intrigue for my readers to want/need to contact me personally. I explain why I do that here.

Mike wrote to me as he is currently going through a tax investigation and from his email it is quite aparent that he has a decent understanding of landlord taxation. Mike’s email raised questions regarding an article I recently published about “Partial Exit Strategies for landlords“, and in particular the taxation strategies for capital raising as referred to in that particular article. Continue reading Taxation strategies for capital raising on a BuyToLet basis for retirement


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