Changes in the Buy to Let market: what you need to know
When George Osborne announced measures to affect the residential property market last year it was described as “an outright assault on the sector”. Indeed landlords are still licking their wounds at the potential fallout of the stringent measures which will be gradually phased in over the coming years. Interestingly, two landlords have recently unsuccessfully challenged the new rules having requested a judicial review. Whilst it is hard to say whether this request for judicial review will progress any further, Leathes Prior are working with clients in order to provide innovative solutions to landlords that are considering their options given the changing face of the buy to let sector.
What are the changes?
As a result of the cuts, landlords will be unable to deduct all of their finance costs from the income made on a property. The current position is that a landlord with a buy to let property can claim tax relief on their mortgage payments at their applicable marginal rate of tax – for example, a basic rate taxpayer receives a relief of 20% and a higher rate taxpayer receives a relief of 40%. However, under the new regime, tax relief is only available at a capped rate of 20%. Whilst these changes are imminent they will be implemented gradually to give landlords a chance to find their feet. However, from 2020/21, all financing costs incurred by a landlord will only be given basic rate tax reduction described above.
The ultimate impact of this is that higher-rate taxpayers who own buy-to-let properties on which there is a large mortgage will pay substantially more tax. Furthermore, some basic-rate taxpayers will be pushed into the higher-rate tax band.
These changes could affect all parties involved in a residential property transaction – not least the tenant who may have to bear the brunt of sudden increased rent. It is also worth bearing in mind that these changes come at a time where a buyer of property may be liable to pay an additional 3% surcharge on Stamp Duty Land Tax. The residential property market really is changing.
It could be observed that the wealthiest of landlords who are able to purchase property without the aid of a mortgage, are largely untouched by the changes. However, given there were an estimated 2 million buy-to-let landlords in the UK at the start of 2015 it is fair to say that this Budget cut will reach far and wide - especially when considering that buy-to-let loans accounted for 18% of all mortgages in the first quarter of 2015.
What service can we provide?
Whilst it may be impossible to avoid the bite of the changes completely, investors have seen opportunities in owning property via a limited company. Companies are untouched by the change outlined in this article meaning that a landlord owning properties through a corporate entity is liable to pay corporation tax at a rate of 20%, rather than higher rate income tax and not be eligible to tax relief. Whilst this solution may not be appropriate for all landlords, and specialist tax advice should always be sought from an accountant or suitably qualified tax professional, it is worth considering that companies can continue to offset their mortgage cost and reduce taxable profit. Furthermore, as it currently stands, finance and other costs can be offset against company profits without restriction.
It had been recognised previously that corporate structures may struggle to obtain a competitive mortgage, however this concern appears to have diminished and corporate entities now account for more than a third of buy-to-let mortgage applications. Before making any mortgage application we would suggest that you liaise with a financial advisor as to the different mortgages and rates available.
As part of a dynamic service to the buy-to-let and investment market, Leathes Prior are able to incorporate a company for clients as part of our conveyancing service through which properties can be acquired. Moreover, Leathes Prior are also able to transfer the equity from a registered proprietor(s) of a property into an incorporated company.
If you have any questions, then please do not hesitate to contact Stephen Wilson on 01603 610611 or email swilson@leathesprior.co.uk.
Please note: The content of this article is for general information only and does not constitute legal or tax advice. Specific legal and tax advice should be taken in any particular circumstance. In any event, please seek specialist tax advice when considering your tax liabilities.