When the chancellor announced last summer that he intended to make the tax regime less favorable for individual buy-to-let landlords, it was inevitable that investors would look for ways to overcome this significant challenge.
The proposed changes mean that landlords will no longer be able to offset their mortgage interest payments against their tax bill and receive tax relief at the higher rates of 40% or 45%. The new tax regime is being introduced on a phased basis starting in April 2017 and will be fully in force by the beginning of the 2020/21 tax year, meaning that individual landlords will only be able to claim back relief at the basic rate of 20%.
For lower rate taxpayers, it makes no difference but for higher rate tax payers the changes have the potential to turn profitable businesses into loss makers. One potential solution to this issue is for landlords to hold their property portfolios within a limited company structure, thereby taking them out of the personal tax regime altogether and subject to corporation tax instead.
There’s nothing new in running a buy-to-let property business as a limited company, but many thousands of individual investors have felt that a limited company structure has not been appropriate for them. However, it’s thought that about a third of all buy-to-let mortgages are now being issued to companies, compared to just 15% last October and it seems inevitable that this trend will continue.
Many lenders have revisited their buy-to-let criteria and, in the light of the tax changes being introduced, some have made changes to the rental stress test being applied, to reflect the impact the new tax changes will have on borrowers’ ability to service their loans.
For example, one lender has introduced a higher notional rate for individuals rather than limited companies, meaning that less gearing is available to individual investors. At the time of writing this lender had a rental stress test of 125 x 5% for limited companies and 125 x 5.35% for individuals, whilst other lenders have adjusted their stress tests to reflect different borrower scenarios. Whether these changes are beneficial or not will depend on your individual circumstances and needs.
Some lenders including Paragon, Foundation Home Loans, Aldermore and Shawbrook are also no longer applying a pricing premium on limited company buy-to-lets, which is making more brokers and borrowers aware of the growing number of options available to limited companies. I have no doubt that as time ticks on; more lenders will offer competitive deals to limited companies.
I believe the time is fast approaching when it makes sense for brokers to supply their buy-to-let clients with two sets of quotes when it comes to new purchases: one for an individual buy-to-let and one for a limited company buy-to-let. Clients should then be advised to seek advice from a specialist property accountant to determine which is the most advantageous option for them.
Deciding whether a limited company structure is right or not is a complex issue and one which doesn’t depend purely on the chancellor’s recent tax changes and the availability of specialist mortgages.
A range of other factors also need to be taken into consideration, not least of which are the cost associated with setting-up and running a limited company and the various exit strategies that are available when it comes to winding the business-up in the future.
For further information on Buy to Let mortgages both for individuals and Limited Companies please contact RLA Mortgages on 0844 858 4420.
Please note lenders have different minimum criteria requirements and not all landlords and property types will qualify for this specific product. For further information contact RLA Mortgages.
This is a financial promotion and in no way should it be viewed as a personal recommendation or advice. Before a recommendation/advice can be given you should seek independant mortgage or financial advice.
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