***Podcast Episode Automated Transcript***
Hello, and welcome to another episode of the Essential Property Podcast with your hosts Paul Samuda and Amanda Woodward. Andtoday we're going to be talking all things HMO council tax banding. So earlier this week, the government has gone into consultation to get views on banding council tax for HMOs. And the view that we should only have one council tax per property, apart from in veryexceptional circumstances, Paul, and I will share with you some of our experience on this subject or experience of others that we've come into contact with. And just share a little bit more about some legislation in around this subject. So Paul, over to you tell us a little bitmore about what we've experienced or what we've learned what we've had on the subject of HMOs and character defects.
I have to say, Amanda, when I read this, I was blown away. This was coming in the background on the back of Michael Gove, levelling up and ensuring that parts of the country that aren't getting their fair share of equity and assistance, they're not being prejudiced. And thiswas a clear one. And I understand that some MPs in the background have been pushing for this to be a real thing. So definitely welcome this new legislation, it's going into consultation, which normally means it's a bit of a slam dunk. But you never know. I think thebackground to this is a little unclear. There's some confusing guidance and legislation from the valuation office, which has sole jurisdiction on valuations of property in the country. And what landlords had been experienced or have been experiencing is that if they convert ahouse or a commercial dwelling to a small medium or large HMO, they have been banded by the VOA as a self contained dwelling. So pretty much treating it as if a room was a flat. And if you imagine in very simple terms in the north of the country, and you're charging 450 pounds a month for a double room, and you now have to pay council tax as a landlord and each of those rooms, that's a third of the rental income goes to council tax. If you add that if you charge that to the renter, ie they pay wrong council tax, the renter will say no thank you landlord, our go to one down the road where the council tax is included. So the strange thing you had a situation where people that we both know have gone about converting a property, anything from a fourth five bedroom property to a 12 acre property and was saddled with this extra capital tax. And one sad case someone who I knewpersonally had to close the property covenant a set up and they had personal guarantees. And it caused no end of problems, no end ofproblems. So the government has now appreciated this could was a housing problem, because it reduces the housing stock. It's adisincentive for development for landlords like ourselves and our listeners, a puts a bit of a challenge on the renter when they're nowasked to pay rent. Along with council tax. It means affordable accommodation is no longer affordable accommodation. Let's face it, you're paying 500 pounds a month for an ensuite room, another 130 pounds a month for council tax. All of a sudden you're right you're in the one bedroom apartment arena. And you're trying to run away from that and you want an all inclusive type package. So this interest so the so the consultation is through to the end of March. All our listeners that are HMO landlords should put their two pennies worth in and theyshould try and give their feedback said is a good idea. There's a whole bunch of questions that they've asked with regard to be a cutoff.Should there be a number room charter, you know, is a 20 bed HMO, the same as a five bed HMO in terms of its treatment? So if we're very, very intelligent questions, and I don't have an immediate answer for that my default would be yes, it should be treated the same but thinking it through perhaps there should be a new banding which I don't think there'll be new banding introduced for forever in a day, perhaps there should be a commercial banding, a lot of properties are being converted from Commercial to Residential. Typically,commercial bandings for shops or small units are more than bank accounts tax for a building. But less then billing by room. So maybethere's a halfway house for some of the larger commercial development, what that figure is maybe over 10, or 11, something like that, not too sure, I'd be interested to see what the feedback is, but I think you'd be looking at in terms of promoting affordable housing throughoutthe country. You know, maybe they should just have as the whole unit, just to make it affordable for people to, to rent, because you got to heat these places, you know, right now heating these places. I mean, you know, not putting a finer point, but we had a tenant that came from overseas. And he contacted us, what a couple of weeks ago, and asked very politely him if we could have the heating on from 7pm in the evening through to 8am the following morning. Obviously, we politely declined. But, you know, this heating thing is a bit of a challenge. So, the more affordable the accommodation is for renters, taking everything into account. I think it makes sense for it to be,you know, doesn't matter the number of rooms, you know, just have one council tax as per. And that's a way of helping people out theAffordable Care Act.
Well, I certainly think that all HMO landlords will be welcome in the news, because I think it is fair to say that some investors have backed off a little bit on some of the larger HMO projects for the fear that they may get the banding by the room. So not only have landlords beensort of leaving the market for a variety of different reasons, whether it'd be interest rates, whether it be the cost of utilities, and the fear of potentially converting an HMO and a council tax by the room.
I think you mentioned something in terms of landlord leaving the market, maybe we should incorporate this in this podcast. Now, this isabout HMOs. But we should talk about some
landlords who are, you know, fleeting rather than toughing it out. But you know, the core subject here is the HMO banding, and what apositive thing it is for the environment. Just going back, it is part of the levelling up exercise, and there is a flip side the levelling upexercise. And that's holding landlords more accountable, as if we're not accountable in the moment, you know, where immigrationofficers were health and safety specialists were all these things, and the governor wants to hold us more accountable. There's more rights for renters, there's a landlord register coming up, I don't think there's a landlord out there that would want a tenant register. For these, you know, some of these tenants that do take advantage, we've all experienced them. So there is a flip side to this levelling up agenda aswell. And for those who are informed know what's coming down the pipeline, which is going to make it tougher, so it's, it's good to havesome potential positive news for HMO landlords who are invested in in upgrading existing properties and infrastructure. You know, thisthing could all be immaterial, if liking a wonderful area of crew, where since they bought in article for how many developments have therebeen in this article for area for calamity applications? Is it 00. And that's a good example where, you know, they've taken sort of asledgehammer to crack open a shell, where there's been zero development. So a couple of counsellors are over the moon. But bilum got anywhere to live. rents have gone up as a result, because there's no more development.
There's no new money coming to the area to develop maybe rundown properties. So this is a
good example of where, you know, it's gone too far. One way, maybe the area was too wide. That said, that said, you probably get a paidoff. And so you probably get accounted for so Well, nobody's applied dry. You know, we're probably going to be the first ones to put anapplication in for something at some point, I record do that wait three, we'll put in an application for something and test test the waters on behalf of our landlords.
Well, I can't wait for our objections column of the planning, application, and sale all of those objections that if we do, then certainly that will be great if we could overcome that and get another development throwing crew. I would remember driving around the roads of crewfrom sort of the station down to Nantwich road around CW two and across the West Street as well. And every couple of roads that youwould drive down the biggest skip and there'll be a team of builders and they'll be churning out the refurbs. Now, okay, it does go a little bit quieter in the winter. But I can remember the last time that I saw the hustle and bustle of a refurbished House been stripped out skipson the street. And come in the last time I saw that in crew does not good as it is no, it just feels a bit sleepy.
So good. I mean, considering we have, okay, not in the immediate near future, we have HS two on the way we have huge train networkflowing through crew. You know, even as small as a team, it's always been dynamic. It's all always had a wonderful transient workforce. And as rightly said, it's become a little bit sleeping because of as other bicycle for.
And what's happened is now those properties that are already licenced, or that already have planning. Or you can prove that theproperty's been running as an HMO before the article for directive came in those properties. And there are a lot more attractive to buyers because
they're buying something that's ready to go and doesn't have to go through that whole process. So that the upside there is obviously thepremiums on your property, if you manage to find somebody that's willing to sell time will tell on that one. Yeah, perhaps we will stick the application and see what comes of it.
So it's going back to the six by the room, I think we should throw our hat in the ring, and try to determine whether there's going to be a cut off interms of what point do they start looking at contact by the room? How large should the property get to before they levy that? Because I think, you know, there's no free lunches in this world. I'm sure they're going to put a limit. What do you think that limits?
Well, let me say one thing first, yes, I think they should put a limit, but I don't think the limit should then be and then it's counter tax by theroute. So it needs to be okay. Yes, it needs to be a cut off. But the cut off to then do what may be to council taxes or business ratesinstead, perhaps the company talking about your awesome to two things at the same time. Because even let's say you have a 20 bedroomHMO, and the cutoff cutoff is 20. And you've got 21 bedrooms. And then everyone's developments are going to be 19 bedrooms, I guessat that point. But you know, you wouldn't want to rent it out to taxes that would still kill the deal. So but to put our hat in or my hat in? I think they might go. I think it's under 20. I'm gonna be a bit conservative and say the cutoff could be like 15 rooms. Yeah, that's not what Iwant. But not be that stopped anything that doesn't look like a house anymore. Yeah. Yeah. could potentially be I'm not sure what criteria would be used. But as you did mentioned, if you do get a chance to go on, well, we encourage you to go onto the government's website and check it out. I'll post the link in the show notes afterwards. And also to then fill in the consultation and give your feedback. You know, the more people that are giving the positive feedback, the better. But it does have some questions in here specifically with regards to sizeand even give scenarios. So it's a scenario A, this is how different kinds of taxes can be banned is scenario a Victorian house that has a fivethat is effectively a five bed HMO, and it has Scenario B, a guest house that has been converted to a 14 bed HMO, all the rooms have ensuites. So they're already defining the difference between shared house and more ensuite commercial type development.
And they say maybe the ensuite development should have tennis tax by design.
They're not necessarily saying that, but they're saying they are two sort of significantly different animals. You know, you know, the consultation, you know, the
irony of this thing. The irony of it is that, why does an ensuite make something self contained? You know, do they want HMOs to retain ashared bathroom? Back in the old days things have moved up, which is what they've actually said the quality of HMOs have jumpedtremendously. And we should applaud developers for bringing a higher quality to this sector, so that people can have a good alternative from a living and residential standpoint, especially if they're only planning to be in the area for about 12 months. They're coming for work or they're coming to be close to their family member, or whatever the reasoning is. My view is that maybe think about it logically, I think they should possibly banned it. If you look at it from a planning standpoint, you have to apply for planning from seven rooms. Yes. So Ithink to be fair, you take seven I think I think seven is a lucky number for some part of the world in our Asian investors like the numberseven was in the break. Well, if you go in blocks of seven, so let's say you had a 20 bed HMO, that 20 Bed HMO or let's say let's keep itsimple a 21 bed HMO yes that 21 Bed HMO would pay three law So if cancer tech, so they'll break it up into three, seven bed HMOs. I think we will take that all day long. Yeah. And from a cancer standpoint, from a local authority standpoint, they're getting free checks money. Yeah, the landlord is happy, the tenant is
happy. Because everything's all inclusive, it's affordable. It's no different to running three small
HMOs or beating one building. And I think something like that will go down a tree.
I think that's exactly what you need to put on our response to the construction
fun. Let's see what happens. I'll do that. And this is important. And we have to stress people shouldn't be complacent. And sometimes it's easy to stand back and believe that somebody else is going to put forward their ideas and their thoughts in terms of the consultation.Okay, so I think this was useful. This is useful for our we have a lot of HMO or HMO specialists, this, everybody knows. So it's good for our listeners to hear this. But let's talk about let's talk about people fleeing the nest Slean the investment and selling stuff up because it's got a little bit tough interest rates have gone up, and energy costs have gone up, what do we really think about that, I really think that is a badmove. And when I have a say, and we say that we're net buyers, and that we're in the market for you know, as long as we can, and we're long term thinkers and take a long term approach to property. So when people are or investors are looking to exit,
there's lots of different reasons, sometimes personal reasons, sometimes they've been in the market for a long time. So it's actually theperfect time to leave. But fleeing because a property isn't quite cash showing you what you wanted it to cash flow is making a couple of100 pounds unless you're going through a bit of a tough time we take a different view. And broadly speaking, that view is that property comes good with time both in an equity standpoint, and from a cash flow standpoint, and we would encourage investors really just to takeanother look at their property to see whether it now is really the best time to sell, or whether by holding a little bit longer, they might have a better outcome. What do you think is the challenge? I think, a number of landlords out there still hold the property in the names? Yeah.So there is an extra burden now being put on starting from your mate George Osborne, my mate who levied that tapering tax, yes, and stop the tax relief. So all of a sudden, there is now a humongous tax burden on landlords to cope with. And when they in the bed, youknow, any smart landlord would have run the numbers with their accountant. And they've looked at it and they thought, Oh, my God, ohmy god, I'm losing money from a cash flow standpoint, which maybe I can live with losing 100 Couple 100 quid a month for a year or two.But I've got to pay 5000 pounds in tax anyway. That's true. Yeah. And that's, that's the bit thinking through that killing people. There's the believer lobby group put forward that want to help landlords out, because of the extra tax burden. I don't think that's going to happen. I don't think it's that kind of government. But I think that's the issue. I see issue. The section 24 that came in is now really, really bitingphilosophically. We are holders were long term holders. And the people that are late in the market are probably feeling a little bit painpeople have been in the market while I probably look back and look back at it philosophically. And you know what we made good money. When before section 24 when interest rates were low. I mean, there's a time, you know, remember the financial meltdown of 2010 2011. When interest rates came down from five 6% down to one and a half percent. A lot of landlords were saved by that and went on to makegood money. So philosophically, notwithstanding section 24, some landlords are thinking, yeah, we can ride this one out. But for the onesthat came late to the party, this is looking like a very, very expensive investment. Now, I always said, when I sit down and do somementoring with people, is that you've got to look at profit in a long term perspective. You have to look at property long term perspective.You've got to do the numbers long term. A long term means 10 years. So you look at 10 years out and say, Okay, I'm feeling some painnow. Is that pain going to be here in year two, year three, year four, all the way through to Year 10. If that's what you believe that you should give up. If the pain is only going to be here for next couple of three years, then there's an argument that you're going to have seven years of reasonable growth, reasonable writing can profit from your investment, and the value of the property will increase. Now, isn't that was thronging in the law? asked budget, the chancellor, you know, the government's rip up your cash. So by raising money, so they're looking at tinkering with the capital with the capital gains tax, yes. And, you know, tapering that way. So you can't blame our federal landlords for certainly considering selling, especially they've been the game for a long time, our position, we've not sold anything, we have no intention of selling anything. And we're still looking to invest. But clearly, we're buying through a company rather than in ourown names. And we're thinking long term, were thinking continuous time, what will be the rent on a two bedroom, terraced house, whichis currently 500? In Scope? Maybe 550? In crew in 10 years, time wise? What's that gonna be? Probably in the order of 1000 1200pounds? Yeah.
And then look at the property value as well. I mean, you gave an example of, why would you want to make you know, 3000 pounds ayear in cash flow and pay 5000 pounds a year in tax? Of course, nobody's gonna want to do that deal. However, do you think that at the end of the year, your property might have gone up in value, but might buy more than 5000 pounds, more than likely yes, or over the long term will have gone up by more than 5000 pounds. So it's taking a slightly broader view, as you've just said, and you can also look atways that you can boost the pressure on a property. So if you've currently got a vital it, and it's not really cash flow, or cash flows minimal, you're paying a bunch of tax because you've got it in your own name, then you can look at alternative strategies. So you know, a three button vital, it could perhaps become a four bedroom house share Boosey income that way, if you look at turning that over toessay we've discussed on previous podcast episodes, whereby running that as as essay could effectively wipe out or heavily reduce the tax element due to Section 24. So I always think there's always a way, it's always a way to do something. And if you end up at a complete dead end, then like you said, fair enough, sometimes the only option is to sell. But I think it's time to exhaust every single option, different strategy, different way of calculating your numbers, looking for the long term. And I'd like to think that we're always gonna see rainbow at the end, or we certainly hope we will, and to stick and ride it through.
Yeah, I think you're right. And I think if we look at some of the properties that that we made for landlords and some of our role, what arethe costs of owning those properties have risen and running, those puppies have arisen. So have the rights, right, so have the rights.And, you know, rents are available, I don't think I'd like to think this country is not going to ever bringing records, but never say never. But Ithink the rents have risen in line with demand. Article four has reduced the supply of property, increased rents. The landlord's exiting the market, for whatever reason, means less supply, increase rents, uncertainty in the economy, means more people want to rent, that drivesrent prices up higher interest rates means people have a lower desire to buy, yes, because they're not too sure of their income, theyprobably couldn't buy whatever you wanted to buy. So they decided to stay poor. So there's less movement there.
That means more people rent puts pressure on rent prices, that means it's gonna go up. So even among this uncertainty in terms of the UK market, you know, the smart money is on increased rent. And, you know, whilst it might not eat for everything, on the other side of the equation long term, and you mentioned you mentioned, I think, a couple of three podcasts ago, you said, when people sell, what are they going to investigate?
Yeah, that's my quite cold approach. But when when investors do say, Okay, I'm looking to sell, okay. And then once you liquidate Where were those funds going, and if they're going into something that can generate far better than the return that you're getting from the property then obviously that's fantastic. But if it isn't, if it's selling out of fear and and the cash is going into the bank and then getting eroded by inflation, then perhaps that's feels like you know, a safe thing to do, but doesn't really sound like a smart thing to do.
I said to you last time that there was an article that I read where this is sort of the wealthy separate really well so they were selling some ofthe trophy assets because of the hassle. And there are buying beautiful pieces of really expensive watches and jewellery on the base. says no. So I can enjoy it. I can look at it, and I'm not gonna get taxed on it. Wonderful to be in that position is that to say that we get to that elitewealth level? Maybe we can have those conversations, but I think we've got a little bit of way to go. Yeah,
Indeed, indeed. So just to wrap up, great, nice news, potentially with regard to HTML and cast x by the room people shouldn't write in and push for banishing of cast x by the room. We don't want it. No, no, no. And that clarity, good news. And in terms of people looking to exit, especially talk to us, they should give us a call have a chat with us, and either adamant we could probably find a buyer for them. We really want to exit the market. But our advice is that property is a long term investment, think long term think 10 years, think children think grandchildren will live on an island. You know, we're not growing, but the number of people on this island is growing. So there will always be demand for real estate. So that's my final word. Do you think it'll be another?
No, I think I think that's it. So until next time, we'll see on the next episode. Thanks, guys. Thank you.
We hope you enjoyed today's episode, and if so, please hit subscribe and share with those who you think would enjoy it too. To get in touch with Paul and Amanda directly. Please visit their website, www dot essential property options.co.uk For more information, we look forward to sharing with you on the next episode.
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