Advising on buy-to-let investments

Advisers will have to understand the full implications of the chancellor’s tax changes and how these will affect clients, even if the brokerage or advice firm does not have any specialist tax advisers in-house.

Andrew Montlake, director for London-based Coreco, says: “It is important that landlords get professional tax advice before deciding which route is best for them.”

However, because some of the tax changes are exceptionally complicated, and not every adviser will be qualified as an accountant or tax adviser, Lee Travis, head of professional development for the Society of Mortgage Professionals, believes it will be important for advisers to make use of strategic alliances with accountancy and tax firms.

He says: “It is very important that brokers maintain the best working relationship with their clients at this time and guide them to work closely with their accountant or taxation specialist, especially in light of the impending changes.”

SPVs

Creating a limited company in the form of a special purpose vehicle (SPV) is one way of protecting one’s property assets against the effects of the changes to mortgage interest relief.

As Mr Montlake has already commented in a previous article in this guide, he has seen a “massive growth in enquiries from landlords looking to purchase in a company name”.

Moving an existing portfolio of properties into a limited company would make sense for many investors as corporate entities can offset mortgage interest against their tax bill as a business expense, so this would mitigate the incoming changes to mortgage interest relief.

However, there will need to be more providers offering limited company products, as the wishlist (left) composed by PMS Mortgage Club for FTAdviser suggests.

Creating an SPV also requires knowledge of corporate law and complicated business tax planning, so it makes sense for advisers and mortgage brokers to work with their professional contacts to help create these for their buy-to-let clients.

Diversification

While some parts of the market may seem overblown, other sectors may continue to look appealing, regardless of the various tax challenges facing buy-to-let.

Therefore diversification will be important, whether nationwide or according to property type.

Mr Travis adds: “The same principles apply to buy-to-let as they would for any investment category: be counter-cyclical and avoid any concentration or risk.”

Richard Sexton, business development director for eSurv, says there is a lot of interest in converting prime central commercial properties, such as offices or pubs, into residential apartments.

Yet there may be concerns over the original build quality of these commercial sites, so some lenders may have reservation when providing finance to buy these converted properties, and will require more detailed surveys.

Instead, Mr Sexton believes advisers should help their clients focus on student accommodation and houses of multiple occupation (HMOs), which he says will be a “big growth market this year”.

This followed a decision in December 2013 by the government to remove the cap on student numbers, meaning that 450,000 students began university in September 2015 - an estimated 60,000 more than the previous academic year.

Be counter-cyclical and avoid any concentration or risk Lee Travis

Mr Sexton says: “There is still much money to be made but investors will need to be savvier with their purchases.

“As with any type of investment, diversification is vital and to mitigate risk, investors should spread their portfolios regionally, as well as by property type.”

Property funds

With the cut to capital gains tax (CGT) from 28 per cent to 20 per cent for higher rate tax payers and from 18 per cent to 10 per cent for basic rate tax payers, except for on any gains on residential sales, bricks and mortar itself as an asset class may be less attractive.

However Naomi Heaton, chief executive of London Central Portfolio, said advisers might consider property funds for their clients who want to invest in residential property, as property funds will benefit from the 8 percentage point reduction in CGT.

This might be one way for advisers to discuss exposure to UK property as part of a diversified portfolio for clients.

Furthermore, according to Jeremy Leach, chief executive of Horizon Asset Management, the reduction in tax relief allowed on finance costs, such as interest payments on mortgages and loans to buy furnishings, means it might not be advantageous to borrow money to invest in properties.

However, he says companies including funds do not have this compromise because it is “perfectly reasonable to offset expenses against income”, so advisers could consider whether their clients - who may be newcomers to property investment - would benefit from funds rather than bricks and mortar.

Mr Leach comments: “The main driver for individuals to invest in property is the long term capital growth and the income that buy-to-let property generates.

“There are administrative issues to deal with as well as the cost of property maintenance, mortgage interest payments, management fees, tax and rental voids.

“By investing in a fund the income is not compromised by any of these issues.”

Costs

While Charles Haresnape, managing director, group mortgages for Aldermore, believes in the long-term viability of buy-to-let investment, he agrees that charges are an essential talking-point for advisers and their clients.

He says: “When advising a client, it is important to make them aware of possible additional costs they may incur.

“For example, buying a property for a house of multiple occupation (HMO) might seem to be a sensible and affordable investment for a client, but added costs such as fire doors and regulatory compliance can tip them towards an unsustainable spending commitment, especially if they are near their maximum level of affordability.”

He adds that over-investing can be just as dangerous as a client over-estimating their potential return, saying: “Factoring in any possible setbacks when advising your client can go a long way to leaving them in a far safer long-term position, and won’t harm your reputation as a responsible broker.”

Know your territory

Mr Haresnape adds that for those committed to buy-to-let, choice and distinguishing the best option is another key area for advisers to concentrate on.

He explains: “There will be hundreds of possible products that would seem to match an individual’s requirements and the deciding factor will usually be the level of research and experience when deciding the best course of action.

“Knowing your territory will be essential for continued success.”