This video recording has been kindly provided by Landlord Investment Show from their recent online Super Show event. Please note there are some issues with the audio quality and readers may prefer to read the transcript below.
On 3rd November 2020 Chris Bailey, Chartered Accountant, and a long-time landlord himself was invited to be interviewed by Tracey Hanbury of Landlord Investment Show on a live webinar as part of their Nationwide Online Super-Show.
Chris and Tracey comment on some of the information (and misinformation) in the marketplace and discuss in particular HMRC and Hybrid Business Structures.
Q (Tracey). On your website and all your materials, you talk about landlords running their portfolios as professional property businesses. Why is having a business mindset so important for landlords?
The first thing you need to think about is are you a passive investor? Have you put your money into property and you simply collect the rent? Or do you see yourself as a landlord running a business? If you are seeing it as a business, then you can benefit from so many more advantages over the passive investor.
Accidental landlords tend to fall into this passive investor category initially too because they may have kept, say, their university house and moved on to buy another, renting that out but not really taking great interest in it. The fact is, business owners make better decisions, because decisions are taken based on what is best for their business. They look at all the portfolio as a whole and work out what part of it is working well and what parts need improving. Tax is one of the biggest expenses a business has, so effective tax planning is crucial. Less Tax For Landlords help landlords reduce the tax liability within the legal guidelines, obviously, so that they have more cash to spend on their business. They can pay down their mortgages and invest in more properties for their business. Everyone needs to analyse their business and plan for the future.
Q. I know that you often talk about Hybrid Business Models as a potential option for landlords. Is this something that Less Tax 4 Landlords invented?
Hybrid models have been around since 2000, so roughly 20 years. Essentially a Hybrid business model is called so because it is a ‘hybrid’ of legal personalities such as humans and limited companies, brought together legally in a mixed-partnership structure.
In the early days they were used by lots of professional companies for example big accounting firms, legal firms, surveyors and so on and many landlords listening today will have noticed their own lawyers are LLPs.
Whilst we would love to take the credit, it is only in the last 5 years that we and others have really drawn attention to using hybrid structures for your typical rental property business. We just use the structure to the advantage of property owners. So no, we did not invent them.
Q. Was the recent HMRC vs Waleski case on a mixed-partnership one of your clients, and has this impacted on your advice to landlords?
There are lots of misconceptions around hybrids. We did not invent them, and we do not own them. In relation to the Waleski case, no he was not one of our clients (it was not even a property case) and it has had no bearing on the advice we give to our clients either, because we have read the judgement very carefully.
There are several points to note about the Waleski case, including the channelling of money through his hybrid into a company then into an offshore trust fund for his children. He could not justify why he was doing it this way and did not have his paperwork in the right order either.
(Speaking at a live Q&A on the LT4L website Chris later added) What it does show as with any tax planning and in particular any partnership structure, is the importance of having real commerciality in place, getting the paper work right, ensuring that there are partnership agreements, that capital is treated correctly, and making sure that it has gone through a proper lawyer. The business also needs to understand what they are doing and why, and have the documentation to back it up.
Q. So HMRC have not banned mixed partnerships?
That is correct. What they have done, and quite rightly so in my opinion, is they have put in tax avoidance measures. If you are using these structures purely to avoid tax, then HMRC will come along and say we are not allowing it. If you use these structures purely on a commercial basis then yes it will allow it. One of my accountancy practices, for example, is a hybrid structure. It is a partnership between me and a ltd company and has been set up like this for over 10 years. During this time HMRC have not had any issue with it. If you use this structure for tax avoidance, then of course that’s not allowed.
Q. How have HMRC reacted to your work with landlords so far?
We’ve been using these structures for about 5 years now and have submitted over 850 accounts to HMRC, they’ve reviewed 8 of them, and have cleared all 8 with no additional tax to pay and have agreed with everything we’ve submitted. There have been no issues for the clients, and I’m relaxed about it.
Q. Why do you think some landlords haven’t taken any action yet? And what advice would you give them?
That is a great question and one that leaves me scratching my head sometimes! I think some are fearful of what they do not know. Some are listening to all the noise on social media with so many different views on what landlords should and shouldn’t do and I think people just get so confused.
One expert says they should do one thing, then another expert comes along and says don’t do that, you should do this, and people just don’t know what’s right for them. Some landlords are just waiting to see what is going to happen and many have decided that it has all got too much for them and they’re selling up and getting out of the industry because the tax is too much of a burden. When seeking advice asking the correct question is so important because you will get lots of different answers depending on what you ask. For example if you were to ask an accountant, “what’s the best way to avoid section 24?” the answer would be very different had they asked, “what is the best way to avoid section 24 and to protect my portfolio from inheritance tax?” Two very different questions.
Q. What advice would you give them today?
My first piece of advice is to make a decision no matter what. It’s very simple, either do something or do nothing, and if you decide to do nothing just make sure you have worked out the cost of doing nothing. We know that with Section 24 fully implemented, landlords will be paying more tax. I would also say, look at your portfolio and decide if you think it is performing well. If it is only making 3% or 4% a year, ask yourself is that good? If you were to sit in front of your “shareholders” and say I’ve invested £1million and I’m making 3%, is that a good return? I don’t think I would be happy with that!
Also, look at how you can change your business to make better returns and analyse your costs fully. I am betting tax will be the biggest cost. Ask yourself, can I have the same level of income but pay less tax? Once you start thinking about your choices, then you can start to make decision on buying or selling more properties, increase the rent, reduce repairs, and a whole host of other decisions – but be careful not to jump in. You need to get considered advice. We offer lots of free advice on our video-vault and I would recommend anyone who needs help making all these business decisions to visit the site www.lt4l.co.uk/tax-tips and educate yourself. There is, of course, always the option to phone us and talk to us in person on 0203 735 2940.
Q. Before going to print, the news landed that the Office of Tax Simplification (OTS) called for consideration that Capital Gains Tax rates be increased to match income tax rates. We asked Chris his thoughts.
First, it’s important to point out that there is a lot of speculation about how the country will pay for the support it has given to the economy during the pandemic. I think this one will run and run.
As advisers we deal with the current law, not speculation, although we also look to act in line with prevailing government policy which is currently looking to professionalise the landlord sector.
If the changes were to go ahead – it looks like just one more nail in the coffin for portfolio landlords with property in personal names. Section 24 has already made buying property without a protective business structure an unworkable strategy for professional landlords using leverage, and these changes would impact those who are unencumbered as well. Especially those with plans to sell property to pay for their retirement.
Once again, we are back to having a business mindset, and landlords are much better placed structuring as a business and taking professional advice if they still wish to be successful in this area.
For example, as well as paying capital gains at corporation tax rates, restructuring as a business can also rebase the value of rental properties for CGT. Significantly reducing CGT liability on any future sales for as long as the business remains a going concern.
Of course, we will obviously review any changes to legislation and look to provide advice based on any new rulings.
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