Given the Rugby World Cup has now kicked off, we’re into early morning breakfast games and – for those who tend not to watch a lot of the sport – we’re probably into a lot of scratching of heads around the complexity of the rules and some of the decisions that are made. Welcome to rugby union.
Over the course of the first set of games, you’ve probably heard a lot about ‘exit strategies’ – this tends to be talked about when the ball is kicked into a team’s 22 and they have to manufacture a way to get that ball away from close to their try line. You’ll also hear a lot of talk about how important it is to reclaim kick-offs – especially after that team has just scored – and the need not to concede straight away. Hence the need for a good ‘exit strategy’.
This focus on the exit reminded me of just how important an ‘exit strategy’ is within our own sector, not so much if you’re a residential borrower but certainly if you’re a buy-to-let landlord who might well have some of their portfolio owned as an individual and/or some owned within a limited company.
Understandably, given the taxation changes that landlords are having to deal with, there is a lot of focus on purchasing and housing properties within a limited company structure, because of the ability to keep on claiming full mortgage interest relief on those payments.
However, and this was a point I mentioned in the recent Sound Advice podcast, it is not necessarily the case that every single landlord should be opting for a limited company structure because every landlord is different, their situations are different, their tax set-up is different, and they might have a very different ‘exit strategy’ in mind for their properties.
Indeed, at the heart of the decision around limited company use should be a first conversation with a tax adviser. Let’s be frank here, landlords tend not to have the most simple tax affairs, indeed many can be ultra-complex and complicated and therefore it is absolutely imperative that landlords take (and heed) that taxation advice before they make any decision around limited company use.
There’s also a need for advisers to be covering themselves in such situations – in fact you might argue, that any adviser providing services to landlords around limited company usage, should insist that the client has seen a tax adviser first. Perhaps there could also be an introducer arrangement in place, for those landlords who have not used the services of such a professional before.
But, back to those exit strategies. Of course, if you’re in this market for the long-term – and I’m pleased to say that the vast majority of landlords are – then it is difficult to think about an exit that might be 15/20/25 years in the future. However, if you’re marrying this up with limited company buy-to-let then you would need to consider how you might offload these properties, how that would work within a company, who might buy the company for example, and how this might work from a taxation and income perspective.
Let’s also not forget that there is a series of costs that come with limited companies that are not there when owning a property in an individual’s name, and therefore these need to be taking into consideration – such as company set-up, use of an accountant, the preparation of those accounts, accessing income and its cost, etc.
But, it’s also important not to forget those potential advantages – not just in terms of tax relief but perhaps in terms of access to finance and the loans required. For instance, Foundation’s rental calculation is lower for a limited company which may help landlords in terms of them getting the loans they need.
And of course, it’s clearly going to be advantageous for advisers to be experts in this field. Our latest sales data shows that we’ve doubled our limited company business in the last 12 months, and we see no reason why this trend won’t continue. Recent research conducted on our behalf by BVA BDRC showed that 55% of landlords would buy their next property through a limited company, and (as mentioned) an increase in the complexity of client needs and circumstances in this area means that demand for such advice is only going to go one way.
So, from that perspective, there’s absolutely no need for advisers to be thinking about an exit from buy-to-let advice – if anything, demand will grow and those advisers who can prove their expertise and can target this borrower demographic effectively are likely to see a significant improvement in their conversions. Why not give it a try?
Jeff Knight is director of marketing at Foundation Home Loans