George Osbourne’s new budget has put a rather hefty spanner in the works for anyone looking to invest in a second property for buy-to-let purposes. The new buy-to-let tax makes it a lot harder for landlords and those owning second homes to make profit. The new rules introduced mean anyone buying a second property with the sole purpose of renting it out (it’s not their main residence) will have to pay an extra 3 percent in stamp duty. This is likely to hit investors hard, with research indicating that the average landlord will be losing the equivalent of a year’s income. For example, a buyer of a home worth £400,000 will be taxed £15,000 upfront for their investment; this will make a huge dent in any returns generated, compared to the £3000 they would have previously been taxed. However, there are still ways to invest in property and generate ample profit; any one investing in a second property should aim to cut out the middle man and hence side-step the new charge in one swift move.   Peer-to-peer Companies P2P property companies enable investors to cut out the middle man; in layman’s terms, they are specialised companies which allow investors to supply money upfront for property loans and mortgages hence allowing the mortgagee to avoid the banks and the new tax that goes with them – whilst gaining interest. Supporters of this new method to do buy-to-let say that not only is it a hugely profitable venture for Investors (they get returns of around 5 percent) but they also get to cut out a load of the inevitable yet unnecessary landlord hassle; they will avoid having to argue with difficult tenants or having to deal with changes to property tax. Further benefits include being able to place investments into the newly created flexible ISAs, which essentially means up to £15,240 of a return, flow into investor’s pockets completely tax-free.   Professional Opinions Due to all the recent changes in stamp duty and tax relief, wannabe landlords are facing pretty insurmountable sums; the fact of the matter, is it’s just not economically viable to be a first-time landlord anymore. However, people still want to invest in property, and these specialised companies allow people to continue to profitably do so. Ian Thomas, director and co-founder of one of these peer-to-peer companies, argues that investing in property cuts out all the negatives of being a landlord and provides positive returns. “You don’t have to worry about Stamp Duty, Capital Gains Tax, or gaps in tenancies. And you’ll never get a call from a tenant in the middle of the night about a broken down boiler. “Instead you do get to enjoy a great, consistent return, and can diversify across a range of different properties much more cheaply than if you wanted to build your own traditional property portfolio.”   Potential Issues Borrowers need to ensure that they will be able to repay their loans, and if not, the peer-to-peer platforms need to be able to reimburse investors. All loans are secured against a UK property, meaning that the companies are able to repossess a property if a borrower is unable to keep up repayments. Some experts have expressed caution about investing in property through peer-to-peer sites; they claim it’s extremely risky for investors, as if the peer to peer site goes bankrupt then cash will be lost with no insurance – money isn’t secured by the Financial Services Compensation Scheme. Finally, borrowers who decide to use peer-to-peer often come to this decision due to rejection for bank loans; suggesting they are higher risk and are more likely to default on payments. This is obviously less often the case with the regular buy-to-let mortgages. Danny Cox, chartered financial planner said: “Most people have exposure to residential property through their own home, so firstly investors should be questioning whether they need more of the same asset class. P2P property loans are amongst the higher risk of personal peer to peer lending, since these are, in effect second mortgages and not investing in property at all. Borrowers have gone done this route as they are unable to borrow more via their mortgage themselves. And there is always a good reason why a bank or building society won’t lend more.”   Conclusion In conclusion, all investors can do is tread carefully when it comes to parting with their money, especially in light of the incoming property dip Britain is predicted to encounter. This is likely to put borrowers under financial pressure, therefore the real test for these firms is how they react to the financial downturn.   By Leila Glen, for Savoy Stewart.

Falling gas prices could kill off the idea of hydraulic fracturing in Britain, amid further protests. Recently, Third Energy were given the go ahead to use hydraulic fracking in the North Yorkshire village of Kirby Misperton. The energy company has been producing gas in the region for over 20 years and will use its fields to produce fuel for its electricity generation plant (42MW). Other energy groups are also trying to find gas, such as Ineos (a UK chemical group, privately owned with a $40 billion turnover, as well as Cuadrilla. The UK Government has also come out in support of the idea, with David Cameron in particular advocating the benefits of fracking. This desire for energy independence has recently been supported by the British Geological Survey which estimates that there is a resource in excess of 1,000 trillion cubic feet below Yorkshire and Lancashire, that’s more than 10 times the amount of gas that has ever been produced from the North Sea. Therefore, to recover even a minute fraction of the resource could be hugely beneficial to the country’s energy concerns, although price would be an issue. Estimates of producing shale gas from fields in the UK are well above the prices of spot gas, which is around 30p per therm. Another company, IGas, which had been examining the potential for fracking in old coal seams, has also abandoned the idea due to the cost being too much. However it will, for the moment, continue with shale gas. Meanwhile, the output of US gas is rising year on year, with their storage almost at capacity and exports being sent to the UK. One of these importers in Centrica. Despite this, there are still fracking advocates in the UK who maintain that the hydraulic fracturing process can be profitable but investors are being advised to let market forces kill the idea off for good.

1. Background Property management companies (or PMCs) are frequently used by residential developers as a mechanism to maintain control of the common parts of a building during development and sale, while enabling the developer to step away entirely once the last unit is sold. PMCs can be equally appealing to purchasers, enabling them to take control of decisions affecting the common parts. PMCs are not unique entities. They are simply private limited companies with articles of association tailored to provide that only residents (and, for a limited period, the developer) can own a share. 2. How do they work? On incorporation, the developer will typically own a ‘golden share’ which carries with it all voting rights until such time as the last flat in the property is sold. As the developer controls all shareholder votes, it also controls of the board of the PMC. Each time a flat in the new development is sold, the buyer will acquire a share in the PMC, but (in contrast to the golden share) that share has no voting rights until such time as the last flat is sold. Once the last flat is sold, the voting rights attaching to the golden share cease and pass to the shares owned by the residents. At the same time, the developer will expect to resign its nominated directors from the board and for new directors nominated by the residents to be appointed. 3. Common issues Sounds simple? In practice, however, PMCs cause numerous difficulties, attributable either to poor structuring or poor management. These difficulties can impact on the ability of a flat owner to sell his property, and result in significant legal fees in trying to resolve. So what are these difficulties and how are they best avoided? Get the structuring right One size does not fit all… Don’t be tempted to cut down on legal fees by simply replicating the articles of a PMC you have stumbled across before. While the skeleton structure may be the same, each PMC is unique and has been tailored to the property in question. How many shares… Decide whether shares should be allotted on the basis of one share per unit, or dependent on floor space. Allotment v transfer… We recommend that all shares are allotted to the developer at the outset and subsequently transferred, rather than new shares being issued each time a unit is sold. This minimises the administrative burden on the developer, who can pre-sign all the necessary stock transfer forms and certificates, and does away with the need to file an SH01 with Companies House each time a new share is issued. If there is a funder, the shares may need to be allotted to them whilst the loan is in place Ensure control passes effectively Divesting the developer’s share… To ensure the developer can step out cleanly on the sale of the last unit, we recommend the articles provide that the golden share automatically converts to an ordinary share, and is then transferred to the buyer of the last unit (rather than the golden share simply losing its voting rights but remaining as a moribund interest held in perpetuity by the developer). Changing the board… Developers often have difficulty in convincing residents to join the board when control transfers. To avoid this problem, consider inserting an obligation in the lease agreeing that the lessee will become a director on demand, and back this up by requiring the lessee to deliver a signed but undated AP01. Don’t forget the registered address… When control passes to the residents, the registered office (which to that point is typically the developer’s address) will need to be changed. Don’t be tempted to use the generic property address, when paperwork can often go array. Provide the address of a unit at the property, or perhaps use the property manager’s address. Looking forward Keeping up to date… Make sure that the statutory books are kept up to date, so that the share register is updated and a new share certificate issued each time a flat is sold. Trying to track down former owners to cooperate at a later date can be a real head ache and can be a stumbling block for a sale. Use a big stick… Consider a provision in the articles that disenfranchises a member’s shares while it is in breach under the terms of its lease. Keep everyone informed… Make sure directors of the PMC are aware of their statutory obligations and that notice of all meetings is given to all interested parties. Failing to give notice just because someone has ‘never shown interest before’ is not an excuse. If you have any questions or would like to discuss any of the issues further, please contact Victoria Symons: vsymons@brecher.co.uk.