Buy to Let Funding Goes Through Dramatic Changes

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From April 2017 small buy-to-let investors will see gradual yet profound changes to the tax system, designed to increase HMRC revenue. The new system will ultimately see investors paying tax on 100% of their rental income. It’s no wonder more landlords than ever are choosing SPVs – special purpose vehicles – to buy to let while avoiding Stamp Duty.

More lenders offering buy to let funding vehicles

Apparently there’s been a dramatic rise in the number of buy to let (BTL) mortgage applications through limited companies, as much as 30% of all buy to let completions. That’s 9% more than the second half of 2015 and 12% more than the first half. At the moment there are 14 lenders prepared to offer products to limited company borrowers, up from 12 at the end of 2015.

Why the increase?

There isn’t a big increase in the number of new lenders entering the BTL market. More existing lenders are offering limited company products, which account for 42% of the BTL lending market, up from 30% last year. At the same time applications and completions for limited company buyers seem to have found their level at around a third of all BTL business.

A dramatic sea-change in the BTL sector

Behind all this lies a dramatic change in the traditional investment pattern for property buying. The proportion of investors buying through limited companies has grown from less than a quarter by value in the first half of last year to more than 50% this year. In fact second quarter limited company applications for 2016 currently sit at 60% of all new BTL applications, representing a seismic shift in the way landlords are funding the purchase of homes to let.

At the same time there has only been a small increase in limited company re-mortgaging, but some existing landlords are holding back until they can see how the post-Brexit economy pans out. With reduced corporation tax on the cards on one hand and landlords being squeezed by the latest tax changes on the other, it’s likely we’ll see even more of the nation’s landlords using limited companies to fund property buying.

Facts about the new buy to let landscape

  • From April 2017 landlords won’t be able to deduct the cost of mortgage interest. Instead they will get a tax credit of 20% of the interest cost. This means higher-rate and additional-rate landlords will pay a lot more tax, even when they don’t make a profit
  • If you structure your landlord business as a limited company, you’re exempt and will continue to pay corporation tax on the profits
  • You can set up a special purpose vehicle to buy property to let for as little as twenty pounds, and you can do so online. But it makes sense to spend a little more to ensure you get all the right paperwork. An accountant can do it for you
  • Whatever you do, you won’t be able to avoid the new 3% extra stamp duty levied on second properties from April this year, which also applies to buying via a company
  • Transferring property into a company has tax implications. The property must be sold at market value, with capital gains tax and potential stamp duty costs included. If the property has increased in value you still might have to pay capital gains tax on the sale, unless it’s a business rather than an investment
  • Average buy to let mortgage rates are around 0.7% higher than ordinary mortgages
  • Limited company BTL investors pay less tax on their rental income. Corporations pay a flat rate of 20% now, reducing to 19% in April 2017 and 18% by 2020

Is limited company BTL investment for you?

A limited company BTL vehicle could be beneficial to you. But like all financial products, it’s your job to consult a professional Independent Financial Adviser before making a decision. It’s important to know that corporations only work for some kinds of investors. Here are a few pointers:

  • If you’re a higher or additional-rate taxpayer, a corporation could benefit you
  • If you’re a basic rate taxpayer with a combined rental and other income of over £40,000 for basic rate tax, you could also benefit
  • Take care if you’re intending to use the money as a pension or extra income in future, because taking out dividend profits will cost you more when dividend tax rates change. Basic rate taxpayers will pay 7.5% tax, higher rate taxpayers will pay 32.5% and additional taxpayers will face a 38.1% tax rate, over and above the standard £5,000 dividend tax relief – all of which means incorporating is a good move when you plan to leave your income to build up into – say – a pension
  • Bear in mind closing down the business might leave you with a tax double-whammy, with 20% tax on the profits plus more tax to pay at the dividend rate or on capital gains. It depends how you take the cash out
  • As a general rule, if you’re in it for the long haul it’s more likely to be worthwhile to arrange a corporation than for a short term BTL investment

Talk to the experts

If you’re in any way unsure or not fully confident you understand the facts, come and have a sensible chat with us.

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