Paul Smith of Touchstone Education predicts that 2018 will see large numbers of UK buy-to-let landlords changing their business model and moving their properties in to the serviced accommodation space.
2018 will see increasing numbers of buy-to-let (BTL) landlords desperate for a solution to the so-called “anti-landlord” tax measures introduced in 2016. These are often referred to collectively as “Section 24”.
These measures included the requirement for landlords to report rental income received without deduction of mortgage interest as a cost. The National Landlords Association has estimated this will push an extra 600,000 landlords into the higher-rate tax bracket despite the fact that they will receive not one extra penny in income. Effectively they will be taxed on turnover not profit.
In addition the tax relief for mortgage interest that can be applied to this much higher reported (but not actual) income is capped at the lower 20 per cent bracket. Section 24 will push landlords into the higher rate income tax bracket and then cap their interest rate relief at 20 per cent.
The same measures increase stamp duty by three per cent in addition to the standard rates when purchasing additional residential property.
For landlords desperate to avoid losing money because of Section 24 many are thinking of simply selling-up. The very same budget made provisions to reduce capital gains tax from old rates of 18 per cent and 28 per cent to new rates of 10 per cent and 18 per cent. Unfortunately this reduction specifically does not apply to residential property!
Why no national clamour? Because for the last tax year there was 100 per cent transitional relief for the income reporting and interest rate relief provisions. In other words no landlords have had the extra tax bill yet, but it is coming.
Looking ahead to next tax-year what can they do? Stay as BTL and perhaps lose money? Sell up and pay 28 per cent capital gains tax or look for another solution?
Increasingly they are turning to serviced accommodation (SA). Not as the industry has traditionally known it, larger blocks with established operators, but perhaps a single flat or house.
Furnished holiday lets (FHL) were specifically excluded from Section 24 provisions. So take the same property and run it as serviced accommodation, and there are no “anti-landlord” taxes.
Take that and add increased “Rent a Room Allowance”, extra small business rates relief, reduction in corporation tax rates, massive capital allowances they can claim even if they bought the property as a BTL many years ago…. It is no surprise over the last 18 months landlords have been flocking to convert BTL properties to FHL or SA.
How do I know? I have trained thousands of them to do it by the book. I have also had high level discussions with Booking.com confirming they are seeing tens of thousands of smaller BTL landlords do just this.
Correct planning permission, ensuring compliance with leasehold issues (including not doing it if not allowed), fire risk assessments, data protection, mortgages, listing on all the OTAs, channel managers and all the rest.
We ourselves have grown our own portfolio of SA from one flat four years ago to more than 170 units (flats, houses, small blocks and recently one larger block) that we either own or manage. Our pipeline is several hundred more in the next 12 months. We anticipate circa 500 units by the end of 2018.
As the opportunity is becoming more widely understood we have been approached by both developers and international investors wanting to build a UK-based SA business. We are just about to send live a block of 102 units for a developer on a managed basis. We are also working with an organisation in Sweden representing hundreds of high net worth individuals.
If we add together the portfolios of the landlords we have trained it is many thousands of SA units, ranging from single rooms to stately homes.
Often with legislation there are unintended consequences. With Section 24 one of these consequences is to push BTL landlords by the thousands into serviced accommodation with its much higher cash-flow and fantastic tax breaks.
For more information contact Paul Smith via www.touchstoneeducation.co.uk
</p
