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Landlords seek u-turns on tax relief

A majority of landlords believe future government u-turns on the increase in stamp duty and cuts to mortgage interest tax relief could provide a “significant stimulus” to the buy-to-let and private rental sectors, latest research by Foundation Home Loans reveals.

Over half (51%) of landlords argued that both measures to be addressed in order to help build greater confidence in the sector.

Jeff Knight, director of marketing at Foundation Home Loans, said: “It doesn’t seem surprising that the two biggest impacts on landlords over the past five years – stamp duty increases and cuts to mortgage interest tax relief – are seen as the biggest factors holding back the market.

“Clearly, such measures were always going to have a real influence and they have undoubtedly resulted in a large number of so-called amateur landlords either selling up, or not being able to go ahead and add to portfolios.

“We now have a sector which is much more in line with professional and portfolio landlords; utilising limited company vehicles to ensure they retain their tax relief, and where appropriate, adding to their portfolios via these structures.

“Because of this, the move towards greater levels of limited company business is likely to continue for many landlords, as I expect a u-turn is very unlikely despite fiscal loosening likely to be a strategy adopted in the very near future to stimulate a weakening economy.

Meanwhile almost a quarter (22%) suggested remaining in the EU would give the biggest boost, whilst 14% said securing the UK’s withdrawal from the EU would be the most helpful.

Four in ten landlords said they would still be willing to make their first investment in property, arguing that buy-to-let remains a good long-term investment.

According to the research however, 50% of landlords said that due to government intervention and regulatory changes, they would not choose to make a first investment decision now.

Only on in four landlords said they wanted to increase rents in the next 12 months, whilst a majority believe they are renting out at least one of their properties below market value.

Knight continued: “There is a continued appetite to be active in this sector and a recognition of the strong demand for quality properties from tenants.

“That being the case, and with a perhaps more sympathetic government ear, we might anticipate that demand for mortgage advice and buy-to-let mortgages will continue to grow, although many are clearly worried about the current economic uncertainty and what might happen in a post-Brexit world.

“The other positive here is the long-term view taken by many landlords and the fact over four in 10 would still invest today if it was their first property.

“Given all the demographics and the underlying demand drivers for the private rental sector, advisers are still likely to see a steady stream of landlord clients seeking to remortgage and/or purchase, for many years to come.

“It continues to pay to be a specialist in this sector and Foundation is here to help advisers develop their buy-to-let propositions for the demand that is clearly still out there.”

By Jessica Nangle

Source: Mortgage Introducer

Buy-To-Let
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The challenges facing the buy-to-let investor

Strong growth once seen in the Buy-To-Let (BTL) market has begun to tail off in the last two years, as the impact from a gradual withdrawal of mortgage interest tax relief, stamp duty land tax (SDLT) reform and stricter mortgage underwriting rules begins to shine through.

“TAX DOESN’T HAVE TO BE TAXING”…THEY SAID.

Before April 2017, BTL landlords were able to deduct the full cost of mortgage interest payments from their rental income, reducing their tax bill. From April 2017 and until April 2020, transitional rules allow for a gradual phase down of deductible mortgage interest from rental income before tax is applied. Private landlords will then only benefit from a 20% tax deduction for mortgage interest relief, unable to deduct mortgage interest costs against profits.

As a consequence of this change, many BTL landlords paying higher rate income tax will see the profitability of their investment fall. As shown in the table below, under the old tax rules a private landlord and 40% tax payer with a rental income of £12,000 p.a. and mortgage interest costs of £5,400 p.a. would be left with an after-tax profit of £3,960 p.a. From April 2020, net profit would reduce to £2,880 p.a.

BTL Mortgage Tax Relief Changes

INCOME

Monthly gross rental income

Assumes 40% Tax

 £1,000 EXPENDITURE

Monthly mortgage interest

 £450

 
Transitional Rules New Rules
2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
Rental Income £12,000 £12,000 £12,000 £12,000 £12,000 £12,000
Mortgage Interest (3%) £5,400 £5,400 £5,400 £5,400 £5,400 £5,400
Deductible Mortgage Interest £5,400 £4,050 £2,700 £1,350 – –
Taxable Rental Income £6,600 £7,950 £9,300 £10,650 £12,000 £12,000
Tax on Rental Income £2,640 £3,180 £3,720 £4,260 £4,800 £4,800
Mortgage Interest Relief – £270 £540 £810 £1,080 £1,080
Tax Due on Rental Income £2,640 £2,910 £3,180 £3,450 £3,720 £3,720
Net Profit After Tax £3,960 £3,690 £3,420 £3,150 £2,880 £2,880

A simple reduction in the cost of borrowing can also make a significant difference.  In our earlier example, even under new rules in 2020/21 a reduction of 0.75% to the interest rate would help to maintain the status quo and net profit at £3,960 p.a.

As well as being able to use a residential property to secure a mortgage loan, Brown Shipley can also use a client’s investment portfolio as collateral (a “lombard facility”).  Without the need to incur valuation or legal fees and often at a rate of interest that is lower than a traditional BTL mortgage loan, the risk is borne by your investments and you remain “in the market”, able to enjoy any potential investment capital appreciation and income.  Furthermore, you are still able to deduct an element of your mortgage interest against rental income under transitional rules and take advantage of future mortgage interest rate relief under the new rules.

GOOD REASON TO STAMP ONE’S FEET…

In April 2016, the government introduced a 3% surcharge on SDLT for second homes and BTL  properties.  Basic economics dictates that as transaction costs increase, sales of BTL properties will decrease, as investors weigh up the financial merits and future capital gain opportunities against the cost of buy-in.  With slimmer profit margins to consider, it really is an old fashioned case of “caveat emptor”.

TIGHTENING THE BELT…

In January 2017 the Prudential Regulation Authority introduced stricter affordability tests for BTL mortgages.  Focus now lies on a landlords experience and track record, their wider assets and liabilities and how a new BTL property purchase and mortgage loan ‘fits in’ with the total portfolio and aggregated debt levels.  Martin Betts, Head of Credit Risk at Brown Shipley says “A portfolio of Buy-to-Let properties can often be an important component of wealth planning. We quickly develop a thorough understanding of our client’s circumstances allowing us to take a holistic view of the funding required.  Individual, tailored and considered financing is our goal, backed by a flexible and streamlined approval process to meet your needs”.

By Paul Spann, Client Director at Brown Shipley.

Source: The Business Desk

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Tax changes could see landlords place £28bn into pensions

The gradual decrease of mortgage interest tax relief could drive out ‘amateur’ landlords from the property market and place £28bn into personal pensions, a provider has said.

One in five buy-to-let landlords are planning to sell up in the next five years due to policies impacting their profitability, such as the 3 per cent increase in stamp duty on second homes brought in in April 2016, and a phasing down of mortgage interest tax relief to 20 per cent, according Aegon.

This could lead to landlords beginning to re-think their investment strategy, the provider said.

According to Aegon, the average property price sits at £225,000, meaning if a landlord releases one quarter of this upon selling the property, they could pay £56,250 into a personal pension net of tax. For higher taxpayers, this turns into £93,750 after claiming tax relief.

While there is a cap of £40,000 on how much can be paid into a pension each year tax free, those who have not used their allowance in the previous three years can catch up, meaning they can pay in up to £160,000, including tax relief.

Multiplying the £56,250 figure by the estimated 500,000 investors planning on selling equates to £28.1bn.

Steven Cameron, pensions director at Aegon, said: “The landscape for landlords has changed significantly in the last two years.

“Having a buy to let property has been seen by some investors as an alternative to saving in a pension. Investors turned to the property market in a bid to secure better returns as property values rose considerably, albeit with significant geographical variations.

“However, tax and regulatory changes and the prospect of rising interest rates is prompting 1 in 5 to consider selling.”

He said those holding property to fund their retirement in the first place may wish to put the money in a pension instead.

But Alistair Wilson, head of retail platform strategy at Zurich, said landlords should be wary of breaching their annual allowance limit, currently set at £40,000.

He said: “For many landlords, using the proceeds from a property sale to boost their pension is likely to make good financial sense, especially as they get a 20 per cent bonus in tax relief from the government.

“However, they should be wary of exceeding their annual allowance, or they will lose this top-up.”

Mr Wilson said one of the winners of any trend from property to pensions was likely to be investment platforms, which would see a boost in inflows as more and more people invest their pensions via platforms.

“We may also see a boost in demand for property funds, as investors seek a similar replacement for their bricks and mortar investment,” he added.

Phil Smith, director and group chief executive of provider Embark Group, said any tax policy influencing net yields could be expected to impact investor actions greatly.

He said: “Buy to let property investors have been progressively and negatively impacted in recent years, and it is only the low cost of debt that has kept them in the game.

“As debt costs rise, switching accumulated equity into pension contributions, taking eligible tax relief at source, and then investing into non-residential property is now exceptionally attractive when comparing like to like.

“We are seeing this in our pension books and have continued to build an sizeable property capability as a result.”

Source: FT Adviser

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Investment Property Buyers Urged To Seek Advice Before Incorporating

Buy to let property investors are being urged to seek the proper advice before incorporating their business into a limited company to avoid rushing into any changes.

Specialist buy to let broker Commercial Trust Limited has issued a warning to landlords following recent reports from the press which suggest that incorporation is becoming increasingly popular in the buy to let sector. There is a concern that landlords may rush into this decision without adequate consideration.

The reduction in mortgage interest tax relief and the introduction of stamp duty have both contributed towards the trend of landlords opting to incorporate in order to improve their finances. It was predicted by lenders that this trend will continue into the coming year as landlords aim to avoid paying taxes and increasingly see incorporating as a viable option.

Chief executive at Commercial Trust Limited, Andrew Turner, expressed concern about the trend: ‘Whilst it is understandable that buy to let landlords want to avoid paying more tax than is necessary, it is essential, as with any investment, that they fully investigate how their personal circumstances apply to buy to let taxation. Upon face value, many landlords are perhaps seeing the headlines and are considering incorporating their property investments, as limited companies are taxed differently to individuals. However, taxation is a complex issue and I would urge anyone considering this move, to seek advice from a tax specialist first, to ensure that their buy to let venture would actually be better off tax-wise, in a limited company.’

He continued: ‘Having done so, we would be delighted to help any landlords that then want to consider investing in buy to let as a limited company. There are a wide range of lenders and products that are available and based on individual circumstances. But the message should be clear to landlords thinking of taking the limited company option, to investigate fully first.’

Source: Residential Landlord