2nd property sch fees Post Reply

[Peggy55]

Hi there,

Unfortunately due to both my parents passing away recently, my brother and I will be receiving our full inheritance many years earlier than expected.

We will obviously be getting an advice from a financial advisor ( will recommend any suggestions, is there such a person who is a combined mortgage/financial guru?

We hope to pay of a good sum off our mortgage, but also to buy a second property to rent to pay for school fees (if we choose to go for a secondary private sch )

But am i being completely naive of the simplicity of this ? I’m
assuming we will have to pay extra tax for owning a 2nd property and also then tax on the rental income?

As anyone done this before or can recommend any financial contacts?

Many thanks

[saffamum]

HI there, 

Firstly I am really sorry to hear about your parents.

You can purchase the rental property in a LTD company and yes you will still have to pay tax but at a smaller fee. I am a local mum who runs a small property consultancy business from home and can assist you further if you need any help.

Please let me know via PM if I can, for a small fee, assist you in finding that property you are looking for in a tax efficient way, especially if you need to go down the Private school fees route.... 

kind regards
 

[chorister]

Try Killik in Northcvote Road for advice.

[Peggy55]

Thank you , this is most useful.
I’m will try and pm you

[Carol Brown]

Try Matt Black on +44 7841861013
Director
Financial Advisor
Elevation. Company
Very helpful guy.

[SW12dadfincladviser]

Hi Peggy, sorry to hear about your loss. I am a financial adviser, live in Balham, and work alongside mortgage advisers. 
There are quite a few issues you would need to consider, and worth having a quick chat (at no charge) to make you aware of these.
Please feel free to PM me back if you wish

[SouthLondonDaddy]

OP, the long and short of it is that I don't see how a buy to let in London can make any financial sense now.

Let me elaborate - starting with some simplifications and imprecisions to get to the gist of it.



1) Rental yields are so low that buy to let doesn't make a lot of sense vs other, safer alternatives.  Simplifying, the return from a buy to let comes from a combination of: rental income, year after year, and capital gain/loss when you exit and sell the property.
Even with the rental increases of the last year, I understand that gross rental yields are between 3 and 4% in London. Rental yield = annual rental / value of the property. That is the gross yield: after you have deducted agency fees, rental voids, maintenance of the property, taxes etc the number will go down. Also, buying a property you will incur upfront costs like stamp duty, legal fees, refurbishment etc. So you may think that the gross rental yield might be 4% (= £20,000 rental on a £500k house) but the net figure can be (depending on lots of things, like your tax situation) more like, say 15,000 / 540,000 = 2.8% Too many people underestimate the costs and fail to appreciate the difference between gross and net rental yield.
Bear in mind that investing in gilts (ie lending money to the British government, super safe and no hassle) for 2-3 years can return 3.5% - 3.8%. The net return will depend on your tax situation (capital gains on gilts are not taxed, only interest), but, still, a risky investment like buy to let makes sense only if it returns much more than a super safe one.
Investing in buy to let might make sense if you are strongly convinced that the real estate market will boom in the long term; it may happen, it may not, no one has a crystal ball, but you must appreciate the risks if that's what you want to do. I.e. you take the view you won't make a lot in rental every year, but you will make a big capital gain when you sell.

2) The rates on buy to let mortgages are too high vs rental yields.
Adding debt to an investment amplifies the returns, if things go well, and amplifies the loss, if things don't go well. Obviously adding debt only makes sense if the cost of the debt < return without debt.
Let's say you have an investment where you invest 100 now and get 110 in 1 year. 10% return. Now let's say that you borrow 75 at 5%. After one year you will have: +110 - 75 (which you borrowed and must return) -3.75 (=5% x 75, the interest you were charged) = 31.25. You invested 25, not 100, so the return is 25% (=31.25/25-1). But if the investment returns 2%, and not 10%, then the return after the debt is -7%. Debt can amplify both your losses and your gains.
Rental yields are between 3 and 4%. Buy to let mortgage rates are between 4 and 6%. I don't see this making a lot of sense.



Obviously all of this is before getting into the detail of buying in your name vs in a limited company and all the tax details.

[SouthLondonDaddy]

PS I should add that another thing which would help the case for a buy to let investment is if every year you managed to increase the rent substantially. Leaving aside the moral and ethical implications of that, there is still no guarantee of being able to do that.

[Jonny Dyson Property Consultants]

I have to say that I am with SouthLondonDaddy on this one, for all the reasons he states.

I specialise in residential property acquisitions, and it's been a while since we have advocated buying buy to let properties to individuals in your position.  To a less extent it does make sense if you are renovating and refurbishing in order to add value (something else we do), but stand alone buy to let is less and less attractive for a private individual.

The other thing that SouthLondonDaddy touches on is capital gains tax which is almost certain to go up in the near distant future (and the main reason that I got rid of my own rental portfolio recently).  At the moment CGT is 28% on residential property, which is one of the lowest rates in Europe. There have been many think tanks who feel that this should be changed (increased) to around 50% - after all, there will be very few voters who would be against raising further taxes from those with second homes.

You could put the property into a company which would be more tax efficient, but there are other implications of this that you would need to consider first.

Sadly the days of someone else paying your mortgage off for you (or covering school fees) via a buy to let mortgage are long gone.

Jonny

[Peggs55]

Thank you all your responses.

It’s really appreciated.

When the grant of probate is all completed,’i will
come back and email you all who are the experts.

You all hve made me think .

If we are going to do down this route , i was actually thinking of buying a new build with “cash” in the likes of Manchester . I listen to the Phil Spencer property podcast and i’m
no way an expert ,
but in the last few episodes he talks about new builds that are “built to rent” .
He talks about these building having communal areas and gyms etc. Im sure if this makes a difference.

It’s useful to be briefed about the “Capital Gain”’tax and how that will likely
increase considerably.

It’s a lot to think about .

Thank you All

[SouthLondonDaddy]

I can't comment on Manchester as I'm not familiar with the area.
But I'd urge you to only buy in an area you know fairly well.

I am personally not a huge fan of newbuilds. At least in London, my experience is that buyers rarely, if ever, recover the newbuild premium.

I am also very, very sceptical of newbuild leaseholds: typically leaseholders have no say whatsoever in the appointment of the managing agent and in all the costs of the building. In the civilised world, if a managing agent does a terrible job and wants to increase its fees, residents tell him to get lost. In feudal England, that is not possible: the managing agent is chosen by the freeholder, which often appoints a sister company that does all the jobs at inflated prices. In the most egregious cases, leaseholders might win a court case - there was a landmark case in Vauxhall (London) https://www.leaseholdknowledge.com/st-g ... 1-million/ - but there are no guarantees. In the vast majority of cases, leaseholders have to suck it up. My gripe is not only with the cost itself, but with the unpredictability of future increases.

There are some cases where leaseholders have control, eg where they own a share of freehold, but they are rare, and even rarer with newbuilds, because this is a huge revenue stream for developers, so they'll never give that up unless forced. The paradox is that the legal framework to fix this already exists (commonhold) but no developer will adopt it unless forced by law.

Lastly, OP, you really need to run some numbers. If you are not capable of doing that yourself, then you'd need a friend / relative / accountant / financial advisor to help you out. You need to put some numbers in a spreadsheet and calculate a few scenarios: if all goes well, how much can you make every year? What kind of situation would cause you to lose money? Eg if the boiler breaks down and you have 6-8 weeks without rent in between tenants? If the tenant stops paying, your savings can cover the expenses for how long?

[tomsmum2008]

Thanks for the expert advice.

We are looking at something similar but longer term for our children - assuming that they wish to stay in London when they are adults, and assuming its going to be even more hidious for them to get onto the ladder in the future, we were thinking of buying a property for them with a view to them living there - whether it be rent free / low rent or gifted we have no idea yet.
But the vague idea would be to buy now and rent it out until they come of age.  Youngest is 10, so they have a little while to go yet.
Would this be wise and, aside from the nature of the property market fluctuating, are there any other pitfalls/reasons not to do this?
 

[SouthLondonDaddy]

@tomsmum2008, well, all the points I have already mentioned apply to your case, too: I don't see buy to let making a lot of financial sense in London, now, for the reasons I have already mentioned.

To recap: mortgage rates are very high compared to rental yield and, even if you are lucky enough to buy cash, there are better, safer, easier investment alternatives. Like I said, I think it might make sense only if you are convinced that you can raise rents substantially year on year (leaving aside the ethical implications) and/or if you are convinced that you will make next to nothing in rent but the property will appreciate a lot in the long term. Neither is guaranteed.

I would not do it.

[louloulray]

I'd also urge caution and agree with the posters above. We have several residential rental properties, plus a commercial property. We have the commercial property in a limited company but because of the way we acquired the residential rentals, those are in our personal names. We have been getting advice on transferring those into a limited company and the pros and cons of both. As SouthLondonDaddy says, you really need to run the figures. Residential renting is rarely as lucrative as you first think, even with rents currently high (I don't believe these high prices are sustainable and in my ten years or so as a landlord we've had variations of over £600 per month more or less on the rental prices we've been able to achieve so it can vary quite wildly).

If you're buying out of London you'll almost certainly need to pay a management agency to look after the property on your behalf, unless you fancy a dash to Manchester or wherever every time something doesn't work or needs fixing. Agencies make their real money on management costs here, and the percentages they charge will eat into profits. Even if you decide to manage the flat yourself, that still requires time and money.

You should also be aware that if you hold property in a limited company, you will pay corporation tax on profits. While this is generally lower than personal tax rates, if you then take out money as a dividend to pay for school fees (or anything else), this can then count as personal income - so you'll pay tax again on that dividend amount. The limited company option can end up with a higher tax burden, depending on how you're taking money out and using it. As I've discovered, it's incredibly complex and definitely not always the cheaper option! Good luck!

[Eurodys]

You can find professionals who specialize in both mortgages and financial planning. While paying off your mortgage and investing in a second property for rental income is a good plan, it's crucial to consider tax implications. Owning a second property may incur extra taxes, and rental income is generally taxable. It might be helpful to consult with a tax expert as well. I haven't done exactly this, but exploring such options with a knowledgeable advisor could make the process smoother. Also, have you considered looking into Vietnam real estate? There could be interesting opportunities there.