Tax changes - have you sought advice?

Many buy-to-let landlords remain unaware of new regulations that could adversely affect their businesses.

It is now six months since the introduction of new Prudential Regulatory Authority rules that require lenders to impose more robust underwriting processes for landlords with four or more mortgaged properties.

But this is only part of the regulatory and tax changes landlords have faced recently. At the start of 2017, the PRA required lenders to apply new stress tests, potentially limiting what some buy-to-let investors could borrow.

At the same time, the Government is in the process of reducing the tax relief landlords can claim on mortgage interest payments. It has also introduced a higher stamp duty surcharge on additional property purchases.

These are wide-ranging reforms, with the potential to influence both the profitability of existing buy-to-let investments and the ability to re-mortgage at a competitive rate.

Limited company buy-to-let

The number of investors purchasing buy-to-let properties through a limited company rose sharply in the final quarter of 2017. Three out of five of all new buy-to-let applications originated from limited companies and this is setting the trend for 2018 and beyond.

Landlords are looking for ways to offset the new tax changes taking place and setting up a limited company seems to be the order of the day. One accountancy firm in London commented “It’s not only multiple property owners, we are seeing the single owner follow this route for tax efficiency as well”. “Buy-to-let portfolios via a corporate structure will be more tax efficient, especially for the higher rate tax payer”.

The limited company mortgage choice is growing daily with more than 40% of buy-to-let lenders now offering limited company deals. Good news for the borrower is these mortgages are getting less expensive and we expect this to continue indefinitely. We are also seeing more lenders entering this market as demand grows, again we expect this figure to continue rising throughout the coming year.

Landlords looking to up rents

Tax and regulatory changes to the buy-to-let market is putting financial pressure on landlords and many are being forced to hike tenants’ rents.

A recent study revealed two million tenants across the UK could be hit with rises totalling £46 million as 40% of landlords said they would increase rents in 2018.

Meanwhile, Only 10% of landlords said they would definitely have to sell their property because of the impending ban on tenant fees plus the loss of mortgage interest relief. According to the report, experts predict rents could increase by 2.5% in 2018, which would add an additional £23 to the average monthly rent which already stands at £918.

In London, where the average rent is £1,274, the impact would be more severely felt as 50% of landlords in the capital said they would hike rents. In the North East of England and Scotland tenants would also be badly affected, with 46% and 45% of landlords respectively saying they would be forced to increase rents.

Landlords look to diversify

Of those brokers who had been approached by landlords about diversifying, 56% of enquiries were about diversifying into Houses with Multiple Occupants (HMOs). HMOs can generate a higher yield for landlords which will help to mitigate against the additional costs that they now face. Research found that the average yield of a HMO could be 3.3% higher than a property with one tenancy agreement. However, changes to HMO regulations following a government consultation, due to be implemented from October, could introduce additional regulation in this area.

Landlords are also increasingly diversifying into commercial and semi-commercial properties in the wake of the recent PRA regulations and the changes to tax treatments for buy-to-let properties. The research found 14% of brokers said they had been approached by landlords wanting to increase the level of commercial property within their portfolio. In addition, 9% reported that landlords wanted to diversify into mixed-use properties.