With this same example, let’s say the interest charged on those buy-to-let properties goes up to 6 per cent. I would imagine most people reading this would have experienced paying something close to that rate at some point in the past.
In my example scenario, the mortgage interest payments would increase to £2,501 each month or £30,012 each year.
This scenario looks a lot less attractive for a landlord.
If they can not offset interest-only mortgage payments from their rental income profit; this will result in significantly lower returns and then they will inevitably have to consider alternative options.
How will landlords adapt?
Let’s say a landlord runs their property business through a company rather than as a private venture; would these new tax changes I mentioned above apply? The answer is no.
If a company owns the property portfolio then the tax which is paid on the profit of the business is corporation tax.
At the moment, the corporation tax rate is 19 per cent but this is going to drop to 17 per cent in the next tax year (2019/2020) making the idea of holding properties within a limited company or specifically a SPV (Special Purpose Vehicle) quite attractive.
This is because a lot less tax will need to be paid which means a much greater net profit.
I must caveat that any landlords who do decide to move their private property portfolio across to a SPV would need to take proper advice because there are lots of implications to consider including stamp duty, lending criteria for new mortgages and various other considerations.
That said, at face value, it feels like these tax changes will nudge many landlords to move across to this type of model going forward.
Partners in business
Let’s look at a scenario where landlords set up a business to hold their property portfolio.
What are the protection opportunities that could arise for situations where people work together on a property venture?
Let’s say three skilled tradesmen get together with the idea of setting up a rental business.
They set up an SPV and they each invest £50k of their own money to buy their first property from an auction.
They buy the property with the cash they have pooled together with the intention of renovating it and putting it on the rental market.
Bob is a builder, Eric is an electrician and Paul is a plumber.
They do all the necessary work themselves and when the property is complete, they put it on the rental market.
The value of the property has increased, so they mortgage it and using those funds, they return to the property auctions to find their second property.