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Opportunity knocks

Grant Bather

December 1, 2007

With all the current doom and gloom pervading the mortgage market, it was a welcome relief to see some good news on the horizon for buy-to-let (BTL) landlords.

Although, with the continued rise in rental income, it’s not like they really needed any, of course.

This good news came in the form of the Chancellor’s Pre-Budget Report outlining the changes in capital gains tax (CGT). The new CGT rules, to be introduced in April 2008, will see some BTL investors thousands of pounds better off when they come to sell their property.

The tax is levied on the sale of the investment property and is currently payable on a tiered basis; the longer the property held the smaller the tax bill.

While there is currently a £9,200 allowance, a higher rate tax payer who has held a property for less than three years will see, after the allowance, a 40 per cent tax bill on the difference between purchase price and sale.

However, from April 2008, the tiering will vanish and a flat charge of 18 per cent will be levied after the CGT allowance. So higher rate tax paying landlords could well be advised to hold off selling portfolios until after this date.

But, for some basic rate tax payers who have held investment property for more than 10 years, it may well be beneficial to dispose of assets now as their current tax levy would be only 12 per cent.

Heads you win – tails you win

So, if you have BTL investors falling in both camps, you should be speaking to them now and giving them this information. Better still, why not use this as a door opener to BTL investors who you currently don’t deal with?

Of course, there are ways of reducing CGT. For instance, the ancillary cost of purchasing the property can be offset against profit. The investor living in the property as their main residence for three months can also reduce CGT liability.

Service or stitch up?

Another area under scrutiny is the sale and rent back market.

While I’m aware of many reputable firms offering a quality service to alleviate difficulties of the home owner in financial trouble, there will always be those who are out to take advantage.

The Council of Mortgage Lenders, Citizens Advice Bureau and Shelter have called upon the regulator to look at this activity. This ball has been passed back to the government to create the appropriate legislation.

Lenders have decided to stop lending to sale and rent back investors. The issue is that a vulnerable client will grasp whatever lifeline they can get when facing repossession, with only a limited six-month assured tenancy giving them any comfort.

Though professional investors looking to the long term want a tenant who will rent the property for as long as possible and would prefer to offer longer term lets if they were allowed by the lender.

They will also look for clients who want to release equity from their property, but are too young to do so through equity release products. Or they were formally right-to-buy clients who prefer to rent rather than pay a mortgage.

So, while undoubtedly some form of legislation is needed, it is important not to tar all of these companies with the same brush.

Giving clients advice

While the press continue to thrive off the credit crunch, I have also seen a rise in investigations of many different facets of the market. Panorama, the Money Programme and a variety of the tabloid newspapers continually report on non-conforming, equity release, sale and rent back and more recently, property clubs.

Quality journalism is always welcome, but I’m concerned that if they’re not careful, it could become a self-fulfilling prophecy and lead to stagnation in the market, if not a crash.

The needs of the mortgage broker during these times are of paramount importance to make sure that an even playing field prevails and offers clients comfort.

Following on from sale and rent back, adverse press comment has now been targeted at property investment companies and the need for legislation.

This is an area that rightly needs to be reported and one where some of these firms, not being regulated, have made audacious claims on the future returns and yields from buying off-plan.

So who is at fault? The firm making the claims? The broker arranging the mortgage? Or the lender lending on such schemes? Perhaps fault could also be laid at the client’s door for not seeking independent advice on whether these schemes stack up.

The lack of due diligence by clients when entering into these arrangements never fails to amaze me, with the promises of becoming millionaires, vast discounts on new builds, superb rental potential and living a life of luxury on the back of these type of investments.

I’m also astounded at the amount of money charged by certain firms to give clients education that could be learnt for free.

Are we letting clients down?

How many times have clients said, ‘I am thinking of buying an investment property to supplement pension provision’, to be met with, ‘When you have found something let me know, and I will sort your mortgage out.’?

We have IFAs giving advice on pensions and investment but where do clients go to get advice on property investment? At present, the majority of that advice is given by companies or individuals that have a direct/indirect financial benefit with the property being sold.

I’m not saying that all property companies are at fault; but clearly it can be a high risk strategy and they should only deal with those who have a similar attitude to risk.

So why are the public being taken in by certain property companies? The answer – where else do they go to get this type of advice but independent to the sale?

As a broker you can give advice around affordability and products, but are you qualified to advise on whether the schemes on offer are viable? I don’t believe we are in a position to offer this type of advice, but can lay out a series of health warnings that the client can take on board.

For the last eighteen months through Thinc, I have been running BTL seminars, at no cost to existing clients, giving them information on BTL without offering advice on property ,encouraging clients to conduct proper due diligence on the property deals that they are considering.

I do believe however that property investment has become such an integral part in the majority of client’s investment portfolios that the time is right for further qualifications to be made available though an accredited body.

In the meantime, the government should legislate, so that there is full disclosure of the relationship between the company and the advice given. There should be transparency on the finders’ fees being paid to the agents of these companies; this should also include property purchased abroad where they can be anything up to 10 per cent of the purchase price.

There should be a series of risk warnings published. It might not stop the unscrupulous seller, but I’d hope it would give the client the right amount of information to make an informed decision on whether there might be bias involved and whether their investment profile matches the property scheme.

Once again, I am not intimating that all property investment companies offer poor product or advice, those wishing to be seen as being totally reputable would embrace such moves. As for the mortgage industry, the more that brokers and lenders can do to give clients information on the pros and cons of this type of off-plan type scheme the better.

Help clients help themselves

You may want to use some of the questions below with client:

  • If there is a discount on the property ask them why?
  • Have you a current resale value of similar properties?
  • How many of these properties will be owner occupied?
  • Has the projected rental been checked with local letting agents?
  • Who is likely to rent it?
  • How many similar properties are coming on the market?
  • If you can’t sell the property before completion, can you afford the mortgage?

If buying abroad, here are a few extra questions:

  • Will all services be available when you complete?
  • Will the golf course be ready by the time you complete?
  • Can you get a mortgage in the country you are buying?
  • Is VAT payable on the property and is this included?
  • Who will you sell it to when you want to leave?
  • Will locals be able to afford it?
  • What are the current mortgage facilities available to locals?

This is not an exhaustive list, but it is enough it to get clients assessing the suitability of such a move.

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