What advisers should know before recommending buy-to-let

In a market such as this, which is changing all the time, it is vital to keep on top of any new policy, regulation or tax guidelines – now more so than ever.

What should advisers know before recommending buy-to-let?

“Advisers need to have a thorough understanding of their customers’ circumstances and financial affairs, particularly whether they are a higher or lower rate tax payer – and if they are a lower rate payer, whether the income from a buy-to-let property could push them into the higher rate bracket,” says John Phillips, group operations director for Spicer Haart and Just Mortgages.

With criteria changing all the time and getting much more stringent in many cases, advisers need to know which lenders need evidence of income as well as being able to get the rental returns.John Phillips, Spicer Haart

He recommends that potential landlords also get tax advice from a qualified accountant before buying their property.

“In addition to this of course, advisers need to know the market and their products,” Mr Phillips notes. “With criteria changing all the time and getting much more stringent in many cases, advisers need to know which lenders need evidence of income as well as being able to get the rental returns.

"This means they can ensure if their client does want to go ahead with a buy-to-let property, they stand the most chance of being able to get the mortgage they need.”

Assessing suitability

Advisers will need to ask clients a number of questions and clients should come prepared with the answers when discussing the possibility of establishing a buy-to-let portfolio.

Matthew Bird, independent financial planner at Seer Green Financial Planning, encourages advisers to gain full knowledge of a client’s situation to assess the suitability of a buy-to-let investment. 

He suggests the following four questions will help them establish whether buy-to-let investing is suited to their client:

• How exposed are they to buy-to-let already?
• Do they have diversified savings in other asset classes?
• What is their attitude to risk?
• What are their long-term financial goals?

Clearly, there is a level of risk involved with any type of investment and while investing in property is typically able to provide a steady stream of income, potential buy-to-let investors should be made aware of any pitfalls.

As Mr Bird points out, property can be an illiquid asset.

“If you need to raise capital fast, a property sale can be expensive and time consuming so is only suitable for a long-term investment,” he explains.

“Also, buying property gives you a lack of diversity as it puts a lot of eggs in one basket. You could access a property fund via an Isa or pension, offering you far more liquidity and diversification plus any capital gains or income would be paid tax free.”

Keeping up with changes

With a number of changes already taking place within the buy-to-let market and more due this year, advisers should be aware of how these will affect the advice they offer to clients already investing in buy-to-let, or considering doing so.

Perhaps the most significant changes are those relating to taxation, which have been well documented.

Paul Shearman, Openwork’s proposition director for mortgages, protection and GI, says the upcoming tax changes will be key to assessing suitability of buy-to-let investing.

“The withdrawal of the higher rate tax reliefs on mortgage interest costs, beginning with 25 per cent of these costs having basic rate tax applied from April 2017, means landlords do have time to plan,” he suggests.

“But with the level of relief continuing to drop over the next four years, the impact will be significant for many landlords. It’s therefore important to consider how they’ll affect clients in the future, so that clients are aware of how the changes will impact them.”

He believes one option advisers should be discussing with clients is whether or not they should be moving properties or purchasing properties within a company structure, as corporation tax is currently levied at 20 per cent, with plans to lower this to 18 per cent by 2020. 

He adds: “This is a big step and while there are pros and cons to incorporating, the financial savings can be significant. Advisers should be exploring this issue with clients and recommending the use of tax/legal advisers as appropriate.”

Tax advice

Buy-to-let investing is a specialism and many financial advisers will also point their clients in the direction of a tax specialist as well.

It is important that mortgage advisers take time to gain the required knowledge on the buy-to-let changes to ensure that best advice is given to their customers.Jane Benjamin, Sesame Bankhall Group

John Heron, managing director at Paragon Mortgages, urges: “Advisers need to make sure their customers are aware of the tax and mortgage affordability changes. They should encourage customers to get professional advice on tax issues and to contact organisations such as the National Landlords Association who will be able to signpost valuable information and advice.”

Donna Hopton, a director at Cherry, agrees advisers need to be fully conversant with the tax changes that have affected the buy-to-let market recently to ensure the advice they give is “up to scratch”.

She points out: “The real effect of Clause 24 [changes to tax relief] means that essentially there is now a tax on turnover and not profit. People need to understand this immediately or there will be risks to consumers – and of course to advisers.”

Case Study 1:

Ms Hopton cites one example: “We were advised of a case where a client has 14 properties, earns £60,000 and pays around £16,000 in tax, leaving her with a net income of £44,000.

"However, the introduction of Clause 24 by 2020 means that with no change in her turnover, her tax bill will be in the region of £48,000.

"This would leave her with a net income of just £12,000 which seems to the adviser concerned to be utterly unacceptable and ludicrous.”

More information

Plenty of mortgage networks are running roadshows and offering workshops to advisers in an effort to help them keep abreast of all the developments in the buy-to-let market, including Sesame Network and PMS Mortgage Club who are organising sessions in their 2017 adviser events programme.

Jane Benjamin, head of relationship management at Sesame Bankhall Group, suggests: “It is important that mortgage advisers take time to gain the required knowledge on the buy-to-let changes to ensure that best advice is given to their customers, including the possible referral to a tax expert prior to a customer committing to a buy-to-let mortgage.”

eleanor.duncan@ft.com