The private rented sector is vital to the housing market. It accounts for a fifth of all households in England, having doubled in 20 years and overtaken the social rented sector.
Landlords range from those with one property to professional landlords with large portfolios. Different rules apply to ‘portfolio landlords’ who are defined by the regulator as those with four or more mortgaged properties and lenders need a separate underwriting policy for these borrowers.
Fortunately, there are specialist lenders who focus on portfolio lending and work hard to make the process as simple, quick and hassle-free as possible.
Two areas that are prevalent in a lot of landlords’ minds right now are the recent tax changes and how this affects their profits, and whether or not to use a limited company structure for existing and future properties.
The government has gradually removed tax relief on mortgage interest payments, replacing it with a tax credit that is capped at 20%.
Higher or additional rate taxpayers will have already started to feel the pinch. Many now find themselves paying far more in taxes, since they can no longer claim relief at their marginal rate.
For most basic rate taxpayers this shouldn’t impact their profit. However, taxpayers that are on the cusp of the higher tax bracket could find themselves pushed into it because of these changes, increasing their tax bill and denting their returns.
These changes not only impact profitability but also the ability to lend moving forward. The new ICR or Interest Coverage Ratios factor in these increased tax costs into the new affordability calculations.
The team at Express Mortgage Services are well versed in this area and can certainly help with your plans moving forward.
Limited Company & BTL
Limited Company buy-to-lets have soared in recent years due to their many advantages. And lenders have responded in kind with more of them entering the market and products becoming more competitive.
Under a limited company, landlords don’t pay income tax on their rental income. Rather the limited company will pay corporation tax, which is currently 19% and reducing. Crucially, companies can also fully offset their mortgage interest, unlike individuals. These benefits can help all clients, but especially higher rate taxpayers.
It’s not all about the tax though. Limited companies also provide a great deal of flexibility, when it comes to changing ownership or succession planning, for example.
The main drawbacks of the limited company structure are the slightly increased running / accounting cost, cash being held by the company on a property sale rather than personally (not an issue where the intention is to reinvest) and less mortgage products available – although this is changing.
However, there is a big difference between setting up a limited company to purchase another investment property, which is relatively simple, and transferring existing properties into one.
The transfer of an existing portfolio can achieve great tax savings but needs to be carefully planned to minimize costs. Specialist advice is needed to assess the stamp duty and capital gains tax exposure, identify the tax reliefs that may be available, and the potential savings.
Taking advice from a specialist property tax expert like Adam Owens at About Tax is extremely useful. He can assess your existing portfolio and help you plan for the future. This will inevitably save you money.
For further information you can contact both of these specialists at:
Express Mortgage Services 01942 235 000 www.emsdirect.co.uk
About Tax 07909737175 www.abouttax.co.uk