Are Landlords Receiving the Best Advice?

In the ever-changing property market, it’s important for professional landlords to keep informed and even more important to have a trusted broker who provides expert advice and knows the current market inside and out.

We recently had a meeting with the Business Development Manager of one of the biggest lenders in the BTL market. During this meeting we were surprised to learn that the lender would not be entering into the Ltd company market (lending to landlords who want to carry out transactions under a Ltd company). The lender had been looking into the possibility of joining this market but after carrying out extensive research had found that 95% of BTL applications were still being carried out in personal names, therefore it would not be viable or cost effective for them to pursue this line of funding.

At Advocate Finance we were very surprised to hear that such a high figure of BTL transactions are still being carried out in personal names. This has made us question whether other brokers are really giving their clients the best advice?

The reason we question this is due to the impact that the Tax Changes on mortgage interest relief (section 24) are having on landlords (and will not be fully felt until 2020 when these will be fully implemented)

What is the impact of the tax changes?

As a result of these tax changes, we have been advising our professional landlords to seek specialist tax advice before carrying out any further property purchases. Those who seek this advice have been coming back to us with the Ltd company structure in which they will be holding the BTL properties under, as it is more tax efficient for them. Now many of our clients are carrying out Ltd company applications.

By 2020 landlords who have built up a portfolio, which is held in a personal name, could face a huge impact on the profitability of their portfolio. There are three important factors to consider with the tax changes:

• Mortgage interest will no longer be allowable as an expense replaced by a 20% tax relief of the taxable profit.
• The income tax rate and banding: landlords could be hugely affected as it will be calculated including the gross rent and not on the net rent as previously. This could potentially push a lot of landlords into the next income tax banding.
• Not only could the new tax changes push landlords into the next tax banding, for those with children, it could also affect their eligibility to Child Benefits if the gross rental income increases landlord’s income to over £50,000 per annum.

Example

Employed individual earning £40,000 therefore a basic rate taxpayer (max income tax 20%). If this individual were to acquire a residential property with gross annual rental income of £16,000, by 2020 this rent and employed income would not only have pushed them into the higher tax band (max income tax 40%) but will have also affected their eligibility to Child Benefits.

This is a simplified example, but it illustrates the issues that landlords need to consider. Seek specialist tax advice and a broker who understands these issues so that you can invest profitably in property.

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