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Extent of landlord exodus to limited companies revealed

Landlords are increasingly transferring properties to limited companies to navigate tax changes in the buy-to-let market, according to lender data.

Figures from Shawbrook Bank showed the proportion of buy-to-let mortgages completed by individual landlords had fallen from 68 per cent in the first half of 2015, to 34 per cent in the same period of 2018.

Meanwhile the proportion being completed by limited companies had doubled from 32 per cent to 64 per cent in the same period.

The buy-to-let market grew rapidly after the financial crisis but tax changes and the introduction of stricter affordability testing meant there was steep fall in the number of buy-to-let mortgages.

The introduction of an additional 3 per cent stamp duty surcharge in April 2016 was closely followed by the abolition of mortgage interest tax relief for landlords, to be phased down to a 20 per cent flat rate in 2020, further pushing the limits of landlord profitability.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules.

Shawbrook Bank has said the reduction in mortgage interest tax relief had led to an increased professionalisation among landlords, with those in a private limited company able to treat interest payments as business expenses to be offset against profits.

Gavin Seaholme, head of sales at Shawbrook Bank, said the buy-to-let figures showed individual landlords were moving across to limited companies but warned this may not always be suitable.

He said: “Firstly, borrowing through a limited company structure is generally more expensive than for an individual, offsetting some of the expected tax savings.

“Secondly, for private landlords with existing portfolios it can be very costly to actually transfer the properties into limited company ownership due to capital gains tax which is due upon the sale and stamp duty due when the newly set up company purchase the properties.

“Together these one-off payments can leave a significant dent in the finances of buy-to-let investors, which makes careful planning necessary.”

Mr Seaholme said the more favourable option could be to convert or create a limited company to continue on the property journey, subject to the correct tax and planning advice.

In its assessment of the buy-to-let market in July, Shawbrook Bank predicted demand for buy-to-let mortgages would fall further over the coming years and expected many landlords to only feel the true impact of changes next year when filing their tax returns for 2017-2018.

Stuart Gregory, adviser and managing director at Lentune Mortgage Consultancy, said since the amendments to taxation for landlords were announced he had seen a big downturn in enquiries for buy-to-let purchases.

He said: “Those we have received have been related to limited company buy-to-let, which does indicate a shift of opinion.

“However, the biggest issue will be as, and when, the landlords’ accountants raise the onward issue of the new taxation – we fully expect to see some more existing landlords to thin out their portfolios, which will of course increase the property supply potentially for first-time buyers.”

But Andrew Turner, chief executive at buy-to-let broker Commercial Trust, has advised to ignore the “doom-mongers” and stressed the buy-to-let market was thriving.

He said: “It was inevitable that tax changes, which could potentially suppress profitability in the short term, would impact upon the perceived desirability of buy to let investment.”

The changes were expected to be most keenly felt by those with fewer properties, Mr Turner said, because adjusting would be a more painful process for new investors or those with less experience.

He added: “However, the simple fact is that buy-to-let remains a solid investment option, with strong potential for an attractive and profitable return on capital invested.

“Investors should not be deterred – demand for rental housing is stronger than ever, the cost of
debt remains relatively cheap and the housing shortage is likely to continue. Even so, any investment decision requires care and expertise.

“The real story has really not been about buy-to-let becoming unattractive as an investment option.”

Source: FT Adviser

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Nearly 50% more lenders lending to limited companies

The number of buy-to-let lenders lending to limited companies has risen by 47% over the past year, Mortgages for Business’ Buy to Let Index has found.

In the last quarter alone, three new lenders have come to the market with 22 now competing in the space. In Q3 2017 there were only 15.

These new lenders include West Bromwich Building Society, Magellan Homeloans and a lender which is currently running an exclusive pilot with Mortgages for Business.

Steve Olejnik, managing director at Mortgages for Business, said: “It has been encouraging to see so many new entrants to the specialist end of the buy to let market in the last quarter, putting product availability at an all-time high.

“This just goes to show there is still a lucrative, buoyant market out there following on from the recent regulatory changes.

“With the uncertainty surrounding Brexit and the possibility of another Bank Rate rise in the near future, I am not surprised that the majority of landlords are choosing to fix.

“It will be interesting to see what knock-on effect this will have on the buy to let remortgage market.”

As a result of these new lenders, there are more buy-to-let mortgage products in the market. Overall the index shows that in Q3 18, the total number of mortgage products available to landlords borrowing via a limited company averaged at 628.

This figure has more than doubled year-on-year from Q3 17’s average of 263.

In the wider mortgage market, an average of 1,571 products were available between July and September, in contrast to Q2 18 when the number of products averaged 1,547.

In terms of proportions of the mortgage market, 44% of completed buy-to-let mortgage transactions were made by limited companies, up 42% from previous quarter.

Corporate structures, predominately Special Purpose Vehicles, can provide financial efficiencies and have proved increasingly popular since the changes in income tax relief on landlords’ finance costs were announced in July 2015.

The trend for remortgaging continued with only one-third of buy-to-let mortgage transactions being made for purchases. The only property type seeing an increase in transactions was HMOs, where 36% of transactions were purchases, up from 33%.

It is interesting to note that 96% of landlords borrowing via Mortgages for Business opted for a fixed rate buy-to-let mortgage in Q3 2108, up from 93% in the previous quarter and 73% of those choosing to fix opted for five years.

If the preference for 5-year fixed rates continues, it will have a knock-on effect of reducing the volume of buy-to-let mortgage borrowing.

Source: Mortgage Introducer

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More landlords will buy using limited companies

Nearly two out of five (38%) landlords will use limited companies to buy properties over the next year compared to 28% as individuals, highlighting the continuing rise of the professional landlord.

Precise Mortgages found that among landlords with more than four properties the percentage buying new property via a limited company rose to 42%, while it dropped to 31% among those with up to three properties.

Landlords operating in London are the most likely to be planning to purchase through a limited company.

Alan Cleary, managing director of Precise Mortgages, said: “Buying property within a limited company structure has become increasingly popular, particularly among larger professional landlords.

“Given the predicted rise in landlords switching to limited company status this year, we can expect this trend to continue.”

“The contrasting levels of awareness of the PRA’s recent changes to lending criteria and the application process between small and larger portfolio landlords points to the growing professionalisation of the latter group who stand to be the most affected.”

“Precise Mortgages is currently one of the most recommended specialist mortgage lenders, helping landlords to find solutions and supporting them through the process.”

Some 89% of brokers expected the number of landlords setting themselves up as a limited company to increase, with the ability to continue to claim tax relief on mortgage interest seen as the main motivation.

Around 15% of landlords intended to add to their portfolios over the coming year, buying an average of two new properties, the BDRC study found. And about 23% of those planning to buy will add three or more properties to their portfolio.

The BDRC also found landlords with larger portfolios are significantly more aware of the Prudential Regulation Authority (PRA)’s lending criteria and portfolio application process changes.

Less than half (45%) of all landlords are aware of PRA changes but that rises to 67% among landlords with four or more buy-to-let mortgages.

However, 74% of those with larger portfolios thought the changes have made it more difficult to secure buy-to-let finance, underlining the growing demand for specialist lenders.

Source: Mortgage Introducer