With years of legislative changes to lettings, landlords are playing catch-up when it comes to the parameters in which they must operate. Changes to mortgage interest relief, in particular, have proved difficult to navigate, as inevitable questions arise around governance.
Since April 2017, mortgage interest relief has been restricted to a basic rate income tax of 20 per cent, phased in over four tax years, which has and will have financial implications for landlords. There are options to help relieve any pressures and our advice to clients is to ensure that they take the time to understand these changes and find a solution that works for them financially, seeking professional guidance if necessary.
The limited company route
While incremental reductions to mortgage interest relief felt like a minefield for many, we are seeing, with increasing frequency, multi-unit landlords and institutional investors finding new ways to mitigate the financial squeeze. In particular, operating as a Limited company allows landlords and investors to benefit from the main rate of corporate tax, which will reduce to 17 per cent from April 2020, widening the gap between corporate and personal tax rates.
Landlords must do their homework before full interest deduction is implemented from April 2020.
That said, the viability of this approach will depend on the amount of Stamp Duty Land Tax the company will pay to acquire the properties, whether Capital Gains Tax is payable when a property is transferred, and whether borrowing has to be renegotiated.
With many landlords feeling the pinch, it is no surprise that the limited company structure is an attractive proposition. However, out of the 60 lenders currently in the buy to let market, only 17 facilitate lending under a corporate structure.
The majority of these are specialist lenders with specialist rates, charging higher fees to a limited company than they would to an individual. Other factors that could affect rates offered by such lenders include portfolio size, the property type and rental yield, so it’s important to seek professional advice before considering this route.
Locate the right lender
For smaller scale landlords, the cheapest form of buy to let lending is often through mainstream lenders. Although, it’s worth bearing in mind that finding a lender with a good rate for one property does not deem them the best lender for an entire portfolio. We recommend that landlords shop around first, to ensure that they’re getting the best deal for their investment as a whole.
On the surface, registering as a limited company could serve higher taxpayers and larger investors well, while mainstream lenders remain a suitable option for independent landlords. However, with different lenders posing differing criteria – dependent on a number of factors – there isn’t a blanket solution.
Looking ahead to 2020
To best navigate the changes to mortgage interest relief, it is important for all landlords to do their homework before the full extent of the mortgage interest deduction is implemented from April 2020. To that end, in addition to finding the right lender with the best rate, landlords should consider this in conjunction with their return on investment to determine the most financially viable solution.
The gradual phasing of this legislative change has meant that, year on year, landlords have had little consistency when it comes to their finances, which can cause concern. However, we’re confident that we can support clients as they adapt to this ever-changing landscape and, for those who are unsure, seeking professional advice should be the first port of call.
Example: John is employed and earns £80,000 in salary and bonuses per annum. As well as his employment income, John owns a buy-to-let residential property from which he receives £40,000 a year. John has a mortgage on the property and pays £25,000 interest per annum so that his net rental profit before tax is £15,000. John’s income tax position and net profit after tax over the next five years is shown in the table below: