I work with a number of Estate and Letting Agencies across the country and I can’t think of a single one who isn’t concerned about the impact of changes to the ‘Buy to Let’ market on their business.
Not only are people facing a 3% Stamp Duty on the purchase of additional properties but we are now in at the starting point of changes to the way a landlord’s income is taxed.
Before April 2017, Landlords used to be able to deduct all finance costs from their rental income with net profits taxed at their marginal rate. This was great, as running a Buy to Let property can become quite costly. Monthly management fees and maintenance add up. However, from April 2017 the relief available will gradually reduce each year and by 2021/21 will be charged at basic rate tax level.
In September 2016 those responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms (The Prudential Regulation Authority (PRA)) – announced expectations of firms’ underwriting standards to apply to the Buy to Let market.
The basics – what you need to know.
This next bit is a little technical; I’ll try not to confuse you too much.
The PRA changes mean that landlords:
- face tougher affordability assessments which take into account borrower’s costs including tax liabilities, verified personal income and possible future interest rate increases.
- must provide evidence that rental income covers their mortgage payments by a minimum of 145% at an interest rate of 5.5% for all products other than longer term (five years plus) fixed rates.
- with four or more properties, will have their whole portfolio assessed for affordability by the lender – even where other Buy to Let mortgages are held with different lenders.
With all of these changes many landlords may find their portfolios are less profitable.
My head hurts thinking about this, and imagine a number of Landlords (professional or accidental) are worried about the impact of these changes.
What can you do?
According to research by the National Landlords Association (NLA), one in four landlords are considering setting up limited companies to negate the tax changes. If you hold a property in a company, your profits are liable for Corporation Tax at 20%, however, if you hold an investment property personally, your rental earnings are combined with your other earnings (such as income from your job) and taxed as Income Tax up to 45%.
At first glance a company structure could look more tax efficient, especially if you are a higher rate tax payer. But before you consider incorporation you should take into account the cost of commercial mortgages.
There’s no doubt the changes in the Buy to Let sector can cause some confusion but we can help find the most appropriate solution for you.
This information does not constitute tax advice. For more details on how this will affect your circumstance you should consult with an independent tax adviser.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.
Your property may be repossessed if you do not keep up repayments on your mortgage.
If you’d like to find out more about Buy to Let mortgages, please get in touch.