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Buy-to-let market on the rise: is now the time to invest?

Buy-to-let landlords are becoming increasingly confident about expanding their portfolios, as rents rise and mortgage rates fall. That’s according to a new report by Shawbrook Bank, which found investors are targeting properties with gardens in an attempt to entice tenants.

A third of landlords look to expand portfolios

New research by Shawbrook Bank has found that a third (34%) of landlords are looking to expand their portfolios in the next 12 months. One in 10 plan to buy in a different area from their current properties, with their plans driven by changes in tenant priorities since the start of the pandemic. Of those looking to invest, 30% say they’ll seek out more rural locations, with the North East of England a popular choice. After a tough year, there are signs confidence is returning to buy-to-let. Two thirds of landlords (67%) told Shawbrook they are positive about their prospects in the next year.

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What are landlords looking for in investment properties?

The pandemic has had a significant effect on what we want from a home, with time spent away from the office and the prospect of hybrid working in the future changing buyer and tenant priorities. Shawbrook’s research shows landlords are reacting to the trend of home movers looking for bigger properties with gardens or access to outside space. The chart below shows the top five priorities for landlords looking to buy an investment property.

What’s happened to rental yields?

Average monthly rents in the UK range from just £396 in the North East of England to £1,755 in London, according to Shawbrook’s data. Across the UK, rents have increased by 1.6% year-on-year, with the South West, East Midlands and West Midlands all seeing growth of more than 2%. Changes to rent prices don’t tell the whole story, however. London might have the highest rents in the UK, but it also has the lowest rental yields for landlords – reflecting the high up-front cost of buying properties in England’s capital. Cheaper areas are more likely to enjoy significant growth in property values, which then has a significant knock-on effect on yields for landlords. The chart below shows how rental yields vary around the UK, from less than 4% in the South East of England to nearly 6% in Scotland. The UK average is 4.3%.

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Lack of supply could boost buy-to-let profits

Rents have only risen slightly over the past year, but rising house prices mean the value of buy-to-let homes has increased markedly. Shawbrook says the value of the private rented sector had grown to £1.4 trillion by the end of 2020, with buy-to-let properties increasing in value by 5.8% year-on-year. With the market now cooling down a little, landlords may be handed a boost by a lack of supply. Shawbrook says that rented homes made up 17% of all households in England, Scotland and Wales as of March 2021. That might sound like a lot, but it’s actually a fall of 2.6% year-on-year. With the number of available rental properties decreasing and tenants competing for bigger homes, it may be that rent prices tick up more substantially the next 12 months.

Landlords take advantage of stamp duty holiday

The stamp duty holiday resulted in UK house prices rising by more than 10% year-on-year, and owner occupiers weren’t the only ones to benefit. Shawbrook’s data shows that 28% of landlords bought an investment property during the tax break. Professional landlords were most likely to take advantage of the savings, with 43% of portfolio landlords (those with four or more buy-to-let properties) making additional purchases. Nearly half (46%) of landlords who invested during the stamp duty holiday said they wouldn’t have done so if not for the savings on offer.

What’s going on with mortgages for landlords?

Buy-to-let mortgage availability crashed in 2020, with lenders withdrawing huge numbers of deals after the Covid-19 outbreak. Now, though, the market has settled down, and the resulting lower rates are good news for landlords looking to buy or refinance. Data from Moneyfacts shows that average buy-to-let mortgage rates have been falling for months, and are now just above the levels seen before the pandemic.

Is now the time to invest in buy-to-let property?

If you’re tempted to invest in buy-to-let, it’s important to do your research first – especially if you’re new to the game. When calculating anticipated rental yields, landlords look to what’s happening with rent prices and the prospect of the property growing in value, but past performance doesn’t always provide a guarantee. Savvy landlords will carefully research local markets to find out which types of properties are in short supply and thus in demand from tenants.

By Stephen Maunder

Source: Which?

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Broker buy-to-let confidence continues to increase

Some 53% of mortgage intermediaries expect to see an increase in buy-to-let business over the next 12 months despite the tapering of the stamp duty holiday, according to research from , Paragon Bank.

This figure, which covers the second quarter of 2021, compares to 50% in the first quarter of the year, whilst the proportion expecting declining levels of buy-to-let business remained consistent at 10%.

Moray Hulme said: “These figures suggest that the strong levels of buy-to-let business witnessed over the last six to nine months wasn’t just as a result of the Stamp Duty stimulus, but down to more fundamental shifts in where and how people want to live.

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“We still expect to see business levels moderate as the stamp duty holiday ends but landlords are seeing plenty of opportunities to expand their portfolios to meet excellent levels of tenant demand and changes in the type of property people now want to rent.

“There has certainly been a growth in tenant demand for family homes, for example, and landlords are reacting accordingly.”

Brokers also reported that demand for buy-to-let was strong during the quarter itself, with 42% of intermediaries stating demand was ‘strong’ and 8% ‘very strong’.

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That compares to 26% in the corresponding period last year at the height of the pandemic.

Just 10% of respondents reported buy-to-let demand as weak during the period, compared with 30% during the second quarter of 2020.

Moray Hulme added: “Mortgage brokers have experienced a busy 12 months after the initial panic of the coronavirus pandemic.

“They enter the second half of 2021 in a confident, robust mood, which is indicative of the underlying demand for mortgage products.”

Source: Mortgage Introducer

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Northern regions remain strong for buy-to-let investment

Buy-to-let properties in the North continue to present an attractive investment opportunity for landlords, offering some of the highest price rises and rental yields.

The UK house price index for February showed the North West was the English region with the highest annual price growth. Average prices in the region rose by 11.9 per cent to £184,351 in the year to February, up from 10.5 per cent in the month before.

By comparison, London saw the lowest annual growth, where average prices increased by 4.6 per cent over the year to February, down from 5.7 per cent in January.

Rental yields in Q1 2021 were also highest in the North, particularly in the North East (9.1 per cent), Yorkshire and Humberside (8.2 per cent) and North West (7.8 per cent), according to data.

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Angus Stewart said: “For landlords it is all about yield – how much rental income versus the price they pay for the property.

“For quite some time this has meant a shift away from London and the South East where historic higher house prices have outweighed the rental income available. This has been exacerbated by the Covid crisis that has hit rental income in London in particular.

“So, it’s not surprising to see in these figures house prices have been rising in the North West and Yorkshire in particular as investors chase those higher yields. At the moment these areas still look attractive for landlords as they are providing the rental income and the opportunity for capital appreciation.”

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Average rental yields by region, Q1 2021

RegionAverage rental yield
North East9.1%
Yorkshire and Humberside8.2%
North West7.8%
East Midlands6.7%
West Midlands6.5%
South West6.0%
Wales5.8%
East Anglia5.6%
South East5.1%
Greater London5.0%

Anthony Rose added: “Buy-to-let investors are viewing areas in the North as having very strong rental yields and the opportunity for further house price growth.

“As currently they only have to pay the 3 per cent stamp duty surcharge, this is offering very attractive investment opportunities with relatively small initial capital outlays, which is further increasing demand in these areas.”

By Chloe Cheung

Source: FT Adviser

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Holiday let deals surge – can supply keep up with demand?

A jump in the sale of homes for holiday let purposes has corresponded with an increase in mortgage options for borrowers keen to cash on this flourishing areas of the buy-to-let market.

This is according to the latest data from Moneyfacts.co.uk which has revealed a ‘notable’ rise in the number of buy-to-let options for holiday lets over the past six months.

The figures are released as prospects of Brits being able to travel overseas for holidays this year continued to look uncertain.

Moneyfacts revealed today mortgage options for borrowers looking at holiday lets had grown by 45% in the past six months and product availability was double that in August 2020.

The analysis drew on research from Hodge Bank, which showed, over the past six months, there had been a surge in sales of holiday homes near the coast.

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Moneyfacts said the abundance of holiday let products had returned to levels seen a year ago. However, supply of housing overall meant the market was failing to keep up with demand.

According to Rightmove, new listings of properties overall were not satisfying record buyer demand, with available stock down nationally by 25% year-on-year.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Consumers may have taken some time to reflect on staycations in light of uncertainties surrounding international travel and how a holiday let could be a worthy investment.

“Lenders have moved over the past six months to cater to the demand for those looking to invest in property, as there has been a rise in holiday let deals of 45%, and product availability has in fact doubled since August 2020.”

Buy-to-let mortgage market analysis 
BTL options available(fixed and variable)Mar-20Aug-20Oct-20Now
Available to holiday let16274103149
Lenders offering holiday let deals20141721
Average fixed rate available to holiday let3.37%3.53%3.79%3.95%
Source: Moneyfacts.co.uk

Trends

According to Moneyfacts it is the building societies which seem more likely to provide the deals to meet the growing demand – whether for someone who uses their own home or takes out a new loan to fund the holiday let investment.

Springall cited research from Hodge Bank, which revealed of those purchasing a holiday home, 65% took out a new holiday let specific mortgage and 35% remortgaged their existing home to finance their holiday home.

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Supply and demand

Springall added: “Supply and demand may well be a key issue in 2021 for investors who feel staycations are here to stay awhile yet, and indeed according to Rightmove, national new listings stock is down 25% year-on-year.

“Any lack of holiday home opportunities will come as frustrating news for investors considering the return of holiday let deals on to the market, especially as sales figures nationally are rising and some consumers have more disposable income from lockdown and are therefore ready to invest.

“Data from PropertyMark cited that one in nine properties nationally sell more than the asking price, with recent figures hitting a five-year high.

“Clearly, for any opportunities that prospective borrowers are contemplating, it is wise they approach an independent qualified financial adviser to go through the deals currently available and to get some valuable insight into the workings of a holiday let, including tax benefits, rules regarding residency periods, rental income desirability and requirements, and other potential expenses outside of utility bills.”

Source: Mortgage Finance Gazette

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Buy To Let Repossessions Up In The UK

The number of buy to let repossessions of investment properties in the UK rose substantially in the third quarter of 2019.

Figures released this week from banking trade body UK Finance revealed a 40 per cent rise in buy to let repossessions on last year.

Around 800 buy to let repossessions were carried out in the third quarter of 2019, compared to 570 in the same quarter of the previous year.

However, there were 4,550 buy to let mortgages in arrears of 2.5 per cent or more of the outstanding balance in the third quarter of 2019, five per cent fewer than in the same quarter of the previous year.

The number of buy to let investors in arrears of between 5 per cent and 7.5 per cent of the outstanding balance also fell by 21 per cent over the year.

In contrast, the number of buy to let investors in arrears of between 7.5 and 10 per cent grew by 9 per cent, while the number in arrears of over 10 per cent dropped just 1 per cent, according to the UK Finance figures.

However, the banking trade body has stated that it believes the large increase in buy to let repossessions due partly to a ‘backlog of historic cases’.

Rules were changed two years ago by the city regulator on how lenders have to calculate how much a borrower owes each month if they fall into arrears. This has led to lenders reviewing a large number of cases on an individual basis and applying for buy to let repossessions ‘only when all other options have been exhausted’ according to UK Finance.

However, David Smith of the Residential Landlords Association (RLA) said: ‘Repossessions for mortgage arrears take place for many different reasons.

‘Mortgage interest relief changes, which are now almost fully implemented, the increasing cost of regulation and the ever-increasing time to repossess a property are all major factors.’

‘Since most repossessions of this kind lead to tenants being evicted it is vital that the next government actively supports the majority of landlords doing a good job to provide the homes to rent the country needs.’

Source: Residential Landlord

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Top spots for buy to let named

Scotland has been crowned the best place for landlords to invest as research has shown the average yield for Scottish buy-to-let properties scoops the rest of the UK.

The findings from lettings platform Howsy, published today (October 2), showed Glasgow City was the overall best place to invest in buy-to-let property with a current rental yield of 7.5 per cent.

Midlothian and East Ayrshire, both in Scotland, were close behind with rental yields of 6.8 per cent, while Scottish county West Dunbartonshire was fourth at 6.7 per cent.

“After years of being slammed by regulatory changes making it harder to turn a profit, choosing where to invest has never been more important for landlords.”
Chris Sykes, broker at Private Finance
The research showed Burnley and Belfast were offering yields of 6.5 per cent, while Inverclyde offered 6.4 per cent, followed by Falkirk (6.3 per cent), the Western Isles (6.2 per cent) and Clackmannanshire (6.1 per cent) to complete the top 10.

Wales fared worst among the home countries with an average yield of 3.7 per cent compared with Scotland’s 5.7 per cent.

Landlords in England and Northern Ireland receive average yields of 4.1 per cent and 5.4 per cent respectively.

Chris Sykes, broker at Private Finance, said: “After years of being slammed by regulatory changes making it harder to turn a profit, choosing where to invest has never been more important for landlords.

“Generally speaking, properties further north tend to require a smaller initial investment. Glasgow, which tops Howsy’s list, has an average house price of just £135,121.

“Being a major city and university town, the area also benefits from strong rental demand so this combination of low property prices and decent regular rental income is a winning formula for investors.”

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.

How the rules changed:
An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Mr Sykes said mortgage repayments often represented a large chunk of landlords’ costs, so getting as low a rate as possible was important to achieve a profitable rental yield.

He said lenders were currently offering very competitive buy-to-let product rates, both as a result of the wider low-rate environment and in a bid to attract more business given the slowdown the sector has experienced in recent years so now was the right time for landlords to remortgage onto a “rock-bottom rate” to maximise their overall profits.

Founder and chief executive of Howsy, Calum Brannan, said technology had helped landlords connect with their tenants more easily which meant they were no longer restricted to investing within the local vicinity to keep tabs on their property or forced to pay large fees for an agent to do so.

He said: “This leaves them free to buy in one section of the market and invest in another to maximise their financial gain across the board.

“More accessibility via digital rental platforms now provides landlords with greater empowerment when managing their property portfolio and they can do so anytime, day or night, with greater peace of mind.”

The research also showed which locations offered the highest annual house price growth for those looking to buy.

North Devon topped the list with expected growth of 15 per cent, while Welsh locations Merthyr Tydfil and Blaenau Gwent came in second and third place.

England had the lowest annual house price growth of the home countries at 0.3 per cent, while Wales stormed ahead with 4.2 per cent.

Location:Annual House Price Growth:
North Devon15%
Merthyr Tydfil13%
Blaenau Gwent13%
Caerphilly11%
Camden10%
West Devon9%
Forest Heath9%
Rochdale9%
Monmouthshire9%
Trafford8%
Home countries: 
England0.3%
Wales4.2%
Scotland1.4%
Northern Ireland1.6%
United Kingdom0.7%

By Imogen Tew

Source: FT Adviser

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Average Buy to Let makes a return of just £2k a year pre-tax

The true cost of a being a landlord: Letting platform Howsy has revealed how the profitability of the buy-to-let sector is being squeezed due to the hidden costs of being a landlord, coupled with the financial penalties handed down from the Government via changes to stamp duty tax.

In recent times, the buy-to-let market has been considered a good investment for those with the financial means to operate within it, leading to a number of Government changes to dent this profitability through initiatives such as an increase in stamp duty tax.

Despite this, landlords are still considered to be ‘raking it in’, but Howsy has found that the average landlord is left with just £2,000 from an annual return of £13,000 once the hidden costs of being a landlord are paid for.

However, with the introduction section 24 mortgage interest relief restrictions and depending on the landlord’s tax status it is easily possible for this to be taxed into a loss!

The research shows that the initial start-up costs of Stamp Duty Tax (£6,663) and agency fees to find a tenant (£811) cost the average landlord £7,475 and that’s before the ongoing costs are considered.

According to a recent survey, the average landlord experiences 23.75 days of void periods a year during a tenancy, that’s an average of £535 a year.

What’s more, 73% of landlords buy with a mortgage and each and every year will see £6,921 paid out in interest as a result. Couple these costs with an additional £1,622 in agency management fees, an average annual maintenance and repair bill of £2,077 and you’re talking £11,147 per year.

In a worst-case scenario, UK landlords may also find themselves forced to stump up for additional unforeseen costs, such as the legal process to evict a tenant. While this doesn’t happen to everyone, there is a one in 500 chance that you will have to pay for bailiffs to evict a tenant from your property.  

What’s left?

Based on an average annual rental income of £8,112 divided by the average B2L property cost of £183,278, the average yield available is 4.4% – that’s an annual sum of £8,119.

Over the last decade, the capital appreciation of bricks and mortar has also averaged an increase of 2.85% a year, £5,223 in monetary terms. That means B2L landlords are seeing a return of £13,343 on their investment.

However, leaving start-up costs and unforeseen events out of the equation, once the average UK landlord has paid the ongoing costs associated with a buy-to-let property each year, they’re left with a profit of just £2,140.

Cost HeadingsCost Amount (£)
One-Offs Costs:£7,474.54
Ongoing Costs:£11,147
Average Annual B2L Return:£13,287
Average Annual B2L Return – Ongoing Costs£2,140

Costs Explained…

Cost HeadingsCost Amount (£)Notes/Sources
One-Offs Costs:
SDLT£1,165.00Initial stamp duty owed – Gov.uk
SDLT second home penalty£5,498.34Additional 3% – Gov.uk
Agency fees (tenant find)£811.20The minimum tenant find fee according to Which?
Total£7,474.54
Ongoing Costs:
Void periods£52723.75 days a year on average according to GoodLord
Mortgage Interest£6,920.7373% of B2L landlords have a mortgage according to Which?
Agency fees (management)£1,622.40The average annual management fee according to Which?
Maintenance & Repairs£2,077.00Average cost according to Pennington
Total£11,147
Positives:
Basis:
Avg annual rent£8,112Monthly average rent of £676 multiplied by 12
Avg B2L mortgage amount£132,075According to UK Finance
Avg house price£183,278Average B2L price according to Money Supermarket
Avg LTV72.06%
Avg equity£51,203
Return:
Annual Yield %4.4%Average annual rent divided by average B2L house price
Annual Yield ££8,064Average B2L house price multiplied by 4.4%
Capital appreciation per annum %2.9%Based on average property price change per annum over the last decade
Capital appreciation per annum ££5,223Source: ONS
Average Annual Return£13,287
Ongoing Costs£11,147
Final Annual Return£2,140

Source: Property118

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Further rule changes would damage BTL market

Regulation in the mortgage market is helpful but any more interference may create problems for brokers and their clients, delegates at the FTAdviser Financial Advice Forum in London were told.

In a panel session entitled “Buy-to-let: how professional landlords can overcome tax and legislative hurdles”, Andrew Montlake, director of Coreco, and Martin Stewart, director of London Money, said the current regulatory environment was generally positive for clients.

Mr Stewart said: “Regulation is nothing for people to be afraid of. A good broker with a good moral compass will always do a decent job for their clients. I don’t mind regulation per se.”

Mr Montlake agreed, saying: “Regulation has created an environment where good brokers can demonstrate their professionalism. This shows the public you are responsible and generally I think we are in a good position.”

But he cautioned: “I don’t want more regulation for the sake of it. If it does get rid of the amateur landlords, the charlatans, the so-called ‘dinner party property investors’, then I am all for regulation that helps make buy-to-let a more professional market.

“What I fear is there may be more changes ahead, that makes things more complicated and doesn’t really focus on what the client really wants and needs.”

Both men agreed there had been a change in the mortgage market, largely driven by government tinkering with stamp duty and tighter controls to weed out bad landlords.

This was visible in a slowdown in new buy-to-let enquiries for London Money and some delegates in the room.

Mr Stewart said he was pleased to see more “amateurs” leave the market and free up housing for first-time buyers but he felt regulation could do more to raise standards further.

However, while there has not so far been a glut of housing dumped back on the market by disgruntled buy-to-let investors, a “perfect storm” could be caused due to Brexit uncertainty, new governments and unknown elements that might see more of an exodus in 2021.

Most buy-to-let lenders are regulated by the Bank of England’s Prudential Regulation Authority (PRA).

In 2017, among other regulatory changes that endeavoured to take some of the heat out of the buy-to-let market, the PRA implemented rules on how much can be lent to potential buy-to-let investors, based on how much rent was being charged.

The rule is that when making a loan, the rent must cover at least 145 per cent of the mortgage payment when the interest rate is at least 5.5 per cent.

This followed the government’s reform of the rules governing BTL, which included a 3 per cent stamp duty surcharge for second homes and cuts to landlord tax relief.

As some delegates in the room commented, higher taxes and a lack of upward movement on rents – especially in London – have meant some landlords with smaller portfolios are not making enough of a profit to continue as a buy-to-let investor.

When asked what their clients are doing, some said their clients were selling, going outside of London, creating limited partnerships or getting their residential property exposure through property funds.

“We are certainly having to be much more holistic now as brokers”, said Mr Montlake. “Professionals can really add value to clients.”

By Simoney Kyriakou

Source: FT Adviser

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Bradford Landlord Fined For Failure To Repair Buy To Let Property

A Bradford landlord has been fined £2,500 for failing to repair one of his buy to let investment properties that had a leaking roof.

Bradford landlord, Mohammed Majeen Khan, failed to comply with a notice from Bradford Council ordering him to improve the property he owned.

Tenants of the Great Horton property, a family of six, had complained to the Council after Khan had failed to replace damage to the building’s roof, leading to water leaking in and damp spreading.

When Bradford Council officers visited on June 26 2018 they found a number of issues with the property in addition to the leaking roof. These included the absence of a working fire alarm system, the absence of any linked smoke detectors, and an inadequate number of working electrical sockets.

There were also other issues, including cupboards missing doors and the property was found to be a generally poor state.

The Bradford landlord failed to respond to a number of requests through to late October. He was given a two-week extension, to November 13, to carry out the work, but when the Council inspected in late November the works had still not been done. Another inspection in March found no work had been completed.

Further to the latest visit a prosecution of the Bradford landlord was brought by the council.

Khan, of Aireville Road, was not at court – Magistrates were told that he had phoned the court earlier in the morning to say that although he wanted his day in court, he woke up that morning to find he was not able to move his foot.

However, council prosecutor Harjit Ryatt pointed out that Khan had made similar last-minute calls before important meetings in the past.

He said: ‘Historically when asked to attend police interviews things have followed the same pattern – half an hour before the interview he’ll phone up to say he’s at a hospital appointment or has fallen ill. That is his modus operandi.’

Hearing this, magistrates agreed to go ahead with the case in his absence.

Bradford and Keighley Magistrates Court found Mr Khan guilty in his absence. Along with costs – the Bradford landlord will have to pay a total of £3,490.

Source: Residential Landlord

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More landlords opt for limited companies

Purchasing a buy-to-let property through a limited company is now more than twice as popular as buying as an individual, as more landlords are seeking out the most tax efficient methods.

Research from Precise Mortgages showed more than half of landlords (55 per cent) plan to use limited companies to buy properties in the year ahead — more than double the 24 per cent who intend to buy as an individual.

The findings also showed the number of landlords using limited companies to expand their portfolio was on the up, from 44 per cent at the end of 2018 to 53 per cent in the first three months of 2019.

Limited companies were the most popular among landlords with a portfolio of 11 or more properties — as 71 per cent of landlords in this sector used them for purchases — but it was also the dominant choice for those with 10 or fewer properties (51 per cent).

By comparison, only 27 per cent of landlords with 10 or fewer properties chose to buy as an individual.

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.

How the rules changed:

An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Based on a property yielding £950 in rent and a £600 mortgage per month, the landlord’s income could drop by about 57 per cent after the rule changes, from £2,520 to £1,080, as shown in the table:

Tax yearProportion of mortgage interest qualifying for 20% tax credit under previous systemProportion of mortgage interest qualifying for 20% tax credit under new systemTax billPost-tax and mortgage rental income
Prior to April 2017100%0%£1,680£2,520
2017-1875%25%£2,040£2,160
2018-1950%50%£2,400£1,800
2019-2025%75%£2,760£1,440
From April 20200%100%£3,120£1,080

Source: Which.co.uk

Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

Interest coverage ratios on limited company applications are also lower than for most individual landlord applications, according to Precise.If landlords who are higher rate taxpayers hold properties directly in their own name, in some circumstances this additional tax can wipe out all profits.John Goodall, chief executive at Landbay

Alan Cleary, managing director of Precise Mortgages, said: “Despite the challenges in the market, professional landlords have still managed to grow their portfolios over the past year with the use of limited companies, and it will continue to be the most preferred purchase route particularly for those with larger portfolios.”

Mr Cleary said the increased use of limited company status was further evidence of how the buy-to-let market was changing and demonstrated how brokers and their clients needed “expert specialist support” when buying as a limited company or considering switching.

Traditional buy-to-let mortgages have also become more popular, according to the research, as nearly seven in ten (69 per cent) landlords now intend to fund their next portfolio purchase with such a policy, compared with 62 per cent at the end of 2018.

David Hollingworth, director at L&C Mortages, said: “With the changes to tax relief on mortgage interest being felt by many landlords that pay higher rate tax, there’s likely to be more considering the use of a limited company as they seek to grow a portfolio.

“Being able to set the cost of mortgage interest against income within the limited company will be the main draw and corporation tax is charged at lower rates.

“Tax advice should be a crucial part of the landlord’s decision to use a limited company and help them understand the practical considerations of setting up and using a company as well as the potential for personal tax when withdrawing income from the company.”

Mr Hollingworth added the growing number of mortgage options for those using limited companies would also help to give landlords more choice to improve the rates on such specialist products.

John Goodall, chief executive at Landbay, said he was seeing a significant increase in landlords who were borrowing within a limited company.

“If a landlord holds their buy-to-let properties within a company structure they will be taxed on profits in the usual way, and the interest they pay will be treated as a cost.”

The market has also seen a number of landlords leave the buy-to-let space due to the changes and in May, as research from Arla Propertymark showed the number of landlords selling their properties had increased by 25 per cent.

The number of new landlords coming to market also took a hit and the number of new buy-to-let purchases dropped 9.1 per cent year-on-year in March.

By Imogen Tew

Source: FT Adviser