Property Update Spring 2019
In this Issue
Brexit and the Property Market With Brexit just around the corner everyone is a little more circumspect and erring on the side of caution when it comes to property investments.
Property Market Update
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In January 2019, it was reported by the Office for National Statistics (ONS) that house prices grew at the slowest rate since 2013. Indeed, Brexit has caused much uncertainty in the property market and is contributing to the slowdown. However, there are two other factors that are having a significant impact.
Restriction to Incorporation
VAT on Property Developments
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Finance
Cost
and
Recently, private landlords have had to settle their tax liabilities. For residential landlords that has meant paying more tax due to the first restrictions that now apply to the tax relief available to them for finance costs. We have been discussing this change and preparing our clients for a few years now, and where viable have incorporated their business portfolios. Unfortunately, there are a lot of clients who have a modest property portfolio and it is just not feasible for them to incorporate. These clients need to review their investments and ensure that this is still the best option for them. The same goes for anyone looking to invest in property for the first time.
Interest Rates
Failure to Declare Rental Income
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All indications are that post-Brexit, the interest rates will rise another 0.25%
Holding a property portfolio as part of your long-term investment plan, to take advantage of the increase in capital value, is clever planning. However, you do need to ensure that you can afford it in the short term. It is predicted that post-Brexit, interest rates will rise by aproximately 0.25%. And after that? You need to ensure that your investment can stand the test. Make sure you have done the maths. Do your returns add up? Can you afford a repayment mortgage, or do you need to go for an interest only? What rate will you move to once your fixed rate period is up? What will happen if you cannot re-mortgage? Can you reduce your
interest rate by increasing your equity? Would it be viable to offload a property with low returns and use the cash to renegotiate lower interest rates on the rest of the portfolio? Have you factored in maintenance costs and periods of void tenancy? These are all questions you should, and need to be, asking yourself.
Other Viable Investments? You also need to consider if property investment is still the best option for you as your money may be able to perform better elsewhere. Depending on your risk profile, you can get up to 6% return on a Funding Circle savings account, or up to 13.9% on high interest fixed income bonds. Or what about ISAs? They are tax free after all. Have you considered these alternative options? Investing in buy-to-let means tying up capital in a property that may fall in value. When investing in high-return high-risk stocks and shares you can sell up quickly if you want, however your capital may be at risk. If you have not done so you need to review your options. Over the next three years, residential property landlords’ tax bills are only going one way. You need to know if property investment is still the best option for you. If it is not, you need to act now. By Andrew Coney Partner and Property Specialist 020 3146 1602 andrew.coney@raffingers.co.uk
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Property Market Update According to the latest UK House Price Index from the Office for National Statistics (ONS), in the year to January 2019 house prices grew at the slowest rate since 2013. In the year to January 2019, average UK house prices increased by 1.7%, down from 2.2% in December 2018 and 5.1% in October 2017. It is feared that if house price growth continues to fall, later this year the UK could see the first fall in property values since the financial crisis. The slowdown in house price growth has been driven mainly by the south and east of England, with London being the worst affected. London experienced the lowest annual growth for the period, with house price growth falling by 1.6%, down from 0.7% in December 2018. In contrast, the Midlands experienced a 4.2% growth in house prices and northern England a 2.8% growth. These growth rates are slightly lower than the past three years, but still have not been affected by the severe slowdown experienced in the south. Regarding average UK house prices. These peaked at £232,000 in August 2018. However, average house prices in the UK decreased by 0.2% between December 2018 and January 2019. As of January 2019, the average UK house price is now £228,000. Although, this is still £4,000 higher than in January 2018. ONS figures also showed the growth in London’s private rental prices rose by just 0.2% in the 12 months to February 2019, up from 0.1% in January 2019. This made the capital’s private rental growth the lowest in the country. Bad news for landlords, but good news for tenants in the city. The cause of the slowdown in growth is not only attributed to Brexit uncertainty, but also to changes in the property market, such as ‘death’ of buy-to-let, increased stamp duty and the prospect of interest rate rises. Some also argue that the slowdown is simply a longoverdue market correction.
Spring Statement Revealed Philip Hammond delivered the Spring Statement 2019 on Wednesday 13 March. As expected, Brexit overshadowed the statement and there was no major tax or spending changes. However, there were several key announcements concerning housing and the property market. To restore the dream of home ownership as announced at the Budget 2017, Hammond reviewed measures from the Budget 2018 that are already having a positive impact. Most notably the abolition of stamp duty for most firsttime buyers and the continued roll out of the Help to Buy equity loans. To build upon this promise, Hammond made several further pledges at the Spring Statement. All of which are aimed towards increasing the housing supply to its highest level since 1970 by the end of the current Parliament, and to reach 300,000 new homes a year by the mid-2020s. £3billion Scheme
Affordable
Homes
Guarantee
The government will guarantee up to £3billion of borrowing by housing associations in England to support delivery of around 30,000 new, affordable homes. This will be delivered through the Affordable Homes Guarantee Scheme. Housing Infrastructure Fund Will Unlock up to 37,000 Homes The government pledged that £717million from the £5.5billion Housing Infrastructure Fund will be used to unlock up to 37,000 homes at sites including Old Oak Common in London, the Oxford-Cambridge Arc and Cheshire. Environmentally Friendly New-Build Homes As part of the government’s Clean Growth Strategy, the Chancellor announced plans to make homes better for the environment. Therefore, the government will introduce a Future Homes Standard by 2025. This will require new-build homes to be future-proofed with lowcarbon heating and energy efficiency. Capital Gains Tax Private Residence Relief It was announced that a consultation will be
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launched on the changes to private residence capital gains tax relief which were announced in the 2018 Budget. These proposals aim to reduce the final period exemption, and to restrict lettings relief - the additional relief if a main residence has been let - to cover only periods in which the owner has been occupying the property with the lodger. Both changes are planned to apply to disposals from 6 April 2020 onwards and will reduce the amount of capital gains tax payable. If these changes come into force, individuals selling properties after April 2020 may see their capital gains tax liability increase. Transforming cities fund £60million of investment will be made in 10 cities across England to support bus station upgrades, new cycle lanes and road improvements. Monies given will range from £4million to £10million and will give people the opportunity to purchase properties that may well be more attractive once the work is complete. Cities receiving this fund include: Derby, Nottingham, Leicester and Portsmouth, amongst others. Borderlands Growth Deal Up to £260 million will be invested in the Borderlands Growth Deal, which on top of the £102million announced recently for Carlisle from the Housing Infrastructure Fund means up to £362million of funding in the Borderlands area. Planning for High Streets A consultation will be launched to explore potential changes to help local areas make better use of planning tools to support their local high streets, including through compulsory purchase orders, local development orders, and other ‘innovative’ planning measures For further information or advice on any of these measures mentioned, please get in touch. By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffingers.co.uk
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VAT on Property Developments We support clients in all areas of the property development process, from acquisitions to disposals and have noticed that VAT often catches a lot of property developers out. This is simply because experienced property developers often fail to get proper advice before they begin a development, which means the tax issues associated with the process are overlooked. Converting a Property for Re-Sell It is common for people to build properties for re-sell. However, in many cases developers often change their mind (particularly in today’s market) and decide to retain the property instead. This is completely understandable and there is no problem in doing this; however, it does have some significant VAT implications that you should be aware of.
What we often find is that clients who do not get advice find themselves in difficult situations. They either must repay VAT that they do not actually need to repay, or they do not maximise the amount they claim back in the first place. If you are thinking about purchasing a property to develop, we advise you speak to your accountant before you do anything and keep them informed along the way, as throughout the process we often find intentions change. Speaking to a VAT expert will ensure you are not missing out on an opportunity or causing yourself an unnecessary problem. For further advice, contact Partner and Property Specialist, Barry Soraff. By Barry Soraff Partner 020 3146 1603 barry.soraff@raffingers.co.uk
Do not miss out on opportunities or cause yourself unnecessary problems.
Purchasing Properties Through SPVs Annual Tax on Enveloped Dwellings (ATED) has been around for many years now; however, it still causes major concern for us, especially with clients that use Special Purpose Vehicles (SPVs) to buy one-off properties. Purchasing Property Through SPVs
Companies that fail to file an ATED return will face fines for failing to comply.
When companies buy properties in the UK through a SPV they have 30 days to file an ATED return. Often, companies do not tell anyone about this purchase, other than a solicitor. As solicitors do not advise on ATED, this means, more often than not, the return is overlooked. Companies that fail to file an ATED return are faced with fines for failing to comply. A late return has a ÂŁ100 penalty immediately applied, with further fixed charges stacking up after 3 months, 6 months, up to a maximum of ÂŁ1,600 at the 12-month mark. This is frustrating as in
most cases companies will have nothing to pay when filing the return and will simply be claiming an exemption. Knowing When to File an ATED Return If you are a corporate property developer, which almost all small property investors are, there is a requirement to file an ATED return at least once a year. But, if you use a SPV you must file a return within 30 days of acquiring the property. If your company is intending on purchasing property and you are unsure about ATED, speak to our advisors. By Barry Soraff Partner 020 3146 1603 barry.soraff@raffingers.co.uk
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#TaxFromTheTrenches
Failure to Declare Rental Income One of our clients recently received a notification from HMRC. It was a letter I have seen many times, where HMRC tells individuals they have good reason to believe they are, or have been, landlords and that they may need to report rental profits and pay tax. HMRC suggest using the Let Property Campaign, or to ring the campaign number if the recipient of the letter doesn’t think that anything is due. There is a 30-day window to get the ball rolling and, from my experience, it is good to act quickly. Our client who received the letter, who we’ll call Clare, came in to meet us. The meeting started along normal lines as Clare discussed her background. She had been born in Essex and lived at home until her late 20s. Mum and dad had never been in great health and it was with some guilt and trepidation that she moved away to take a job in the Midlands. Then one December morning Clare’s dad took a turn for the worse and within a matter of weeks he was gone. Clare, being an only child, felt torn living miles away from mum and still holding down an important job. In the end, Clare decided to resign from her job and come back home. Unfortunately, Clare could not find a buyer for her house, so she approached a local letting agent who secured her a tenant. Clare moved back to Essex and has been living in rented accommodation near her mum for around five years. We spoke about the rental income and expenses for a while. She then told me that her house in the Midlands was in the process of being sold, but the solicitor had told her she might have capital gains tax to pay. Clare was in the process of asking me about this when the flood-gates opened. Clare worried she couldn’t afford the amount due. I decided then and there to put her mind at rest about the capital gains position. It was obvious to me, as it would have been to any tax professional, that no capital gains tax would be due. She had lived in the property for a long period of time and
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would therefore be entitled to Principle Private Residence Relief. She was also entitled to “Lettings Relief”, which can be claimed when a house that used to be a private residence is subsequently let out. Clare had already told me the sale and purchase value of the house and I prepared a short capital gains calculation for her to show, conclusively, that no capital gains tax would arise. I also told her that I didn’t expect her tax liability to be particularly high. Afterwards, I reviewed Clare’s rental information. Some degree of guess-work is always needed, particularly when the rental goes back many years, and invariably some estimates are needed for expenses, as noone is going to have expense invoices dating back 5, 10 or 15 years. It’s my job to make sure that any estimates used are reasonable, and to make sure that the client has properly remembered all their allowable rental costs. In this case Clare’s expenses were pretty much full and complete and, within a few days of getting her details, I was able to tell Clare that she had a small tax liability in the current year, but that we were well within time to register her for self-assessment and complete a tax return by the electronic filing deadline. It doesn’t always work out like this of course. Most of the time a “result” in a Let Property Campaign case is to prepare the accounts, calculate the tax interest and penalties, submit the disclosure to HMRC and have the figures agreed. In Clare’s case the rental income for the house was pretty much on a par with her allowable expenses. She had also spent money getting the property into the right condition for letting at the very beginning, which had created rental losses in the earliest years. We have subsequently written a detailed letter to the HMRC Property Campaigns office explaining that no tax liability arises on any rental income prior to 2018. By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffingers.co.uk
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