Specialist Lending - May 2017  

How to navigate buy-to-let changes

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Changes in the complex buy-to-let market

How to navigate buy-to-let changes

Successive Budgets have seen tighter tax rules imposed upon buy-to-let landlords, starting in 2015 with former chancellor George Osborne’s comments on prioritising the needs of first-time buyers over those of buy-to-let investors.

The first thing Mr Osborne did was to make a change to the way in which landlords can claim ‘wear and tear’, by replacing the allowance with a charge on a cost-incurred basis.

Until 6 April 2016, landlords were able to claim 10 per cent of the net rent as ‘wear and tear’ allowance for furniture and equipment provided with a furnished residential letting.

Net rent, according to the government website, is “the rent received, less any costs you pay that a tenant would usually pay, such as council tax”.

But this allowance was being replaced with a relief that will mean landlords of residential dwelling houses can now only deduct the costs they incur on replacing furnishings in the property.

Also in the Summer 2015 Budget, the chancellor announced buy-to-let landlords will receive a lower rate of tax relief on mortgage payments.

Before April 2017, landlords could take advantage of loan interest relief up to 45 per cent. Now, it will be reduced to a flat rate of 20 per cent tax credit - under changes to the taxation of mortgage interest. These changes will be phased in gradually until 2020.

This means landlords can no longer deduct the cost of their mortgage interest from their rental income, so tax will be applied to the rent received, rather than net rent - that which is left of the rent after the mortgage interest has been paid. 

This could transform properties that currently generate positive cash flow into a loss-making investment (on an income basis) because of the extra tax, and could mean some landlords receive no profit at all, as it will be eroded by the tax payments and mortgage interest.

Jeremy Duncombe, director for the Legal & General Mortgage Club, comments: “Higher-geared portfolios will suffer more from these tax changes, so landlords in this situation should contact a broker to consider remortgaging.”

Thinking ahead

A lot of professionals at the time considered bringing forward any property purchases ahead of the 2016 rate increase, which according to Louisa Sedgwick, director of sales, mortgages, for Vida Homeloans, gave a “false reading in the market”.

She explains: “The SDLT deadline gave a false reading in the market as buy-to-let property purchases were simply brought forward to avoid the additional duty”.

Many of these properties were put into special purpose vehicles – limited companies – as it was believed incorporation could protect landlords against the full impact of SDLT, adding an additional layer of complexity to buy-to-let investment.

“Many landlords were wondering whether incorporating will be a good idea in light of the higher tax bills heading their way”, says David Hollingworth, associate director of communications for London and Country Mortgages.