“No one can see a bubble. That’s what makes it a bubble” [The Big Short]. But is buy-to-let one such bubble?
In January 2019, This Is Money reported, “How Britain’s £239bn buy-to-let bubble burst: Our devastating report reveals landlords ruined by tax penalties – and their pension plans hit”. Yet, our experience, and that of our specialist lending clients, suggests that the market remains active and investment is looming. It is true to say that the volume and vanilla buy-to-let lenders have seen volumes drop but this, in our view, coincides with the rise in opportunistic, savvy investors transacting across portfolios, complex buy-to-let (such as Houses in Multiple Occupation) or property carving (creating two flats from a terraced house, for example).
The same This Is Money headline exclaimed, “Existing landlords are offloading around 3,800 properties a month”. The flip side of this coin is that there must be acquisitive landlords to take them on, and, therefore, supportive lenders looking to provide debt to those doing so.
In recent research published by one of our clients, Foundation Home Loans, we saw that the last 3 years’ lending applications for buy-to-let have been at consistently stable levels and just sitting below the 10-year highs before the global financial crisis. The general lending curve has been measured and successful. They report that, “the majority of landlords will purchase their next property through a limited company”, and that, “portfolio landlords are even more likely to purchase via a limited company, with almost 7/10 landlords who own more than 11 properties in a portfolio, intend to do so in this way.”
Complex buy-to-let is consolidating. UK Finance: Mortgage Trends Update March 2019 reports “There were 4,800 new buy-to-let home purchase mortgages completed in February 2019, 7.7 per cent fewer than in the same month in 2018. There were 14,400 remortgages in the buy-to-let sector, 2.1 per cent more than in the same period last year. While buy-to-let house purchases continue to contract due to tax and regulatory changes, buy-to-let remortgaging has increased as borrowers move from fixed rate mortgages and lock into new attractive rates.”
With landlords now settled on the impact of the Government’s market dampening exercise in 2015 (the Stamp Duty Land Tax increase, the loss of mortgage interest relief and the wear and tear allowance deductions) the rise of the portfolio investor has been noticeable in the last two quarters. We have found such investors looking to put their houses in order as their current fixed rates end, and the competitive specialist lending market has made it financially attractive to do so. These same specialist lenders can also tackle the incorporation of portfolios (moving titles from private individual ownership to limited company ownership) and we regularly train lending teams and clients on the efficient methods of doing so.
The key to any successful incorporation will be considering:
- Tax implications for Stamp Duty Land Tax and Capital Gains Tax purposes
- Evidencing (for the lender’s underwriters) how the exchange of value works (they will want to see that this value matches the property valuation) – and such value to have been formalised
- Preparing corporate authorisations.
The lender will look for these in addition to assessing the security offered (the property) and the underlying ownership of the company. A partnership ownership model is the most obvious starting point, as that will give weight of evidence to the two key reliefs which make such portfolio incorporations financially viable on Day 1: the Sum of Lower Proportions and Incorporation Relief.
The incoming debt will be used to repay any existing debt and to probably raise additional capital, but the lender will treat this transaction as a purchase irrespective of the commonality of underlying ownership. So, the balancing sum (to make up the purchase price as declared) must be seen to be represented by, for example, cash, convertible equity or director loan. Our role at TWM will be to support this with the corporate authorisations (board resolutions, minutes and loan agreements) to evidence the structure.
These incorporations are likely to become more regular as the tapering of mortgage interest relief ends in 2020. Our lender clients are preparing accordingly to meet this demand, both in terms of capital requirements and in product criteria, working with TWM as strategic partners to deliver best in class advice.