George Osborne’s proposal to restrict tax relief for wealthier landlords will no doubt be fiercely debated by interested parties in the coming months.
At the moment, when calculating tax, individual landlords can deduct their costs, including mortgage interest, from their profits. Wealthier landlords get tax relief on finance costs at 40% and 45% but from April 2020, this tax relief will be restricted to 20% for all individuals.
Currently, the proposals are just a Policy Paper and implementation is likely to commence, in tapered form, from April 2017.
That’s nearly two years away; however, savvy brokers should act now to help their landlord clients prepare for the changes, which should come into full effect from 2020.
At Mortgages for Business, we are getting in touch with our clients to suggest that they review their property investment strategy now and talk to their accountants to get advice on their specific circumstances, regardless of whether they are higher rate tax payers.
There is even speculation that some landlords could be better off, if only they were to seek proper tax advice and re-structure their affairs accordingly.
After taking advice, no doubt some landlords may choose to sell up and leave the Private Rented Sector altogether but others will adjust their strategy accordingly and/or accept the inevitable – to pay more tax.
Going forward, investment strategies will have to consider how to purchase additional rental property and perhaps, more importantly, whether to transfer existing, personally -owned rental property into a corporate vehicle.
Limited companies can still offset financial costs, including mortgage interest, against tax and, from 2017, Corporation Tax will be cut from 20% to 19%, then cut further to 18% in 2020.
In addition to the costs associated with getting a buy to let mortgage, transferring existing property will incur Stamp Duty and potentially Capital Gains Tax and Early Redemption Charges, so there is much to consider which is why getting professional tax advice is vital.
For those who choose to continue as landlords investing via a limited company rather than individually, whilst not exactly a panacea, could be a more profitable and tax-efficient route going forward. Indeed, since the Chancellor’s announcement we have encountered an extraordinarily dramatic increase in the number of enquiries from both investors and brokers regarding buy to let mortgages for limited companies.
Buy to let mortgages for limited companies are not every lenders’ cup of tea. Assessing applications requires greater knowledge and understanding by the underwriters which is why many mainstream lenders steer well clear – including TMW and BM Solutions.
Those that will lend often restrict lending to Special Purpose Vehicles (those which only hold property and do nothing else) because they are less complicated to underwrite.
Having said that, there is quite a bit of choice. As I write, of the 850+ buy to let mortgages on the market, around 120 are available to limited companies (predominantly for SPVs) from 11 lenders. Some even price the same as if lending to individuals, although most do look for an additional margin.
Our lending brand, Keystone Buy to Let Mortgages, adds 0.2% onto the rate and an extra 0.25% onto the arrangement fee to cover additional underwriting and documentation costs.
It will be interesting to see if more lenders enter this space. Those looking to lend to trading limited companies as well as SPVs will be particularly welcomed.
In addition to the changes to tax relief, from April 2016 the “wear and tear” allowance on furnished properties, which allows landlords to reduce their tax, regardless of whether they replace furnishings, will be replaced by a new system that only allows tax relief when they replace furnishings. Yet, another tax foible to factor into any property investment strategy.
Clearly, there is much to consider.
At the very least, the changes certainly give brokers the opportunity to open up new lines of business.
Perhaps more importantly though the conversation should start with pointing clients towards getting professional tax advice.
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