Topical articles for the Property sector within the Scrutton Bland Property Newsletter - Summer 2017
PROPERTY
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w w w . s c r u t t o n b l a n d . c o . u k
Advice, legislation, market projections
Hip to use SIPP – increasingly popular investment vehicles Rethink of SDLT for property developers Risk management for rental landlords
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Directors’ and Officers’ insurance – why every business owner should consider it.
In the UK directors’ and officers’ insurance (D&O) is frequently held by larger companies but it has yet to become standard cover within the SME market.
Property owners’ claims example: A director of a management company was held liable due to the fact a tenant’s flat had fallen in value and was not in line with current market valuations of similar properties in the area. This was shown to be due to the director failing to recognise and subsequently fix external disrepair to the property. Without D&O cover the standard property insurance policy would not protect the director from being personally sued.
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t is a common misconception that legal expenses or professional indemnity insurance provide all the cover needed for these smaller companies. A Data Monitor survey found that only 23.3% of respondents had D&O cover, down from 26.7% the previous year. Risk management can be lacking in smaller firms such as property owners and landlords as they can rarely afford the same risk management systems and resources as seen in larger corporations. This can make them more vulnerable to errors. As a director or officer of a company, any failure to adhere to and comply with, legal requirements could be catastrophic as a landlord could be personally sued for any resulting death, injuries or financial loss suffered by their tenants due to a landlord’s negligence. Even if someone has been involved in running a limited liability company for years without a problem, their personal assets could still be at risk. Any director, officer or employee carrying out supervisory functions can face unlimited personal liability for actions they take on behalf of the company i.e any decisions made or that fail to be made, which jeopardise residents’, tenants’, investors’ finances also leave the property owner/landlord liable. A landlord could find themselves being sued personally by any of these parties for the amount of the financial loss they have suffered as a result of an error or omission. Modern legislation such as the UK Bribery Act 2010 puts additional responsibilities on directors to ensure their companies are not involved in bribery, holding them personally liable if they have in any way consented to the offence. Claims against directors and officers are rising. Companies of all sizes are increasingly seen as targets for criticism, including mischievous allegations. Clients, employees and creditors are far more likely to take action nowadays against a company and its directors than in the past.
Regulators are taking a tougher stance across the globe and the risk of investigations and fines is increasing. Legal expenses cover is not sufficient and should not be seen as an alternative to D&O, as limits are generally lower and provide for defence costs only rather than any damages awarded. What does D&O cover? A D&O policy will typically cover: • Claims from shareholders against the management • Employment tribunal costs (where the claim is brought against individuals) • Health and Safety Executive enquiry costs • Legal and defence costs • Damages arising from employment practices and discrimination (where the individual director is found guilty) Three notable exclusions that are not usually covered within a D&O policy are: • Fraud – although defence costs would be covered until such a time as fraud is proven • Pension fund liability, which can often be covered separately • Criminal fines and penalties For more information on D&O insurance and how it could mitigate your exposure in the event of a claim please contact ryan. whybrow@scruttonbland.co.uk or tel 01206 838461 .
If you are a director of a residential management
company or a landlord, there will be numerous legal obligations that must be adhered to when letting your properties, these may include: • Gas Safety • Fire Safety Order • Energy Performance Certificates (EPCs) • Deposits • Payment of Rent/ Administration Fees • Licensable HMOs • Electrical Inspections • Electrical Appliances • Fire Alarm Systems & Fire Precautions • Carbon Monoxide and Alarms • Legionella Assessment • Illegal Eviction/Harassment • Maintenance For more information visit: https://www.gov.uk/renting- out-a-property/landlord- responsibilities
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All too often private landlords view life assurance protection on their investment property mortgages as a luxury rather than a necessity. Lenders do not always insist upon it, as the property will often be used as security in the event of the death of the landlord, and the natural assumption for many is to assume that the estate would sell the property to clear the mortgage.
F or a single landlord with the reasons behind why the investment was made in the first place. If a property investment was intended to generate a regular income or to help in retirement by providing security for the family’s financial future, then the question needs to be considered of what happens in the event that the landlord were to fall ill or die prematurely? Life assurance plans can be an effective way of ensuring that a mortgage can be repaid and therefore allow the property to pass (debt free) on to the beneficiaries of the landlord’s estate, thereby providing a level of security for the dependants. To Be or Not To Be? “Covered” that is no dependants this may well be the case, however for a landlord with a family, attention needs to be paid to
While the issue of managing an estate after death is an inevitability which many investors choose to tackle when investing in property, what can be more difficult to predict is unexpected illness or incapacity. No one likes to think of what might happen if they were to become ill, but according to a recent report by Legal & General one in five people in the UK will suffer a serious illness before retirement. One way of managing this exposure is to take out critical illness cover. Critical illness policies can help in the event of a landlord being diagnosed with a serious illness, disability or in need of an operation. By extending a life policy or taking out standalone critical illness cover, it is possible to arrange for a lump sum to be paid in the event of serious illness which could help to repay
a mortgage, cover associated medical costs or help to bridge the income gap if one or more properties were to be vacant when the landlord is ill. As with any health related policy there will be limitations, so before you take out critical illness cover you should discuss your needs with a professional adviser. Being mortgage-free on your investment properties can provide financial security at a time when you need it most and help to secure future income if you are no longer able to work.
If you would like to talk through some of the ways to set up a life assurance plan, or to add critical illness cover to your existing policies, contact Tim Bell on 01206 838457 or email tim.bell@scruttonbland.co.uk
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Using a Pension to purchase Land or Property For those investors who own or are considering the purchase of a commercial property, it can be extremely advantageous to consider holding the property within a Self-Invested Personal Pension (SIPP).
I f you already own commercial land or property which is mortgage free, it could be sold to your SIPP at market value which will provide a cash injection for you or your business. Alternatively, if you are looking to acquire commercial land or property, you could use the cash in your pension to purchase, or part purchase such property. If you have insufficient funds in your pension to do this, you could consider funding it by making a pension contribution which would usually attract Income tax relief at your highest rate of relief. SIPPs also have the ability to borrow up to 50% of the value of the fund at commercial rates, which may help to make a purchase possible and further increases the potential for capital growth and income in the future.
Once held in the SIPP, any growth in the value of the property will be free of Capital Gains Tax, and any rent generated will be free of Income Tax. The value of the property acquired will not form part of your estate for Inheritance Tax purposes. Ring fencing property within a SIPP can be a useful tool as, once owned by the SIPP, the asset will be protected in the event that you were to be declared bankrupt or the business became insolvent. Holding agricultural land in a SIPP A landowner may use a SIPP to purchase agricultural land from his own farm. The resulting cash could be utilised for further investment in the business or to provide for heirs who may not wish to continue in the farm.
The land could then be leased back from the SIPP to the farm, at market level rent. Any increase in the value of the land once held in the SIPP will be free of Capital Gains Tax. The rental income accumulated in the SIPP can be used to provide an income to the farmer in retirement or the pension assets can be sold to provide liquidity. If you would like further information about setting up a SIPP you should speak to an Independent Financial Adviser. Scrutton Bland offer an integrated financial and tax planning service which brings together tax and IFA expertise. If you would like to find out more about SIPPs please contact Michelle Groves , Independent Financial Adviser on 01206 838465 .
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Rethink of STAMP DUTY LAND TAX (SDLT) for property developers
The additional 3% SDLT rate for purchasing residential property sites has exacerbated the already high cost burden for a large number of property developers. This change has particularly impacted those developers who are involved with the redevelopment or conversion of existing houses.
B ased on a purchase of a £550,000 land or farm land or other non-residential elements such as farm buildings, or redundant office buildings or even short term furnished holiday lets. With these aspects in mind, consideration should be given from an SDLT perspective as to whether the site being acquired is a mixed use site. If the site is acquired as a mixed use site, SDLT applies based on the non-residential rates. These are set out below:- residential site, a developer could be paying SDLT of £34,000 based on current SDLT residential rates. Many of these houses or sites have land with them, such as paddock
If the site being acquired is not capable of being regarded as a mixed use site, and the site includes a number of buildings which are capable of being separate dwellings, a developer may be eligible to claim multiple dwellings relief. For example, if a building comprising 3 flats is acquired for £600,000, the SDLT liability could be reduced from £38,000 to £18,000 by making a claim for multiple dwellings relief. In some cases it may be possible to claim a refund of any overpaid SDLT from HMRC for transactions which have already completed by submitting an amended SDLT return or, if outside of the requisite time limits, by making an SDLT overpayment relief claim. How we can help Scrutton Bland’s property tax specialists can:- • review any previous property transactions for you to determine if you are eligible for a refund of SDLT; • make any SDLT reclaims on your behalf; or • advise you on the impact of the SDLT rules on new or prospective transactions Gavin Birchall , is a Tax Partner at Scrutton Bland and leads its property and construction sector group. Contact him at gavin.birchall@scruttonbland.co.uk or 01206 838464 .
Band: market price £ Non-residential 0-150,000 0% 150,001 - 250,000 2% Over 250,000 5%
Applying these rates to the purchase of a £550,000 mixed use site, would result in an SDLT liability of £17,000 (compared to £34,000 for a “residential” site).
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TACKLING TAX If you’re a residential landlord, you could be forgiven for feeling targeted by the Government. Many private landlords provide much needed, good quality accommodation, after all, not everybody has the ability, or indeed the desire to own their own home, but recently introduced legislation is clearly aimed at reducing the size of the previously expanding private rental sector.
S ince April 2016 we have seen the introduction of an additional 3% Stamp Duty Land Tax on ‘second homes’, the removal of the 10% Wear and Tear Allowance for furnished rental properties, and whilst the disposal of most other assets will qualify for the new reduced rates of Capital Gains Tax (CGT) at 10% or 20%, gains on the sale of residential property are still subject to rates of 18% for gains falling into the basic rate tax band, and 28% for gains above this. From April 2019, there will also be a requirement for CGT on residential property disposals to be paid within 30 days. With careful planning, patience, and the use of certain tax favoured investments, it is possible to reduce the rates of CGT on residential property gains back to the lower rates of 10% and 20%, but these changes are still clearly an attack against investors who prefer to put their money into bricks and mortar when the Government would clearly prefer investment into UK trading businesses.
Additional taxes at the point of acquisition and sale however are one thing, but the fundamental change to the way in which tax relief on interest charges will be given to property businesses from 6 April 2017 could mean a significant increase in the tax bill of many landlords who have borrowed to fund their portfolios. Prior to 5 April 2017, relief for interest expenses, was given at the landlord’s marginal rate of tax, therefore a 40% taxpayer, received relief for any mortgage interest at 40%. This was achieved by allowing a deduction for the mortgage interest against the rental income. From 6 April 2017 however, changes will be phased in over a 4 year period limiting the amount of mortgage interest which can be deducted in this way. In the 2017/18 tax year, 75% of the mortgage interest can be deducted against the rental income, and the remaining 25% will be given as a ‘tax reducer’ at a flat rate of 20%. Over the following 3 years, the amount of interest deductible against rental profits decreases, whilst the amount relieved as a tax reducer increases so that by the time we reach 2020/21, all of the mortgage interest will be relieved at just 20%.
Those likely to be most affected by these changes are landlords who are not basic rate taxpayers, and who have borrowed to fund their property purchases. Of course the higher the borrowing, the greater the effect these changes will have. Although it may appear that there is no light at the end of the tunnel, there is still much planning that can be done. At Scrutton Bland, our property taxation professionals are committed to helping our clients make the best of this changing landscape and to providing advice to minimise the impact these changes will have. To speak to someone about your buy to let portfolio please contact Faye Howard at faye.howard@ scruttonbland.co.uk or 01473 267000 .
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Project accounting – beware of black holes
What’s in the black hole? As a property development business expands, so the allocation of costs becomes an increasingly important factor in its success. Without an adequate system in place to accurately record costs, it will be almost impossible to assess the profitability of individual projects. For example, where a project has multiple properties within it, it is often not until the final property is completed and sold that any accounting black holes are revealed. While the contents of these black holes can be good or bad news depending on how successful the project has been, what is inevitable is that exposing these black holes will relieve the element of financial uncertainty that may have been building up for months or even years. Accounting black holes are best avoided. By putting appropriate accounting systems in place to allocate costs specifically to each individual part of a project, nasty surprises can be avoided. By way of an example, where a number of properties are being developed at the same time, as each property is sold the appropriate level of costs should be recognised against the sold property. At each period end, the costs being carried forward as work-in-progress should then represent costs incurred on properties that are yet to be sold.
Navigating the black hole Whatever accounting system you are using, be it a basic accounting package or a more sophisticated cloud based system such as Scrutton Bland offer in SBLive, the important point is to ensure that every cost is allocated to the relevant project. Where single suppliers cover a multitude of projects, such as professional fees or landscaping costs for example, it is important that these are proportionately split over the number of projects they cover.
Why bother? It sounds obvious, but without an appropriate allocation of costs you will never know how profitable each of your projects has been. Not only is this critical in ensuring the profitability of your business as whole, but accurate recording is crucial to ensuring that you are managing liabilities such as tax correctly. If you need advice on dealing with any aspect of managing accounts for property or construction projects including how to deal with work- in-progress Scrutton Bland have a specialist team of accounting and tax advisers who can help. For further information contact Mark Smith, Head of Internal Audit and Senior Corporate Services Manager mark.smith@scruttonbland. co.uk or tel 01473 267028 .
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Top tips for buy-to-let insurance
As the landlord of a buy-to-let property it is crucial that you have the right insurance in place; a standard home policy is not always adequate. W hile tenants will need to arrange for their own contents insurance, as the property owner a landlord must have the correct covers in place to ensure that the building itself is covered, and in the case of furnished lettings that any property is protected. If your property sustains damage through circumstances such as fire, flood, burst pipes or subsidence, despite who is to blame, the landlord is often expected to foot the bill so having the right insurance in place could protect your livelihood when facing significant repair costs. It is also worth remembering that specific insurance cover is required if the property is being leased as a business or commercial property.
The most important tip is to understand the different types of cover which are available to you and which are most suitable for your needs. These can include: 1 Buildings cover Check your buildings cover includes not only the structure and fabric of the property itself but also includes walls, doors, gates, drives, paths and outbuildings. 2 Contents cover If you are letting a property as furnished or part-furnished then you should ensure you have cover for items such as carpets and curtains, and white goods such as washing machines. A landlord’s contents policy does not cover property which If your rental property is damaged or uninhabitable through an ‘insured peril’ such as fire or flood, you should consider cover to meet any shortfall if the property cannot be rented out whilst the repairs are being undertaken. 4 Property owners’ liability for compensation and third party legal expenses This is a flexible option which is usually up to £2,000,000 with the option to extend to £10,000,000. 5 Legal advice cover This provides you with access to a 24-hour legal helpline for advice when you need it. belongs to the tenant. 3 Loss of rent cover
Another important tip is to think about any additional coverage that may be required, depending on the type of property owned. These options can include: Accidental damage cover To cover repairs to structure, fixtures and fittings Loss of rental income If your tenants miss payments Specific leaseholders Such as professionals, students, local authority tenants Subsidence Ground heave and landslip cover Terrorism cover An important consideration if your property is located in or near a city centre In the case of multiple property portfolios there may be additional complexities, and it can be difficult to arrange insurance for each property. This is where a professional insurance broker can provide expert advice on specialist cover.
To find out more about the insurance covers available to landlords, call one of our insurance teams for advice. Scrutton Bland have insurance specialists who regularly
work with clients in all areas of the UK. Call 01206 838400 or 01473 267000 .
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Property Projections
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The preamble to Scrutton Bland’s recent Budget Breakfast event underlined the prevailing view that the 2007/8 crash has set the economic and political landscape for the first half of this century. General elections, the Brexit vote, more talk of Scottish independence, Donald Trump and the like is, according to some financial pundits, background noise in comparison. So where does this leave property developers and landlords, a decade on?
O n the residential side, the principal issue continues to be first-time buyer affordability. This has impacted demand considerably. The fallout from 2007/08 has hit first-time buyers with the double whammy of historically low interest rates and falling income growth (not exactly what you need to accumulate a deposit), together with stricter bank lending criteria when environment, builders have found it challenging to finance smaller scale residential developments whilst at the same time facing regulatory hurdles around the social housing requirement and planning, leaving the supply of housing duly dampened. These factors are all key to the property sector as a whole: first time buyers provide liquidity to the entire market. Hence, we are now seeing a growing “Generation Rent”. So, what does the future look like? We can certainly expect continued demand for housing and opportunities for buy-to-let landlords to expand their portfolios. However, the government has woken up to this as a politically expedient source of tax revenue (“to deal with the ‘housing crisis’ and address the ownership aspirations of the young”). applying for a mortgage. In the post credit-crunch
Serious private landlords are treating the current market as an opportunity, moving to the limited company route. The new rules on loan interest relief do not, for now, apply to companies. Given the right circumstances it’s possible to restructure and refinance affairs, incorporating a portfolio whilst holding over any capital gain. In certain circumstances the transfer may be free of stamp duty land tax. On the commercial side, the current challenges are equally as interesting. The main issue is likely to be around the fundamental change in nature of the UK economy. The retail shopping sector has had to adapt to the increase in online shopping and the rise in “click and collect”. In financial services, Britain now has fewer than 10,000 bricks and mortar bank branches left – closures often leaving the grand and historic buildings so familiar to our high street vacant. A total of 2,000 regional branches have closed during the past five years, with no sign of this letting up. As we move towards a digital, knowledge-based, flexible and freelance “gig” economy there is a rising trend of home-working and collaboration in sharing office space. The archaic and obscure business rates system is a big disincentive to new entrepreneurial ventures making use of commercial property and, according to the last Budget, that message does now
seem to have gotten through to Government. We are working with several businesses in the property sector who are now taking the time to re-write their business plans. Long term commercial landlords need to revisit strategy. Creative thinking, exploiting niches and specialisation are the watchwords for 2017 and beyond. The overriding sense for property is that there is still room for optimism. On 29 March the Prime Minister officially triggered Brexit and, whether for or against the move, it’s happening. It arrives as Qatar—a prolific buyer of London real estate—announced a further £5bn of investment in to the UK. With a General Election now set for 8 June there will undoubtedly be all sorts of distractions, but they will not affect the fundamentals which were re-written in 2007/08, and which only now we are starting to fully understand. Luke Morris is a Corporate Partner at Scrutton Bland. Luke heads up Scrutton Bland’s Corporate Finance team, working with clients buying, selling, refinancing and reorganising businesses. Luke can be contacted at luke.morris@scruttonbland. co.uk or by calling 01206 838466 .
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Scrutton Bland regularly advises professionals within the property industry on a range of services, from raising finance and mitigating tax to independent financial planning and insurance. We enjoy taking a collaborative approach, supporting our clients in a broad range of projects and on portfolios of all shapes and sizes. All of our teams are based in-house and pride themselves on offering a professional and personal service. TEAM PROFILE Key contacts
Insurance
Tax
Tim Mulley Insurance Partner tim.mulley@scruttonbland.co.uk 01206 838404
Jason Fayers Tax Partner jason.fayers@scruttonbland.co.uk 01473 267047 Gavin Birchall Tax Partner gavin.birchall@scruttonbland.co.uk 01206 838464 Graham Doubtfire Tax Partner graham.doubtfire@scruttonbland.co.uk 01206 838437 Sarah Gamblin Manager sarah.gamblin@scruttonbland.co.uk 01473 267005
Tim Bell Protection Insurance Account Executive tim.bell@scruttonbland.co.uk 01206 838457 Ryan Whybrow Commercial Account Executive ryan.whybrow@scruttonbland.co.uk 01206 838461 Natasha Sadler Private Client Insurance Executive natasha.sadler@scruttonbland.co.uk 01206 838443
Accounting and Audit Sue Gull
Independent Financial Advice James Wright
Corporate Services Partner sue.gull@scruttonbland.co.uk 01473 267011
Independent Financial Adviser james.wright@scruttonbland.co.uk 01206 838413 Michelle Groves Independent Financial Adviser michelle.groves@scruttonbland.co.uk 01206 838465
Luke Morris Corporate Services Partner luke.morris@scruttonbland.co.uk 01206 838466 Mark Smith Senior Corporate Services Manager mark.smith@scruttonbland.co.uk 01473 267028 Claire Appleby Manager claire.appleby@scruttonbland.co.uk 01206 838400
Scrutton Bland Financial Services Limited is authorised and regulated by the Financial Conduct Authority ‘Partner’ is used to refer to a Member of Scrutton Bland LLP. A list of Members may be inspected on our website www.scruttonbland.co.uk
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