Property Q&A 2: Private landlords and holiday letsby
For landlords, the pandemic giveth and the pandemic taketh away. To complete their discussions of property finance, Owen Kyffin and Ian Boden consider the situation facing private landlords and furnished holiday lets.
When AccountingWEB brought together Whitley Stimpson property specialist Owen Kyffin (OK) and Swoop’s Ian Boden (IB) to discuss post-pandemic property market trends, they devoted a lot of attention to the private landlord sector. This Q&A presents their thoughts on the subject.
Q: The furnished holiday lettings sector almost came to a standstill last year. How do you see landlords reacting to that challenge?
OK: To state the obvious, the biggest financial issue they were facing is that they had very limited income, but in terms of customer demand, when they were open, it was rampant. It’s just they weren’t able to open for long.
The doubts hanging over holidaying overseas are certainly boosting the UK market. I looked for some accommodation for a friend’s 60th birthday party recently and my old university was asking for £320 a night for letting out rooms in the halls of residence. I stayed there when I was a student. I’m not paying £320 a night for that!
IB: Time will tell, but I suspect Covid’s impact on the holiday market will be more of a cashflow shift than a loss and that landlords may have to combine the two years to see how it washes through. Overall, I see far higher occupancy rates in the times that they can open than they would in a normal market climate.
We are seeing a number of buy-to-let landlords looking to diversify into holiday property. Over the past three years I’ve been focusing on finance for buy to let landlords and saw them trying to chase increased property yields and returns through moving to things like houses in multiple occupation (HMOs) and multi-unit properties, Now we’ve started to see those same landlords looking to holiday lets because they see an increase in rental returns. It’s a different proposition to an HMO, but nonetheless, it’s a property investment. And I think we started to see them diversify into how they do that, because it’s a favourable tax treatment.
Q: Has the tide finally turned on the buy to let market?
OK: Although they’ve whittled away the tax benefits [for buy-to-lets], there are still some potential tax benefits there. Although it’s not guaranteed, and you have to look at it carefully. There’s still a potential to get business asset disposal relief, there’s also rollover relief and possibilities with capital allowances for fixtures and fittings. With buy-to-let, the main concern was about the restriction on loan interest relief, but I haven’t seen that much evidence of it putting people off. Experienced landlords who have been running buy-to-let businesses for some years are comfortable with it as an area of investment. Therefore, as a business that they know and understand they’ve ploughed on regardless.
IB: I think we have seen a shift towards more experience and professionalism than the type of landlords that do it purely to top up their pension planning.
The landlords who are more active have taken the stamp duty and finance changes in their stride, so the last data I saw showed fewer landlords active in the market, but with bigger average portfolios. Where the average used to be two or three properties it’s more like four or five, and more property purchases are being brought into limited companies.
OK: We’ve also seen an increase in landlords with bigger portfolios exploring different ways of holding that property. There was a very useful landlord tax case a few years ago [Elizabeth Moyne Ramsay vs HMRC] over whether the business had enough substance and involved sufficient activity to qualify for business incorporation relief. There’s no guarantee of getting incorporation relief if you transfer your rental business to a limited company but more people are exploring that as an alternative way of running and managing the business.
If you’ve got a buy-to-let business which you are continuing to hold directly and can structure your borrowing, you might still have a limit on the loan interest, but you may be able to release equity by gearing without the need to sell and thus crystallize capital gains. This can be a way of expanding the portfolio with the current property assets.
Good time to refinance on fixed rates
IB: That was one of my points about refinancing in any property setting. Releasing equity and property value gains through refinancing is quite a tax efficient way of deferring your capital gains tax liability.
Most lending is taken on five-year, fixed rate arrangements thanks to the affordability calculation that lenders have to apply under the Prudential Regulation Authority (PRA) rule book. That rule came in five years ago, in March-April. So lots of landlords now will be coming to the expiry date on five-year fixed mortgages. As brokers, we’re advising accountants to be alive to that and to watch for landlords sitting on the standard variable rate, which is rarely a good place to be.
It’s better to review those plans, maybe to refinance and release gain at the same time. Certainly with interest rates still at a historic low, it’s a very good time to move onto a new fixed rate for a new period. When talking to landlord clients, accountants should make a point of asking when was the last time they reviewed their finances and whether any fixed rate loans are likely to expire. Make sure they don’t wait until the end of the fixed period, but get their ducks in a line to refinance it 5-6 months in advance
My follow-on point from that is not to advise landlords to refinance debt if the business is under pressure. By all means talk about finance for reinvestment, but they’re in financial difficulty, it’s probably not advisable to borrow to help with that.
IB: Aside from refinancing, the other challenge facing landlords is improving standards. Last year there were HMO licensing and room size changes and we’ve seen the introduction of electrical safety reports, which were a “nice to have” before are now a must-have. The next thing on the horizon are energy performance certificate (EPC) changes. At the moment the property has to be in band EPC to be viable. That moves to band C from 2025. So the impacts affecting landlords are less about stamp duty tax changes and more around actually improving standards for tenants. A lot of these requirements are not well publicised so anyone talking about entering the market should rely on landlord groups and professional advisers to keep abreast of the changes, because the potential sanctions for failing to meet them can be quite severe.
OK: Before we sign off, the other group I would mention from a tax point of view would be the “accidental landlords”. We’ve seen a number of clients where a couple got together and moved into one or the other’s house and refurbish the other one to let out.
I always advise caution with people in that situation because they’re likely to have some element of private residence relief in the house that was originally their home. It’s worth involving a professional here, just to quantify the numbers if they’re going to get a big capital gains tax bill when they eventually sell it. If there is any possibility of maximizing or enhancing the private residence relief available, that’s got to be worth looking at as well.
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