Considering Incorporation for your buy to let portfolio? In this interview with long-term MFB Client, Rent London Homes, we look at his successful journey and the benefits he’s accessed.
We sat down with MFB client Rent London Homes to discuss why he decided to incorporate, his advice for landlords, and why working with an expert broker and tax advisor is essential to the process.
How and when did you decide to invest in buy to let properties?
I started way back in 2003, which, looking back, was the gold rush, really, where lenders were falling over themselves to lend to anyone with a pulse. Think Northern Rock 110% loan for value, no deposit, etc.
After school, I did the whole University route and got it into my head that London was the greatest city in the world, and I would live there forever. Lots of students rent rooms in London, so I thought, well, if I'm going to be in the greatest city in the world forever, and I want to live here, as soon as I finish Uni, I'll buy a house and live in it and I won’t have to pay all this rent. The problem was, obviously, I had no money, so I had to borrow everything, including the cash for the stamp duty.
In order to buy it, and because I couldn't possibly afford to pay the mortgage once I got it, the only option was to fill all the rooms of a three-bedroom house and turn it into a 5-bedroom house with as many tenants as possible.
You could say I was a kind of accidental landlord. I was doing it to get a house to live in, but I threw myself into it fairly quickly and really specialised in getting tenants in, renting by the room.
After 12 months, I thought, well, I may as well buy a bigger house in a better location in London. So again, I went back for as much money as I possibly could. The first house was £160,000, so I upped the ante and doubled the budget and bought the next one for £328,000. Again, I let it as an HMO for students and just repeated the same thing. I was in the right place at the right time, of course.
You couldn't possibly replicate this model now because, again, lenders were falling over themselves to lend to anyone. There was no such thing as rental calculations, and 90% loan-to-value was the norm. 95% was quite common, and even 100-110%.
Of course, the crash happened, but because I'd always bought and maintained them as HMOs and not as houses to live in or to flip, I didn't really come unstuck. Cash flow was no problem, and there was still no drop-off in terms of demand.
On the flip side, all those mortgages we'd obtained in those 4-5 years prior to 2008 were on 2-year trackers and went on the standard variable above the Base Rate. Well, of course, in 2008 the Base Rate went down to c.0.25% or whatever it was. So, our mortgages all went down to around 2%, and so we were very, very fortunate in terms of cash flow.
So, you then at some point had to start thinking about incorporation as a result of Section 24. So, Noel, why was this an important consideration for you? What things attracted you to the process?
Going back to the Base Rate dropping, I, along with many people with these ultra-low mortgages, sort of rode them out. Even though lending was a challenge, there was no challenge in cash flow. And so, I sort of bumbled along post-2008 for several years with these very low rates leading up to the 2015 election.
I was watching in horror as Ed Miliband, who's now come back to haunt us, led the sort of Labour socialist brigade. And then naively, I heaved a massive sigh of relief when the Conservatives won a small majority. Stupid me, because within the second or third week, George Osborne announced Section 24.
The moment he did this, my blood ran cold because I realised it was absolutely lethal, particularly for someone as heavily leveraged as I was. Luckily, I'd been warned about the importance of incorporating and moving to a Limited Company before that, because we had pretty large borrowings.
Of course, when I started back in 2003, I didn't really have that as an option because there was no market for Limited Company lending. It was such a niche option, as the interest rate was so much higher than having it in your own name, that it just wasn't really viable. So, in a sense, I was kind of in that situation, like a lot of landlords, by accident.
I went through a whole range of emotions, including shock, horror and betrayal. I quickly wised up to it all and then realised that incorporation was vital.
But the problem was how to achieve it.
But don't think you're just presented with two options: incorporate or sell up. There is a third, which is do nothing because again, rates were so low and they got even lower during lockdown, I think we went down to like 1%.
But I knew that this was too good to last, and that Incorporation was going to be vital to get out of that situation.
Of course, once inflation started kicking in and rates started rising, I knew we were going to have to act swiftly, having gotten away with it for so long.
How long did it take you to decide this was the best course of action?
Well, as previously mentioned, in one sense, instantly - the moment George Osborne announced Section 24 10 years ago, it was a no-brainer.
But the entire process was a very long, slow, drawn-out one. I was agonising over the best way to do it. What was the best approach? Should I partly incorporate, like Sean (from Comprehensive Tax Planning) alluded to in your webinar? Should I just incorporate any new properties? Should I liquidate the existing portfolio? What should I do?
I spent the whole of 2021-22 thoroughly researching our options, getting as much advice as possible, and trying to be as educated as possible about them before making the decision.
Again, like all industries, there were some very good people out there, but also some unreliable schemes. And they weren't cheap either. I mean, they wanted to charge a large upfront fee and then a monthly fee for the admin as well.
I wasn't attracted to that at all. I wanted to do a straightforward incorporation. What sold it to me with Comprehensive Tax Planning was that there was a precedent set for incorporation, as opposed to these pop-up companies doing it as a reaction to section 24, where the sole purpose just seemed to be to avoid the tax, which HMRC ultimately are not going to tolerate, and sadly, that seems to have transpired now.
Beyond the quality of the advice and the sort of structures that have been suggested, was there anything else that made you slightly dubious or concerned about incorporating?
I don't think so, no, you'll always have tiny doubts about anything you do. It's really about taking a long, critical view of it and trying to put yourself in the shoes of an HMRC tax inspector. You need to prove that you're actually running a business and not just sitting on a passive investment.
Comprehensive Tax Planning proved that we would qualify for the incorporation relief, and the fact that my family was involved and we had a legitimate partnership where we'd been working together for years ultimately gave me confidence. With the history and the knowledge of Sean's expertise, we took the leap of faith.
There are two reasons why people are slightly nervous about incorporating. The first one is costs and mortgages. I don't want to pay all the fees; I'm worried about the stamp duty. Obviously, if you qualify for the right Stamp Duty relief, the Capital Gains Tax kind of disappears for a bit.
The second thing is that I don't want to pay limited company mortgage rates. Was that a concern for you?
Well, no, because again, connecting to what we were talking about earlier with Limited Company mortgages, in 2003 when I first started, there was virtually no market for Limited Companies.
If there were one or two lenders who offered these products, they would have been more specialist, and their rates would have been exorbitantly high, maybe 3-4% higher.
We've seen so many lenders enter this market over the last 10 years, and rates have continued to drop to the point where they’re virtually the same. There’s very little difference between them now; that's the irony of it.
I don't know if the arrangement fees are substantially more, but in terms of the actual interest rate, there's very little to choose between them. Sean mentioned in the webinar last week that his set-up fees are around £14-15k, which I admit is a lot. But everyone's different, and you need to look at your own portfolio and decide whether that's worth it. I think the tax savings were more than what we’d have spent if we’d kept the properties in our name in the first year alone – in fact, it would have been more expensive than the Comprehensive Tax Planning fee.
Section 24 would have bankrupted us. I mean, there's no mincing around it. It's just totally unsustainable. So, it's again a no-brainer. What do you want to do? Do you want to pay a one-off fee of £14,000? Or do you want to pay 10s of thousands of pounds, potentially if not hundreds, over the next 10-20 years, if you can even sustain that.
Have there been any other changes for your business and the way you're working, and the benefits other than the taxation that you can think of?
We've always tried to be as professional as possible, and I'm sure all landlords do, but I think having that ability to distance yourself from the company adds a layer of professionalism. It shifts the focus to be as business-like and professional as possible.
It's been very liberating as well because now that we've made that decision to incorporate, we really can think properly as a company, both now and in the future, and plan for further expansion with confidence, knowing that we're going to get full interest relief.
I think it's a horrible place to be if you're stuck with it in your own name, subject to Section 24, and not knowing which direction to go. Certainly, you won't be able to expand any further because you've hit your limit.
Not just in terms of being able to pay the tax, but also in terms of lending. Lenders will obviously look at your tax position in terms of affordability and will not lend you as much.
I'd thoroughly encourage anyone else to seek professional tax advice and to look at incorporating.
What advice can you give to any landlords looking to embark on this journey?
Take a very long, hard look at your existing portfolio and decide if this is really for you; don't take a short-term or long-term view, but an indefinite view, because that is what property has now become.
Look at somewhere like London, where there’s been no growth in the last 10 years. Anyone who bought in the area in, say 2015, could potentially, if they sold now, be facing a loss. It just shows you need to decide if you want to be in this for the very long term and whether you want to run this really professionally like a business.
And if you don't, I think either liquidate or find a way to transfer out of it, because where I disagree with Sean, I don't think standing still and doing nothing anymore is an option. Frankly, and some people may disagree, I think now it's all or nothing. It's either go big or go home. For any first-time landlords looking to start, I'm not saying that you've got to start with a 200-unit conversion, but you've really got to throw yourself into it 100%.
Treat it seriously and professionally in your spare time while you're trying to build. Treat your employed job as a means to an end to ultimately leave to work for your own property business.
Now, people may disagree with that, and good luck to them. But the problem is that, rightly or wrongly, and it is unfair, the government does not want small businesses. They love kicking landlords. They've shown it with the NI increase that's going to kill off small businesses. They've shown it with Inheritance Tax, with small farmers. They’ve shown it with section 24. They want big corporates with which they can work hand in hand. So, either join the big boys or just don't do it because it's so overregulated now, and it really is all-consuming.
I don't mean to discourage anyone, but I think you should really look at your existing portfolio. If you qualify for Incorporation and Stamp Duty relief, go for it. If you don't, but you've got excellent-performing properties, maybe think about biting the bullet and paying that CGT and Stamp duty.
Finally, you've worked with MFB for a long time. Why are we your broker of choice?
I think what stood out to me was, before your rebrand, you were Mortgages for Business, and that goes back to what we were saying earlier, treating it as a business: this is a business, it's business-oriented, it is business-focused.
You guys support all landlords, from buy to let, commercial landlords, semi-commercial, holiday lets, you cover everything. You’re a broker who really focuses on the business side again.
Secondly, again, going back to when Section 24 was announced and all these different hybrid schemes, sadly, again, this is an industry where you do get terrible brokers as well as brilliant brokers. And what's brilliant about MFB. Basic things like responding to emails, calls, etc., that's all done swiftly.
You know that they're on it. You can rely on them. You know, if you send an e-mail, it's going to be swiftly dealt with, and all the points will be addressed, not just the first and second, then everything else will be ignored, which again can be horribly familiar if you're used to dealing with bad people in the industry.
The holistic approach is so important. Again, I think it's brilliant that you're now doing webinars with Sean and other lenders and accountants because it shows that we're all working together as a team. We treat this all under one umbrella because the more synchronisation we get, the further we'll go.
This would be my advice with my 22 years of experience: you've got to get good brokers, good accountants, good solicitors, good agents, good advice, and good role models.
Got a question?
If you have questions about Limited Company mortgages, please speak to our expert team. They’ve helped many landlords incorporate portfolios.
If you have any tax-related questions, contact our expert partners at Comprehensive Tax Planning.
