Transcript

Martin Stanley  00:25

Good evening ladies and gentlemen, and welcome to the latest in Rowley Turton’s series of webinars on topics of interest to people in their financial planning. We try to keep these things topical, and today I think it is very topical, because most of you listening today will be buy-to-let landlords and today is all about that, and about some of the challenges which you have been experiencing over recent times and may experience in the future. In a minute, I am going to hand over to my colleague, Scott Gallacher. He is going to take you through a lot of information around buy-to-let, and whether or not it might be time to try something else. Before I do that, your cameras and your microphone will be automatically muted, so that will not be a problem. If you have any questions during the webinar, please put them in the question box at the bottom of your screen, and we will try to answer at the end as many of those as we can. That is it from me, other than to say that at the end of the seminar today, we will be asking you if you would like us to send your copy of a book, which will give advice, it is very useful, and sets out Rowley Turton’s approach to long term financial planning. It is called Enough by Paul Armson, we will mention that at the end again, but just to let you know that we will send that to you if you would like us to next week. We will also be sending each of you a copy of this webinar with the slides so you can watch it back to your heart’s content. Without further ado, let me hand over to Scott Gallacher. He is the director of Rowley Turton, is a Chartered Financial Planner and has great experience in the buy-to-let area, and he will be taking you through the webinar today. Thank you, Scott.

 

Scott Gallacher  02:02

Thank you, Martin. I am Scott Gallacher, I am a Chartered Financial Planner with Rowley Turton. Thank you for joining us this evening for our webinar titled Buy-to-Let Landlords: Is it time to cash out? What we are going to be looking at today is a number of factors. Firstly, what I consider was the golden era of buy-to-let, there is some debate on that for about the last 25 years I think was a golden era of buy-to-let investment, then we are going to look at some of the challenges people are facing today, that buy-to-let investors are facing. Ageing landlords, hostile tax regimes, rising interest rates, increased regulation, problem tenants, the possibility of falling house prices and we will be asking the question, is it time to cash out? And then we will also be looking briefly at alternative investment options and how Rowley Turton can help you. So the golden era for buy to let orders, as I think about it. By the mid 90s, the UK was arguably ripe for a buy-to-let boom with relatively depressed prices, house prices fell in about 1988 and by about 1997 they had only just reached the level they were in 1988, so there was a 9 year period where house prices had gone down and back up, but effectively had not moved. So there is an argument that house prices were due to recover, and it was attractive. Rental yields, I started at Rowley Turton in 1997 and at the time, rental yields were around 10%,11%, 12% so levels unheard of today. Rising housing demand, there was some demographic changes, immigration, young people moving out, etc, and therefore there was more demand for housing in the mid 90s. A lot of people I knew wanted to get onto the property ladder, not necessarily as an investor, although people did do that. So there was certainly a lot of demand for owner-occupied houses. Also, there was improved mortgage access. Alan turton, who I work with, previously was a building society manager for Hinkley and Rugby, and he tells me of mortgages effectively being rationed in the 1980s, and that was not the case in the mid to late 90s, with the extremes later on of Northern rocks 125% mortgages, I believe. So there was definitely improved mortgage access and an increase in short-term tenancies. Rules had changed earlier than that, but essentially long-term secure tenancies ended, and it was effectively these six month short-term tenancies, which made buy-to-let investment a much more attractive proposition for investors and potential landlords than was previously the case.

 

Scott Gallacher  04:52

Also it is worth saying that 2023 is not 1997, I joined Rowley Turton in 1997 and the Spice Girls were high in the charts. And there was a feel good factor for the country after being in the doldrums for a little bit, we enjoyed quite a good period of economic growth. I do not believe we are in that situation today, headlines are that the Bank of England are expected to raise interest rates yet again to 5.5%. Now it is worth saying that 5.5% by historical terms is not high, but is a lot higher than it was a couple of years ago, and in recent memory, is proportionally a huge increase. That has a knock on effect, not only to investors, but also owner-ocuppiers, so I think people are squeezed in that way. Tenants have a rising cost of debt: credit cards, car loans, etc. So it is a factor. Another one of the factors that we are seeing is ageing landlords, the buy-to-let pioneers who had seen the opportunities in the late 90s and even into the 2000s and then became the first real en masse buy-to-let investors, are now becoming seasoned veterans. They are now reaching retirement age or beyond, and they may now have different perspectives and different investment priorities, so rather than building wealth they want to be enjoying it, and they might not want the hassle that does come with a lot of buy-to-let investment ownership. We have clients who previously, would manage and fix the properties, and do the basic maintenance of those properties. And when they are in their 40s, 50s, even early 60s, that was not an issue. But now they are in their 70s, 80s. That is not such an attractive proposition. Of course you can outsource it, but there is a cost to that. So it is a natural ageing of the market, but also those investors and landlords. The next change, and this has changed gradually but almost relentlessly, is what I would consider a hostile tax regime, which has a big impact on buy-to-let investors. We will run through this breifly and then I will explain some of them in more detail in a moment. So perhaps one of the biggest is the reduction of the mortgage interest rate to 20%. Previously, your mortgage interest, not the capital payments, but the mortgage interest payments was offset against your rent, and you were only taxed on the profit, and therefore it was genuine. Now that calculation is effectively separate, so you are taxed on the rent as income tax, with a separate mortgage interest relief calculation of 20%. What that means is that it can push some property investments and property investors from being in a profit situation to a loss situation on the income, purely because of the change in the tax position. And that is quite a big change that has occurred in the last few years, and probably did not affect people too much in the early days when interest rates were lower, so therefore the impact was less. But as interest rates have risen, that is having an increasing impact on people. The next change that came in, although this is not in any particular order, was the 3% stamp duty surcharge. Now you may think to some extent that does not affect you, especially if you already own the properties and you bought them before the stamp duty surcharge came in, but it has an impact. If you are thinking of buying new properties, it is an issue. If you are thinking of changing the property, if you want to sell one and buy a new one, that is an issue. And of course, if you are selling a property, even if you are exiting the market and are selling to another investor, that investor has to factor that into their equation. So it is going to have an impact on the sale price one way or another, so therefore it does bear consideration. Another change was that capital gains tax for residential property is either 18% basic rate tax payers or 28% for high rate tax payers, versus 10 or 20% for assets. So again, that is a situation where property investment is treated worse, from a tax perspective, versus non property assets. There was removal of the 10% wear and tear allowance a number of years ago, which has not gone down well with professional investors. And then, of course, you have 40% inheritance tax. That is not a specific change, but compared to other assets that you can hold, it is not as tax efficient, and it is a tax a lot of people do not really think about when building their property wealth, because the reality is that when you die, most people with decent property portfolios are going to pay up to 40% tax on those property portfolios. So if you own five investment properties worth £200,000 each, and you have three children. For the sake of argument, two of those properties will go to Jeremy Hunt the Chancellor and the remaining three properties will go to your three children, they are assigned one house each. There is an argument in that scenario that Jeremy Hunt is essentially your favorite child, and that is a thing that people do not really think about, but the idea of losing 40% of all of your capital and all your hard work, it is a thing that most people are not happy with, but do not always think about in the way they should. It is worth saying that limited company structures we use do help to mitigate some of these issues, primarily the removal of reduction in mortgage interest relief, but it does come with hidden costs, generally additional accountancy fees and also potentially more expensive by-to-let mortgages. The by-to-let mortgage market is not entirely up to speed with corporate structures still, but some members do not consider lending to corporate structures. Therefore you effectively have access to a slightly smaller market, meaning that on average, you would expect a slightly higher price for the mortgage, not in all cases, but it certainly is a factor. I mentioned the mortgage interest relief reduction as being quite a significant change, and as we see, it has the potential to turn profits from your rental property into losses. So how does that work? How can a tax change turn a profit into a loss? Most people accept that it might reduce your profits because you pay more tax, but surely it cannot create a loss, but it can because of how the calculation works, and this separation between a tax on the rent and relief for the mortgage interest. We have a fairly simple explanation, that will explain in principle how it works. Imagine that you are a higher rate taxpayer who is paying 40% income tax, who has one buy-to-let property, and the mortgage interest because interest rates have risen is £10,000 a year, and it generates £12,000 a year rental income (for ease I have ignored agent’s fees from the costs).

 

Scott Gallacher  11:47

It is generating a profit of £2000 a year, not significant but of course most investors will be looking at capital growth on the house as well, so they would be quite happy with that. Under the old rules, it was fairly simple. You paid 40% tax on the £2000 profit. That is £800 on the tax bill. Therefore you have a £2000 profit, minus your £800 in tax, which was 40%, so you made £1200 net profit after you pay the taxman. It is not a fortune, but hopefully the capital prices are going up. Now under the new rules, the calculation is split. Essentially you have a tax liability of 40% of the £12,000 rent.  That is £4800 with a reduction for the mortgage interest, and that is a 20% reduction. 20% of £10,000 is £2000, so your tax bill which was £800 a year in the old system is now £2800. We only made £2000 of profit. That cannot be right. Unfortunately it is right. we are now in a situation where you are making an £800 net loss. Previously, we were making £1200 net of tax profit, and were hopefully getting capital growth to the profit. The property was generating a net income and hopefully delivering capital growth. Now purely on an income basis, we are effectively generating a loss. Some people will be able to sustain that loss, but other people will not, and it is a big change, and that is mainly because of the tax change, but also because interest rates have gone up and interest payments have gone up. That has made the situation worse for people. On capital gains tax, I just cover this briefly because people sometimes overlook this. They enjoy owning the property, and do not really think about selling it. But often people will eventually want to sell a property or possibly want to pass it on to somebody else. And that can have a capital gains tax event associated with. For basic rate tax payers you pay 18% of any gain. In simple terms, you pay 18% of the profit. For higher rate and additional rate tax base it is 28% but it is worth pointing out that even if you are a basic rate tax payer gains from any property sales are added to your income, and it can effectively push basic rate taxpayers into the 28% higher rate for capital gains tax purposes. For most people, I would say that you are probably expecting a 28% tax. There are some exemptions if it was tour main residence for some time and there are letting’s exemptions. It is not always as simple as that, but the simplistic version is. It is also worth pointing out that you get an the annual exemption, currently £6000 per person, so if the property is owned jointly that is a £12,000 gain that is tax free. Of course the buying costs of the property are generally taken into account and the selling costs and solicititor fees. But it is quite a significant tax issue. If you make £100,000 profit on selling a buy-to-let property, you can easily end up with a £28,000 tax bill. You just need to be aware of that. And finally, the inheritance tax trap. I mentioned before that essentially you can pay up to 40% tax. Generally for a married couple with children, the first million pound that they leave is tax free. Transfers to the husband or wife are normally exempt, of course, so it is effectively a tax on second death. But people do not think about it. So if you have a £2,000,000 estate, the husband dies and leaves it with the wife. Then the wife dies, and leaves it off to the children. The first million pound would generally be tax free, the second million pound will be submitted to 40% inheritance tax, or £40,000. Again if that is five investment properties, worth £200,000 each with no mortgage, then that is two of those investment properties going to the taxman. Rising interest rates is the next factor, which is a relatively new phenomenon. A lot of investors, until recent times, would have only experienced low hand falling interest rates. If you look at this chart, they do not always go down, but there has been a trend for 30 years, potentially even longer, of interest rates coming down. There is three reasons why interest rates have generally come down. The first major factor is the expansion of Chinese manufacturing. So in very simple terms, China in the mid to late 90s really became the manufacturing centre, producing goods in the west at cheaper and cheaper prices. We saw the cost of goods come down, flat screens TVs came in, and it just got cheaper. They got cheaper and better every year. Mobile phones got cheaper. Lots of things got cheaper, and the impact of that was that the West had lower inflation because cost of goods was generally becoming cheaper, and therefore high interest rates were not needed to control inflation, because inflation was not up, so interest rates came decreased, and falling interest rates has helped house prices as well, that happened for a number of years. Then interest rates were just recovering a bit, but then we had the banking crisis in 2008, and typically what happens with a banking crisis, this happened in Sweden, is that interest rates fall dramatically afterwards, as banks try to rebuild their balance sheets by basically paying less interest. There are other factors, but that is a factor. And then finally, as interest rates might have been starting to recover, and there was certainly talk of it, we had Covid, so interest rates fell yet again because of Covid. And then over the last year and a bit, interest rates increased dramatically especially with the Liz Truss mini budget debacle last year. There are some arguments about whether this is a temporary blip and if would we go back to the interest rates that were seen over the last 5,10, even 20 years. I suspect not. I think the norm is interest rates of 6%, 7% maybe 5% somewhere in that band, and I think the last 10 or 15 years is the abnormal period. So I think it’ is more likely that interest rates stay at about 5% or 6% and that is a factor for investors, because that changes a lot of maths. People need to be aware of that. They need to consider whether their buy-to-let investment works, especially if they are mortgaged, whether the maths still work, because I do not think there is a immediate solution. And we are certainly seeing clients exiting the buy-to-let market, primarily because of the interest rate increases, and the next change that is happening is increased regulation. The rental sector is in the news quite a bit at the moment, and it is in the focus of both the current government and the Labour Party who may win the next general election. Currently, we have the renter’s reform bill going through, and there is some argument that this is effectively stalled and because of parliamentary time, the general election is due not that long away, this could fall by the wayside, but I do not think that is necessarily a savior for by-to-let investors because of what labour’s plans are. I will cover what the renters reform bill says, and then we will look at what Labor said. Essentially, it is the abolishing of no fault section 21 evictions. You now need a good reason for evicting people, at the end of the six months you would get the property back, that is going to disappear. New mandatory ombudsman to deal with complaints and issues. Tenants right to keep pets. Some landlords do not like tenants having pets because they are worried about damage and other factors. It is going to be much harder to stop tenants having pets.New rules on rent increases and renting amounts, new property portfolio for landlords and tenants. I suspect the cost of that will be borne by landlords rather than tenants. Decent home standard for the private rented sector, I think there is two issues with that, really. Firstly is the initial cost of getting homes to comply, certainly older homes and some homes could cost maybe £15,000 to bring up to standard, which is going to have an impact. And then there is a danger of mission creep. It is very easy for the government to revisit this in future years, and impose higher and higher standards on landlords, because effectively there is no cost to the government, the costs of that will be borne by landlords. And you certainly see that in other areas where there is regulation, that those regulations tend to get gold plated or improved over time, and that effectively has no cost for the government but costs for the people in that sector. And finally, an outlawing of the blanket ban on benefits, so the old no DSS effectively. I mentioned that the renter’s reform bill was currently stalled and may disappear, but it is worth looking at. We obviously have a general election that is not too far away. Currently, Labour are likely to win that if you look at the polling. So what have Labour said? Well, Labour have got their own renter’s charter. Lisa Nandy said they will it introduce it within 100 days of the general election and again, will scrap no fault evictions, it is very similar to what the Conservatives are proposing. A formal notice period for landlords, a national register, sounds a bit like a portal. New rights of tenants and the right to have pets is one of them. These are the ones that are probably more worrying, the right to make alterations to your home. What alterations? Who approves it? Who pays rent to what standard? And the right to request speedy repairs. On the face of it, it does not sound that bad, speedy repairs. But the question is, how speedy? Does that mean you have to hire somebody to come in? Does it mean that you are paying call out charges when you might not need to? So there is an issue with that, potentially. And finally, one of the next things, problem tenants. I think this has always been an issue if you are a buy-to-let landlord but it is possibly going to be more of an issue with the cost of living crisis and other economic problems. If people lose their jobs, which some people are, if people are struggling with rising costs of living, energy bills, then do they become problem tenants even if they were not previously?

 

Scott Gallacher  22:03

If you have a very large property portfolio, for example if you own tens or hundreds of houses, I think problem tenancy is less of an issue because it is spread across the entire portfolio, and it just becomes a cost of business. We know clients with very large property portfolios, and it is just the cost of new business. All of those costs that you worry about as buy-to-let investors, they will just add it all up and share it across the portfolio. And it is a low cost, and it is manageable. Where it is more of a factor is when you are a smaller landlord with 1,2,3, or 4 properties. We either have no issues, and think that stories about other tenants are oversold, or you will experience a problem. And of course, it has a much bigger impact on you, because it is your only property or one of only two or three. A some couple of real life examples, one where the client retired and used her tax free cash from her pension in order to buy one investment property, which was against my advice, not because I do not think that buy-to-let investment properties can be a good investment. They certainly can. It was because all her eggs were in one basket because a large part of her retirement income would be on this one property and one tenant. First two or three years, there were no issues at all. It worked really well. There was a good tenant who paid on time, no problems with the property. Then there was a change in tenant. A new tenant came in who was not a good tenant, did not look after the property, did not pay the rent, and then that client lost a year’s rent in lost rent, getting the tenant out, legal costs, repairing the property in that period until it was relet. That was a whole year’s income which, as she only owned one property, had a big impact. Somebody else that I know is just finally thrown the towel in their buy-to-let portfolio. They had a number of buy-to-let properties, about three or four. And the final nail in the coffin of that was when he discovered a cannabis farm in one of their properties, which would be bad enough, but the tenants had also taken out some of the internal walls in order to expand the growing area. That is huge damage to the property, a huge cost for the client. And when the client went to their agent to get the details of the tenant for legal action, and possibly also the police, he was told that whilst the agent claims have seen the ID of the tenant, they did not actually take a copy. The landlord had no proof of the people who were renting the property. Now there may be an argument in both those scenarios that with better vetting or better agents, you could have avoided the problems. But even then, that is not a foolproof solution. Another one of my friends actually is an estate agent, so is definitely well versed in the property market. He owned a couple of investment properties had a married couple as tenants, no issues with them. They pay rent on time, are a really good couple. Unfortunately they split up, the wife left. The husband did not take it too well. He starts drinking, stops going to work, loses his job, stops paying rent, stops looking after the property which falls into disrepair, at huge expenses of maybe 18 months of rent costs, perhaps more when you add up all the costs of getting the property back, evicting the tenant, bringing it up to standard and reletting it. People can be very lucky or very unlucky, but there is certainly a risk factor, and if you are an ageing landlord the question is whether it is worth the hassle. Now falling house prices. You might think this is a new phenomenon, but it is not. I will comeback to why it is not in a moment. However, a lot of professional buy-to-let investors will say, I am not worried about house prices today, because house prices always go up. To a large extent, they always have increased over the longer term. The question is, how long is the long term? John Maynard Keynes famously said “in the long run we are all dead”. If you are a professional landlord in your 40s or 50s, the long term is not an issue, and you can probably weather some periods of falling house prices or static house prices, whereas if you are in your 70s or 80s, that is less easier to weather, in a sense. And whilst in the long term house prices have gone up, there can be very long periods where they do not go up. Average house prices in the UK, this graph only goes up to 2021, and does not show the most recent falls. The two key bits of interest really are this period from 1988 to 1997 when effectively house prices did not move for nine years. In reality, they did move. They fell about 20% from peak to drop before a recovery. So there is a nine year period where you would lose around 20% in capital value, and it took you nine years to recover that money effectively. That is the average, some would have fared better, some fared worse. And again with the banking crisis, from 2007 to 2014, similarly prices dropped about 20% then recovered, but this lasted seven years before prices were back to where they were originally. If you are in your 70s or 80s, do you want to wait seven years or nine years to get your money back. Houses can fall in price and could always be worse. I would say that in this period, certainly in the period of the banking crisis, it was still relatively benign for the house market in the sense that interest rates were lower, the recession economically was tough, but there were still various good factors in favour of owning houses in the UK, those same factors might not apply. So that raises the question, is it time to cash out? And fundamentally, that is a question for you as the investor to answer. I can only pull together arguments for why you might want to consider this. Although I believe you need to at least consider that. So, what do I believe that you need to think about, as a professional landlord or buy-to-let investor. I think you need to acknowledge and understand the challenges that are affecting the market. Investors always tell me that buy-to-let is a business, and in any business, you need to understand the marketplace. And the marketplace has changed significantly from where it was in 1997 and throughout a long part of that period, and I cannot see it necessarily changing for the better anytime soon. You need to assess the income in a capital position. Is it still profitable? Just a change in the mortgage interest relief situation alone, coupled with rising interest rates, can turn profitable properties into unprofitable properties almost overnight. And then, having done that, consider whether it now is a time to cash out. It will not be for everyone. Certainly for younger people it might not be, for older people, it might be. It is not for me to tell people when they should cash out. It is just for me to raise the question. If you are looking at cashing out, then perhaps you need to consider alternative investments. And I will run through those in a moment. Also consider working with Rowley Turton for independent financial planning and advice. We can help clients to manage that transition in the best way. So, what are the alternative investment options for people?

 

Scott Gallacher  22:27

Firstly, there is individual savings accounts or ISAs. Most people have heard of those, investment or cash ISAs. I would say that in my experience, buy-to-let investors, which are very successful and build great buy-to-let investment portfolios, tend to overlook ISAs more often than not, and do not take full advantage of the £20,000 a year each that you can  put into ISAs. As a married couple, that is £40,000, and we have clients with hundreds of thousands of pounds in ISAs built up over many years that are now entirely income tax and capital gains tax free, and can, in certain scenarios, also be inheritance tax free as well. You have to hold special assets in order to get them to be inheritance tax free, but it is possible. That way, you can have a couple of benefits. The income from ISAs, you can have the income tax free, but also you can make your income tax position on your buy-to-let investment portfolio better, which is another thing. They do not have to be replacements, all of these things can be complementary to buy-to-let investments.

 

Scott Gallacher  30:49

Secondly, you have general investment accounts, which normally would hold the same kind of things as an ISA, without the same tax efficiency as an ISA. They are not income tax or capital gains tax free, but they do allow for capital gains tax planning by the buying and selling of the investments within them in a way that is much harder than a property portfolio. With a general investment account, you can sell one particular fund and buy another particular fund and realise the gain, to use your annual capital gains tax allowances, which is much harder with property, the buying and selling costs of the property make that much less viable. Investment bonds for wealthier clients, investment bonds are another investment vehicle, and in essence they shelter the income and capital gains on your investment from higher rates of tax. So what clients will do is hold those investment bonds whilst they are a higher rate taxpayer, and effectively save tax by deferring a tax problem, and then we will look to access the money that is in investment bonds when their tax position is better. Normally, we will do some planning to create a year or two when they have a lower income, and then can access that money. That is incredibly powerful. You can also take withdrawals from investment bonds of up to 5% a year for 20 years. Those withdrawals are effectively tax free, or technically tax deferred. You can also transfer ownership of the bond, or parts of the bond, to children once they are over 18, and they can encash it so you can use it for things like university fees, planning and stuff like that, so there is a lot of tax planning involved. Pensions, I mentioned that ISAs were overlooked by buy-to-let investors, pensions also tend to be overlooked. Pensions have huge tax advantages that people overlook, firstly on contributions, which are limited or restricted by earnings unless it is by way of an employer, generate income tax relief, so you get a reduction in your tax bill, or you get more money added to your pension in contributions. The money in a pension is generally free of income tax and capital gains tax and also inheritance tax, generally. And when you come to take the pension benefits, obviously there are restrictions, it is a pension, you cannot take it too early. You can have 25% of the pension tax free. The balance is taxable as income, so it is not completely a free lunch, but it almost is. But also the value of that pension can pass to family free of inheritance tax, and often free of other taxes as well, so it is an incredibly great tax planning vehicle that people should take more advantage of. And finally, discounted gift schemes and other trusts, I will focus primarily on gift schemes. It is a special type of trust that allows you to give capital to beneficiaries, usually children, but it could be somebody else, and yet retain regular withdrawals, effectively income from that. And the advantages of that are you can give the capital for inheritance tax purposes, with an immediate inheritance tax saving and a further potential inheritance tax saving after seven years, and yet retain the income. If you built up a large buy-to-let investment portfolio, but you have an inheritance tax problem, so you are going to lose 40% of it on death, what you can do is you can look to encash that portfolio, and we have probably got capital gains tax, we have to take that into account, but then use the net money to fund the discount gift scheme, which would be for the future benefit of your children. They do not get the money until you are not here, but you would have a regular withdrawal. So you can use that to replace the rent, and certainly for older clients that can be incredibly valuable versus doing nothing and giving 40% to the taxman when you are no longer with us. A quick comparison of the alternatives. I will not bore you with it, because I have covered a lot of it anyway, but it is available for you on the slides that we will send later, after this presentation. One of the things that I have not particularly covered, is liquidity, which is a big factor. So one of the issues with buy-to-let portfolios is that they are not very liquid. A lot of clients will say to me, I have this capital, but cannot actually use it Scott, so that is a problem. As I explain to clients, you cannot take the door off its hinges of your rental property and use that door to pay for your shopping at Tescos, whereas if the have the other types of investments, with the exception of the discounted gift scheme, you generally can take capital withdrawals. So you can take money out of your ISA or your general investment account, or investment bonds, or even your pensions, and use that for shopping. So of those investments, you can spend the income and the capital. With a buy-to-let investment portfolio it is harder to do that because you have to sell a house, that is not quick. Whilst with the other assets, you can generally get the money within a couple of weeks, maybe quicker sometimes, with property it is usually harder to do that, and normally you have to sell the whole property, you cannot sell part of it. Of course, taxation varies based on personal circumstances, it is advisable to consult an accountant or financial advisor for professional advice.

 

Scott Gallacher  35:54

How can Rowley Turton help? A great question. Firstly, I think we can help you understand your overall financial planning picture. When we sit down with our clients who are in a fabulous financial place, they do not always understand that. Often, you will add up all their assets and investments and subtract any liabilities. We find it is a very large number. Often clients will go, “that is not right Scott, I am not worth that”, because they have never actually sat down and ran through it. And you run through where the house is worth this, your investments are worth this, your car is worth that, your cash savings and investment properties are worth this, minus any mortgages. So that is a rough figure. And they are often amazed. We can look at your income and expenditure, and we can also do future projections to bring it altogether, and see fundamentally, where you are. There are people who have not got enough and still need to keep working and building the wealth, people who are just right and are already there, they have got enough, if you have too much you should be perhaps enjoying it. Based on that, we can calculate how much you need, and often people are already there. We can advise you on alternative options, ISAs, pensions, and more tax efficient investments, in many regards. And we can work in conjunction with your experts: accountants, solicitors, etc. Financial planning, certainly for buy-to-let investors, generally involves bringing in other experts. Finally, we can help you enjoy your wealth. A lot of our clients, particularly on the buy-to-let side, build up huge investment portfolios and do not necessarily enjoy that wealth. So part of our job is nagging people to spend. Fundamentally, I think they should enjoy it. The Enough book. As Martin had mentioned earlier, there is a free book, Enough by Paul Armson, who I know very well. It explains the financial planning approach that we use with clients. People who have read it often find it quite transformational. It makes them think about their life and financial planning differently, so that they can enjoy their wealth, and that is fundamentally what it is really about. Thank you very much, and it is time for questions answers.

 

Martin Stanley  38:00

Scott, thank you very much for all of that. I hope everybody enjoyed that whistle-stop tour through buy-to-let investments. I hope that it has not been too much of a  downer for people. I know a lot of you will be thinking about the negative side, but there are also some positives and also things you can do. We have some questions, a couple of good questions here, if we do not have time to get to all of your questions, do not worry. We wil pick them up later and contact you directly. But for Scott, a couple of questions. Jamie asks, “can you use profit from a private buy-to-let portfolio to invest in a private pension?”

 

Scott Gallacher  38:38

Yes and no, if it is owned directly, and you have no other earnings, then the simple answer is, no. There is a de minimis that you can pay ,£3600 gross into a pension, regardless of earnings. so you could do that. But if your only income is from that buy-to-let property, then no, you cannot.

 

Scott Gallacher  38:56

If you have a job or self-employment, a small business or something like that, then what you can do is, in a sense you can use the rental income to make pension contributions, but based on your earnings, if that makes sense, so you do not have to use your wages to make pension contributions. The taxman does not really care where the money comes from, but you can use money from other sources. In that sense, you can, or alternatively if you own those properties through a limited company structure, so you do not owe them directly, you own shares in your own limited company that owns the properties, then that limited company can make pension contributions. But if you own it directly and have no other earnings, then then in simple terms no, but again, we can sit down with people and run through how that works in practice.

 

Martin Stanley  39:41

Thanks Scott, yes. I was going to say to Jamie there that if you would like to go through that, give us a ring, or send us an email, and we will take you through that very happily. Another question here, where I believe Jamie is thinking of the investment bonds. you were talking about alternative investments. He says “are gains made from income bonds classed as income tax or capital gains tax.”

 

Scott Gallacher  40:05

Great question, if we assume that Jamie means investment bonds, then the gains made by the underlying investment, so you do not withdraw, that tax is taken care of by the insurance company on your behalf, as it were. But then when you access gains yourself, i.e. you cash in the bond, or you take or withdrawals above a certain level, then those gains are regarded as income tax or subject to income tax. However, it depends on the bond, but if it is an onshore bond, then essentially, the insurance company pays 20% tax on your behalf. So if you are a basic rate tax payer there is no more tax to pay, depending on the amount you take out. If you are a high rate taxpayer, there is normally 20% tax, but it is only 20% of the gain. Investment bonds are very good and very powerful. The tax treatment can be a bit tricky, and I would always advise clients to speak to an accountant or financial advisor before taking money out of the investment bond, because of a couple of pitfalls where you can end up with an unnecessary tax charge, just because of what you have taken out and how you take it out. Very powerful, really great tax planning, and we use them a lot, but there are some pitfalls for the unwary.

 

Martin Stanley  41:12

Thank you Scott, for answering that. That is really helpful. We have a couple of more questions coming in, we will get through as many as we can. There is a really good one here to put you on the spot. Laura asks “if running for a limited company, can I add my child as a director, can I offset their school fees as a loss to the limited company.”

 

Scott Gallacher  41:33

A great question, I would assume that the child would have to be 18 to be a director. I do not know technically what age you have to be, but if the child is 18, then theoretically, yes. There are some issues. You have the whole issue of the person to trade restriction for corporation tax relief, which might be an issue. But if the child is a genuine director, and I will leave it up to people to interpret how many people are genuine directors, then yes, you can pay them a salary for being a director, and provided that they are over 18, that should not create an issue, and they can use that salary to pay their own school fees. So that can be a good way. Revenues, a bit nervous to put it mildly, on what they might see as income transference, but it is certainly a thing to look at. If they are under 18, then I do not think it would work, parental settlement and other issues, but if they are over 18, it is fine. Equally, you could possibly transfer shares, albeit there maybe capital gains tax issue with that, and they could receive dividends. And again, normally what I would say is, if you do not already have the limited company structure and are looking to set one up, speak to Mark Cook at Rowleys, he is probably the best person to speak to on this. But you can set up the limited company structure in a way that is kind of future proof for this, and that is much easier to do before the company exists, as it were, and has no value. Then you can set up this for quite assertive or aggressive tax planning, depending on your position, but there are certainly options to consider.

 

Martin Stanley  43:05

Thank you for that, Scott. I think, as Scott said, that is something where we bring in colleagues on the accountancy side to help as well. Let us rack up a couple of quick ones. Quick answers, please, if you can, Scott. Uche asks, “can I pay into my private pension some money, realising the sale of my buy-to-let property”. I believe you have covered this one already, though.

 

Scott Gallacher  43:24

Yes, effectively the sale of the property is not income for the purposes of pension contribution purposes, but if you have either the de minimis limit, £3600, or if you have other earnings that you can use, so you have an allowance that you can use, then yes you can use the money, but not necessarily the gain, if that makes sense. Again, you probably would want to discuss it with ourselves and an accountant and just make sure that you fully understand the difference.

 

Martin Stanley  43:51

Thanks for that, Scott. David asked, this is an interesting one here, one thing i do not think we have considered so far, is that “the property investment landscape has been changing of late with the introduction of buying shares in property, or crowdfunding to invest in property, or multiple properties”. So crowdfunding, multiple ownership, is this something you have considered for clients.

 

Scott Gallacher  44:11

Not specifically. There has always been property funds, certainly in the time that I have been in. Now to be fair, they are primarily on the commercial property side rather than the residential side. I am not sure on a specific structure of crowdfunding, and am a bit cautious on the structure. We tend to prefer to use traditional, established things where the risk is less and the ownership is more clear. I would want to look into that very carefully. I suppose the principle of having a more diversified portfolio makes sense. The issue is, how is the ownership structure, how do you get in and get out, and what are the charges? I would be a bit cautious, but principal is sound.

 

Martin Stanley  44:51

Thank you, Scott. I have to make this the last one, but David asks, I think it is an easy one for you here, Scott, so an easy softball one to finish on. Can you easily transfer property ownership between spouses to take advantage of differing tax bands?

 

Scott Gallacher  45:06

Easy question, I think the general rule is yes, once. If you try to do it repeatedly, you are going to have issues, because the revenue do not like you transferring for income tax reasons, you can generally do it once, going back and forth would be problematic. And I assume spouse means married, if you are not married there are different issues. Also if there is a mortgage on the property, you can potentially have a stamp duty issue. So again, you need to take advice, but in principle, you can do it as long as you do not do it too often.

 

Martin Stanley  45:35

Thank you, Scott. There are questions still coming in, Laura has another question in, Laura and some other people. I am sorry that we do not have time for those this evening, but please will you drop me an email at martin@rowleyturton.com and Scott and I will answer your question, will be very happy to. On that note, I would just like to say thank you very much all for joining us, and just to reiterate, if you have any questions or if this seminar raised thoughts in your mind that you might like to explore a little bit further, give us an email. Come in, sit down, have a coffee with us over the boardroom table. There is no commitment. We can have a chat and see where we go from there, we are always very happy to meet new people. So we will be emailing you with a copy of this presentation, we hope you find that interesting. Email us if there are any more queries, or get in touch if you would like to have a chat. And one other thing we wanted to mention was the book called Enough, which is about a long term approach to financial planning for your lifetime, getting the most out of life. It is something which you give to clients and is often very useful. So if you would like copy that book, a bit of light reading, drop me an email, martin@rowleyturton.com and I will be happy to put a copy in the post for you. Now I think that is everything for this evening. Thank you very much for attending. We will be doing another one of these seminars in a couple of months, perhaps sooner, we expect this to be a regular series, so hopefully you will find those of interest as well. Thank you very much, and good night.