Specialist Lending - May 2017  

Top Tips for complex buy-to-let

  • To understand the tax changes to buy-to-let.
  • To ascertain what potential obstacles advisers must overcome when discussing complex buy-to-let.
  • To learn how to help clients with complex buy-to-let portfolios.
  • Imposition of a 3 per cent stamp duty land tax (SDLT) for purchases of rental properties and second homes, from April 2016.
  • Retention of capital gains tax (CGT) rates of 18 per cent for basic-rate taxpayers and 28 per cent for higher rate taxpayers on disposals of residential property, where the property was not a primary residence. This rate was reduced to 10 per cent and 20 per cent on other asset types, such as investments. This was brought in in April 2016.
  • Also in April 2016 was the removal of the 10 per cent wear and tear allowance that HM Revenue & Customs allowed for furnished rental properties. Now, landlords must document carefully any actual expenditure as this is all that is allowed.
  • From April 2017, the government removed landlords' ability to deduct interest paid on buy-to-let mortgages from taxable income. This was replaced with a flat tax credit of 20 per cent of interest paid.

Chris Ioannou, senior independent financial adviser for Prestige IFA, comments: "I would argue, as a respectable mortgage adviser, there's no such thing as a complex buy-to-let case.

"Having said this, a higher-rate tax payer, or someone now moving into the higher rate band as a result of the tax changes being introduced certainly presents both the applicant and the adviser with a lot more to consider and to work through."

According to Mr Hollingworth: "One of the biggest changes that will see clients having questions or seeking more tailored solutions will stem from the phased removal of higher and additional rate relief on mortgage interest.

"As a result it's important advisers keep on top of the changes, and understand what it could mean for landlords, what their options might be and any potential implications of those various options."

Jeremy Duncombe, director of the Legal & General Mortgage Club, says it is important for brokers to "understand fully" what the tax changes are so they can explain these to customers.

"In times of uncertainty and change", he explains, "brokers can show their true worth to their clients who will need more advice and guidance for their buy-to-let property transactions."

Macro-prudential warnings

In addition, the Prudential Regulatory Authority (PRA) has sounded some macro-prudential alarms over the quality of buy-to-let lending.

In 2016, it published a review which highlighted concerns about the seemingly inexorable growth of buy-to-let lenders’ growth plans and how they might meet them.

In particular, it said "there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for microprudential action".

This led to the publication of its Underwriting Standards for Buy-to-Let Mortgage Contracts paper, in which it outlined new affordability tests.

Specifically, it proposed that all firms use an affordability test when assessing buy-to-let mortgage contract in the form of either a mortgage interest coverage ratio (ICR) or an income affordability test, where firms take account of the borrower’s personal income to support the mortgage payment.

It also proposed that firms consider: 

  • All costs associated with renting out the property where the landlord is responsible for payment.
  • Any tax liability associated with the property.
  • Where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs.

Top tips for helping clients through complex buy-to-let

All these changes have pushed more landlords into a complex buy-to-let bracket. Says Mr Hollingworth: "More landlords [are] having to make a wider lender search to find the right one for their needs, given the tougher regulatory requirements."

As a result, some landlords are simply jacking it all in, according to data from the Association of Residential Lettings Agency (Arla)

The data showed estate agents had reported an average of four landlords selling up per branch, compared with just three in February.

But for those who remain - or for those who have become 'accidental landlords' through inheritance or some other way, they will need advice on complex buy-to-let.