The Government’s changes to buy to let mortgage tax relief are starting to hit home.
Building a rental property portfolio can be hard work, and many landlords must borrow money to do it. However, before the April 2017 changes, they could alleviate some of the pain by declaring rental income after paying the mortgage, potentially shaving thousands of pounds off their bills.
Things have changed, now that the phasing out of mortgage interest tax relief has begun. For many landlords, the result is higher tax bills where rental income has not gone up.
Here, specialist mortgage consultant Grahame R Harwood looks at the options that are available to buy to let landlords.
The Impact on Income and More
“This is just the start of the reduction in interest rate tax relief that will be completed over a five year period,” says Grahame. “Those landlords that aren’t adapting and realigning their strategy are going to be worse off financially.”
“Some landlords might not be affected by the phasing out of buy to let mortgage interest tax relief, if they are able to remain basic rate tax payers,” suggests Grahame. “However, the Government has made this very difficult, as a buy to let landlord’s gross rent will be added to any other income they receive.”
This is regardless of whether they are making a profit or a loss. Furthermore, those landlords that fall into a higher tax bracket will face far more stringent underwriting requirements.
“Anyone who has five properties or more will be classed as a portfolio landlord, meaning that lenders will assess the viability of every single property in a landlord’s buy to let portfolio before agreeing to a further buy to let loan”
“One underperforming property will be enough to put a spanner in the works for a new buy to let mortgage application,” warns Grahame. “Plus, there’s also the the additional three percent stamp duty surcharge.”
Easing the Pain
Naturally, landlords will be looking at ways of holding onto as much of their profits as possible in the face of these changes.
“‘There are simple and legitimate ways for landlords to work around the effects of the tougher mortgage underwriting, allowing landlords to move ahead with smaller deposits and larger mortgages”
“One option is to transform yourself into a limited company,” says Grahame. “This is already proving popular.”
Buy to let landlords can make themselves more tax efficient by choosing this option, but only if the circumstances are right for them.
“There are tax benefits in doing this, but it’s not a universal solution,” warns Grahame. “There are various technicalities, and getting it wrong could prove to be very expensive.”
“While it is a positive factor that landlords can also claim other expenses, there are negatives to consider,” Graham cautions.
“Not all buy to let mortgage providers will lend to a limited company. In the case of an existing buy to let portfolio, it may be necessary to remortgage to new lenders. Typically, personal buy-to-let borrowing is far a wider market.”
“I strongly recommend that buy to let landlords seek specialist advice before making any decisions,” concludes Grahame.
To discover more about the options available to you, as a buy to let landlord, please contact Grahame R Harwood:
For an additional read, please visit Investors: Why is Buy To Let Not Dead, But Different?