Tax
Some landlords are still unaware that they are now unable to offset all their mortgage interest against their profits. Within three years none of the interest will be tax-deductible. The changes mean that many landlords will pay more tax – and in some cases, may be taxed even if they do not make a profit.
The reduction in relief is being phased in between now and 2020 and will be replaced by a 20% tax credit. Landlords can currently offset only 75% of their mortgage interest against their profits. This falls to 50% next year, 25% in 2019 and zero in 2020. For more information click here.
Of course, it’s not all bad news, rental yields are often excellent and property investment has still outperformed the stock market, and most other asset backed investments in the medium to long term.
LTD Company Buy to Lets
The changes in tax have resulted in the rise in popularity of Landlords putting their buy to let properties in Ltd companies. The rules allow clients to either use their existing trading limited company or so set up a new “Special Purpose Vehicle” (SPV).
Although this sorts the problem of additional income tax out, Ltd companies do of course pay corporation tax.
Anyone considering buying a new property through a Ltd company or transferring in existing property should consult their tax adviser before proceeding.
Stamp Duty
The government hit landlords where it hurt by introducing higher rates of SDLT, on 1 April 2016. The additional 3%, is intended to apply to purchases of additional residential properties, such as second homes as well as buy to let properties.
Portfolio Landlords
In September 2017, the Prudential Regulatory Authority outlined new rules for “Portfolio Landlords,” which have resulted in additional checks being carried out.
Most lenders define “Portfolio Landlords” as borrowers with 4 or more buy to let properties. Anyone falling into this category will find the process very different when they come to buy another property or re-mortgage an existing one.
Typically, lenders will want to see some or all of the following documents:
- Existing portfolio details, including property address, lender, mortgage amount, mortgage interest rates and rental income
- Personal Statement
- Cash Flow Forecast
- Statement of Assets and Liabilities
Until now, buy to let lenders have underwritten cases on an individual property basis, taking little or no notice of other properties in the portfolio, or any residential mortgage the borrower may have. If the rent covered the mortgage and there was sufficient equity in the property – lenders would lend. In fact, there was no stopping them!
To understand why the PRA have implemented these changes, we have to think the worst. Imagine a landlord with 10 buy to let properties with 85% mortgages on, earning £20,000 from their full-time employment with a residential mortgage of £80,000.
If a situation arose where a tenant could not afford to pay the rent there is little chance of that landlord being able to supplement the rent and get the mortgage paid. If the situation worsened and the lender needed to start repossession proceedings, there is a tenant who needs evicting which can take time. Meanwhile if arrears are mounting up, there is a strong chance the lender will not be able to recoup their losses
If the same situation arose where a landlord earning £120,000 had the same 10 properties with 30% mortgages on, he may be in a better position to supplement rent arrears and the outcome would be very different.
It’s all a question of risk
Conclusion
I think we can conclude that the Buy to Let landscape is changing. The government fully intends to collect more tax from landlords and the option to buy and rent out property may no longer be open to just anyone who can raise a deposit.
We have certainly seen a shift at the bottom end of the market where there are more first-time buyers around, but as far as the professional landlord is concerned, it seems to be business as usual.
For more information contact us on 01628 507477.
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