While still a specialist area of the market, awareness of the opportunity is starting to grow among investors and brokers, but lenders still remain few and far between.
Crystal FS has recorded a 10% year-on-year rise in the transactions and says the emerging trend is down to the continued professionalisation and consolidation of the private rented sector.
Jason Berry, group sales director at Crystal, said: “On one side we have a group of established landlords who may have spent many years building portfolios and are now considering succession, retirement or reducing their exposure. On the other side are professional investors who remain ambitious and want to scale. A portfolio share sale brings those two groups together in a very efficient way.”
He added: “Portfolio share sales could become an increasingly important part of the next phase of the professional landlord market.”
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Stamp duty appeal
Rather than dismantling a portfolio and selling off the properties one by one, a portfolio share sale involves a purchaser buying 100% of the shares in the company.
The convenience of being able to offload an entire portfolio in one swoop can translate into a discount for the purchasing landlord. It’s a quicker way of growing your exposure to the buy-to-let market and the stamp duty rate is much lower.
Stamp duty payable on share purchases is 0.5% of the value of the company, compared to a 5% surcharge on top of the standard rate of stamp duty for a residential property when landlords purchase buy-to-lets individually.
The properties may already be tenanted, producing income and operating within an established structure creating less operational disruptions and challenge for investors looking to expand. There is no change of ownership on each individual property title which avoids the time and legal cost of transferring multiple registered titles individually.
But there are plenty of risks involved, which has created hesitancy among most buy-to-let lenders to get involved with the market. Shawbrook is one of the main players. Together will consider offering a business loan for the purchase.
Investors run the risk of inheriting liabilities such as historic tax, legal or contractual liabilities if the company is not fully investigated. HMRC can pursue the company for errors made before the sale and Capital Gains Tax is calculated from when the properties were first purchased, not when the new owner takes over the company – which would trigger a costly tax bill if the properties are sold individually in the future.
Investors can’t cherry pick which properties they want to buy from the portfolio and which they don’t. If they are buying shares in the company – all assets are included.
Gaining an early foothold
For brokers new to the transaction – it’s a chance to establish a presence, gain experience and grow your reputation as a specialist in a burgeoning market before it becomes crowded.
“The last thing brokers should do is ignore these opportunities,” said Berry. “They’re going to be in a market where their income is probably affected by the effects of product transfers so this is a brilliant area to actually focus in on.
“If they can understand the journey that is required, then ultimately they’re going to see increased opportunities because professional landlords want to understand the most effective way to hold their portfolio.”
Rishi Sudra, mortgage and specialist lending consultant at Smart City Mortgages is one such broker. His clients are typically larger portfolio investors who are buying from retiring landlords.
“We’re seeing a rise in this type of transaction in the larger portfolio space,” said Sudra. “My clients are already established portfolio landlords with between 10 and 20 properties and they’re looking to build on their holdings in a more tax efficient way.
“Of the sellers I’ve seen, it tends to be old money. A lot of the older landlords with these sorts of structures in place are moving on to different investments. Because of changes in the law and so on, a lot of landlords don’t think it is potentially viable to invest in the UK property market anymore.”
Sudra’s approach is to compile a property spreadsheet for each client which, once complete, is submitted to the mortgage lender providing finance.
This includes rents, LTVs, valuations, existing lenders, mortgage balances and when the early repayment charges (ERCs) expire.
For each mortgaged property, he establishes if the lender will consent to the change of director or if they need to be redeemed. If lenders will not consent, resulting in a need to refinance the property, Sudra calculates the ERC penalty and presents this back to the investor which can then be used as a bargaining chip to lower the purchase price of the portfolio.
Lifting the rock
Partnering with an accountant who specialises in share purchase transactions is vital, says Sudra, because of the level of due diligence required before the investor goes ahead with the purchase.
Simon Thandi, director of UK Landlord Tax, a specialist in this field, says the reduced rate of stamp duty is one of the main attractions of this type of purchase and, as limited company purchases have grown in popularity, so too have share purchase transactions.
On the surface, he says, it may seem like a quicker and cheaper way to buy a lot of properties in one go but “all is not often what it seems”.
He described the process of investigating the company as “lifting a rock” to see all the life beneath it. With the broker taking care of the finance, his role begins with reviewing the company’s tax history and filings to uncover any hidden liabilities before the price is agreed.
He reviews the structure of the deal, supporting the client and broker with advice on whether a share purchase or individual asset purchase is the most appropriate and reviews the capital gains tax liability the purchaser will inherit which can be used to negotiate a lower price for the portfolio.
Thandi works alongside the solicitor to ensure the sale agreement includes suitable warranties and a tax covenant protecting the buyer against pre-completion tax risks.
“These transactions are gaining ground, we have done a number of them,” he said.
“Brokers new to this don’t need to be afraid of the deal,” Thandi said. “Engage with a firm that specialises in these transactions because as complex as they seem, they are still very much a common or garden variety transaction for a specialist.”
