How to build a property portfolio: Capital Gains & Inheritance Tax advice

In this video we look at a landlord expanding his property portfolio, discuss Portfolio Landlords, and explain why some higher rate, highly geared landlords will pay more tax than the profit they earn.

Full text transcript below:-

David Court: You were good enough to hold a seminar for us recently and the reflection from that was that there are people who are looking to invest in properties. From a lending point of view what would be your initial reaction to somebody adding to their property portfolio?

Murdo McHardy: It’s a great question because I think we all know people that have maybe a small portfolio of properties that has grown up over a number of years. Either by accident or by design. Traditionally in the mortgage lending market they’ve been dealt with on a stand alone basis, so when each property is bought or refinanced, the lender’s mainly looking at that property itself, what the rental income is, and what the monthly payments on the mortgage are. From October this year there’s new guidelines coming in for mortgage lending that means that anyone who has four or more properties will be treated as what’s called a Portfolio Landlord, and lenders will have to look at them much more from a business perspective to see how is this portfolio performing over all, including all the costs across the portfolio? All the income across the portfolio? And make an assessment based on that when lending’s required. That’s quite a big change, and I think that will mean that some lenders might even exit the market and decide not to participate where there’s larger portfolios.
But for investment and property going forward I think it will mean a big change. People just need to be aware of that. They need to make sure they keep accurate records, they need to make sure they know all the costs involved and be able to translate that to a lender.

David Court: Does that offer the opportunity for banks to take a more flexible approach to the way they would lend?

Murdo McHardy: I think it does, and I think part of the problem we’ve got in the mortgage market just now is that there isn’t that flexibility across most of the market, and it’s very much a tick box or a criteria-driven lending environment. So, I think there is a need for a much more flexible approach, and if lenders can provide that it will help out in the future where there’s more of a portfolio, or what is now deemed to be a portfolio compared to what was maybe just an individual owing three or four properties in the past that didn’t think of themselves as a business necessarily.

David Court: David, you think this is a case that somebody should see the level of gearing they have?

David Miller: Absolutely. We have a very, very unusual, if not crazy, situation looming that by the tax year 2020-21 there will be some high-rate taxpayers who are highly geared who will actually pay a lot more tax than the profit they earn. It just seems to be inconceivable that that will in fact be the case for certain individuals. So, buy-to-let landlords need to be much more mindful of the amount of borrowing they have as Murdo referred to, especially people who are high-rate and highly geared. People will need to look about perhaps sharing a property with their spouse or civil partner, and try and mitigate any disadvantage with the new tax rules along that sort of line. So, people are going to have to look very, very carefully at their own tax situation. The model, which worked in the past, where people would be highly geared and rely on capital growth over the long term, will not work to the same extent because people will end up paying more tax than they’re actually making. Which is truly unheard of.

Rob Trotter: Certainly that is in reality what we are witnessing as well. The majority of people who are coming to us looking to expand their portfolio are not highly geared. These are people who have got large lumps sums for whatever means, and they’re looking to develop more of what they’ve got. So, my advice usually to them would be: If what you’ve got is working, and it’s working well, and you’ve analysed that property and you think it’s performing well, you’ve had it revalued, the rental income is strong, and you aren’t suffering from lots of maintenance costs, and void periods, then replicate that and buy similar properties. Similarly, if you look at what you’ve got and you think it’s not maybe not performing particularly well, it may make sense to diversify in different locations so you’re not relying on one particular market, one particular area. Especially if you’re trying to second guess where the market is going. If you’re thinking I’m going to try to catch that up-and-coming area, don’t put all your money in that area in case you’ve got it wrong. But, it certainly is worth spreading the risk, if there is a degree of risk.
There’s no one-size-fits-all solution to that. But, you’ve got an advantage if you are an existing property owner, and you’ve got property under ownership, is that you’ve got a measurement. You’ve got something to measure it against to see, “I’ll compare it to that, and I’ll replicate it or I’ll do something different.”

David Court: What you’re really trying to do is get your investments to work better for you?

Rob Trotter: Yes, absolutely.

David Court: From a banking point of view that would always be the case. You want it to be tax effective and as efficient as possible.

David Miller: Obviously it’s tax efficient. But, if you get the lending levels at the appropriate amount then compound interest is a great benefit to the landlord. With 4% compound growth in the value of a property will double in value in about 17 or 18 years. With 6% compound growth it will double in about 12 years. So, if you get the model right and it hangs together for a number of years, and you’re a long term property investor, there are long term gains to be had.