Commercial Watch: Unwrapping new opportunities

Despite the Chancellor’s apparent attack on landlords, the buy-to-let sector offers good prospects during 2016

As 2016 continues to unfold, a number of new market opportunities have already appeared. Perhaps the most obvious, given the tax changes instigated by the Chancellor in 2015, is that of limited company wrappers.

The introduction of a 3 per cent stamp duty surcharge will make a big difference to the upfront cost of acquiring residential rental property and, inevitably, will cause a number of landlords, particularly more speculative investors, to think twice before adding to their property portfolios. However, one way for borrowers with larger portfolios to overcome the surcharge may be to borrow within a limited company.

It should also be remembered that the stamp duty surcharge is a cost that can be offset against capital gains tax when the asset is eventually sold, so in fact this is more of a cashflow issue than anything else. What is more, most buy-to-let transactions are remortgages, so stamp duty is not an issue in many of the deals being handled by brokers and lenders.

I predict an adjustment in the buy-to-let market this year – with fewer speculative investors taking the plunge (probably no bad thing) – but the sector is certainly not going to implode as some have been forecasting.

George Osborne has suggested companies holding 15 or more properties should be exempt from the stamp duty surcharge but the final details are not yet known. The number of properties may reduce from 15 but, whatever the outcome, it seems limited company status will be the way to go for many landlords.

At the moment, only a few lenders will consider financing buy-to-let properties held within limited companies and, in the past, we have seen notable players pull out of this market. However, I have no doubt that, as the year progresses, an increasing number will develop strategies to either re-enter or launch into it for the first time.

This brings me to another market opportunity: the disposal of properties held within limited companies. Admittedly this is looking some way ahead but the issue must be tackled eventually.

Landlords that hold properties within limited company wrappers will ultimately face two options: they can either dispose of properties on an individual basis or dispose of their entire portfolio by selling the limited company complete with the assets it owns.

Towards the end of 2015 the UK’s largest buy-to-let landlords, Fergus and Judith Wilson, sold their 900-property empire to Arab investors for £250m, having already sold 100 properties to Chinese and Indian investors for £25m. These types of high-profile deals will inevitably act as catalysts and encourage property investors to consider their exit strategies.

As more lenders move into limited company lending, they need to consider the eventual disposal of portfolios and ensure they fully understand the nature of the transactions when developing products and underwriting cases.

The third opportunity I foresee, for both lenders and brokers, is furnished holiday lets. To date, these have been a very specialist niche with only a handful of lenders participating. However, a favourable tax regime means they could increase in popularity.

To qualify as a furnished holiday let, a property must be available for letting to the public for at least 140 days a year and actually be let for at least 70 days. It must also not be occupied by the same person for more than 31 days in any period of seven months within a tax year.

The tax advantages are too detailed to list here but they will be increasingly attractive to investors as they look to diversify portfolios to include higher-yielding assets.

The final opportunity is that of arrangement fees. To date, the pressure has been on lenders to keep them as low as possible. However, there is a strong rationale for them to increase arrangement fees (but compensate by reducing pay rates) in the period before the implementation of the lower tax relief rate for buy-to-let landlords, which will be phased in between 2017 and 2020.

Until that time, arrangement fees will continue to be classified as ‘finance costs’ and can, therefore, be claimed back in the same way as mortgage interest. By raising arrangement fees, lenders make more front-end profit and, provided they lower the pay rate by a similar amount, it should not disadvantage borrowers.

There is only a limited window of opportunity but it is nonetheless worthwhile.

Doug Hall is director of 3mc