With the deadline for filing last year’s accounts on 31st January, landlords will now have a clearer idea of how the changes to mortgage interest tax relief are going to affect their profitability. For the tax year 2017-18 landlords can claim 75 per cent of their mortgage tax relief, reducing to 50 per cent in 2018-19, 25 per cent in 2019-20 and ending up at zero from April 2020. Thereafter, landlords will qualify for a 20 per cent tax credit for their mortgage interest payments.
This new system will clearly have a significant financial impact on buy-to-let investors, particularly for professional landlords, and may well push some into a higher income tax bracket as they will have to declare income used to make mortgage payments.
The new system only applies to private landlords – people who own their properties as individuals rather than through a business. For this reason,TBMC is seeing a growing interest in limited company buy-to-let mortgages, with around 25 per cent of all applications being submitted for properties held in a corporate structure. This is true of both experienced portfolio landlords and newcomers to buy-to-let property investment.
However, it’s not a completely straightforward decision to make as incorporating can make taxes more complex. Taxes need to be filed for a business and corporation tax is payable on the profits.
Additionally, if a landlord decides to transfer an existing portfolio to a limited company, they would have to pay stamp duty on each property.Limited company mortgages may also be more expensive than those offered to individuals which could cost more than any tax saving made. Advice from a qualified tax adviser is always recommended for any landlord considering incorporating for the first time.
As landlords consider the impact of taxes on the profitability of their property investments, those who choose to invest in Houses in Multiple Occupation (HMOs), will have some additional concerns to address. The new HMO regulations that came into effect in October 2018 include stipulations about minimum rooms sizes for this type of property. These rules may have implications for existing properties and mean that new purchases require some modification before they can be let out. This may also impact on the availability of mortgage finance for properties that don't meet the required standards.
It is certainly something for landlords to consider, particularly if they are purchasing an HMO at auction when completion is normally required within 28 days. There are solutions though, most notably short-term finance options that can provide the required funds to carry out any necessary refurbishment works or room modifications before remortgaging onto a standard buy-to-let product. TBMC has recently expanded its buy-to-let bridging panel to cater for this type of situation and now has a wide range of different options available.
There was a cooling in the number of mortgage applications for property purchases during 2018, but a healthy remortgage market is still apparent alongside the growing interest in short-term finance options. Needless to say,the buy-to-let sector is ever changing and it can be challenging for brokers and landlords to identify the best product options in the current lending environment. TBMC aims to make the process easier for customers, providing support and solutions using our experience and expertise in this complex sector.