Could private landlords club together as an alternative to selling up?
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Mike White of Martin & Co discusses whether private landlords should come together in a bid to avoid relinquishing their properties
My last column in April highlighted the 'Good News' that abounds for private landlords. I did touch on the difficulties that a proportion of landlords are facing given the relentless squeezing of the sector by HM government and concluded, for those affected, selling their asset was likely the only option.
However, this has been bugging me; essentially, my role as a letting agent and property manager entails managing our clients' risks and finding solutions to problems. So, saying, 'Just Give Up' goes against the grain and I've been contemplating other ways around the issue. There's been a lot of hot air about setting up a limited company and transferring your property into that; my view on that one is, it doesn't really solve a problem and will cost way more in the short run than the potential savings. Two transactions are created in doing this both of which will incur some form of taxation, let alone getting your mortgage company to agree to it!
But, in discounting the limited company route, I pondered whether there were any other Corporate or Trust based vehicles out there which might be both tax-efficient and investor friendly which were capable of being used. And the answer is, 'Yes' conceptually. Firstly though, before I elaborate, I just need to caveat this by saying, I'm neither a tax advisor nor a financial advisor in the regulated sense and what follows are just my personal musings. Nonetheless, the vehicle I think could work is a Real Estate Investment Trust, more commonly known by the acronym REIT; they've have been around since 1960 and in the UK since 2007. Ours are highly regulated companies, quoted on the London Stock Exchange, set up to be tax efficient owners of large property portfolios. When they were first established here, a number of the really big commercial property-owning companies switched to REIT status because of the tax advantages. For example, the owners of the Chapelfield Shopping Centre and the Riverside Leisure Centre are both REITS.
The tax efficiency comes from the fact they do not pay capital gains nor corporation tax. Add to that REITs are legally bound to pay a minimum of 90 per cent of all property rental profits to shareholders on an annual basis and, by being quoted on the stock exchange, can offer liquidity, you've got an alternative worth considering. For those landlords who don't have much of a buy to let mortgage and/or are not higher rate tax-payers, a REIT is unlikely to offer the same returns as owning your own property. However, for those who only have a choice of selling….or what(?) a REIT could be the 'Or What'.
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At this point you'll be shouting, 'that's all very well but how do I get my property into one of these REITs without incurring a Capital Gains Tax liability?' Hmm, there's a question… which before I answer, let me just say while most of the REITs in the UK are still oriented towards commercial properties, a few focusing on residential portfolios have now sprung up and I'm sure others will soon follow. Not least, because government is pushing for PRS property to be held in large portfolios by corporate-like entities. Right, the answer to the question is to find a REIT which is willing to exchange your property for shares. Ok, that's potentially a big risk as swapping bricks for paper has got to be but the advantage is, there would be no CGT liability incurred until the shares were sold at some future point.
As I say there's a few residential REITs already out there but I think the far more interesting play would be to put together a Norfolk based REIT for local investors. It would probably only need a total of 500 properties to make it work. Anyone interested? Give me a call at Martin & Co and let's see if it could be a goer!
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You can contact Mike White, director, Martin & Co Norwich, column sponsors, on 01603 766860.