Posts with tag: landlord finance

The Government’s Guide to Tax Relief Changes for Residential Landlords

Published On: July 20, 2016 at 9:35 am

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Ahead of the phased introduction of tax relief changes for residential landlords in April 2017, the Government has released a guide that explains how the restriction will affect you.

As of April next year, the amount of income tax relief that landlords can claim on residential property finance costs will be cut to the basic rate of tax.

The changes

These changes will affect you if you let out residential properties as an individual, or in a partnership or trust.

The reduction will change how you receive relief for interest and other finance costs, and will be gradually introduced over four years from April 2017.

Under the new rules, finance costs will not be taken into account to work out your taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be cut to the basic rate. For landlords, this will be the basic rate value of your finance costs.

The Government's Guide to Tax Relief Changes for Residential Landlords

Who will be affected? 

You will be affected by the changes if you are a:

  • UK resident individual that lets residential properties in the UK or overseas
  • Non-UK resident individual that lets residential properties in the UK
  • Individual who lets such properties in partnership
  • Trustee or beneficiary of trusts liable for income tax on property profits

All residential landlords with finance costs will be affected, but only some will pay more tax.

You won’t be affected by the introduction of the reduction if you are a:

  • UK resident company
  • Non-UK resident company
  • Landlord of furnished holiday lets

If you operate as any of the above, you will continue to receive relief for interest and other finance costs as usual.

What does the restriction include?

The finance costs that will be restricted include interest on:

  • Mortgages
  • Loans – including loans to buy furnishings
  • Overdrafts

Other costs affected are:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages and loans
  • Discounts, premiums and disguised interest

If you take out a loan for both residential and commercial properties, you will need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties, as only the finance costs for the residential property business are restricted. This also applies if your loan was taken out partly for a self-employed trade and partly for residential property.

The introduction 

The changes will be phased in gradually from 6th April 2017 and will be fully in place from 6th April 2020.

As of April next year, you will still be able to deduct some of your finance costs when working out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate tax relief reduction.

You will still be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction as follows:

Tax year

Percentage of finance costs deductible from rental income

Percentage of basic rate tax reduction

2017-18

75% 25%

2018-19

50%

50%

2019-20

25%

75%

2020-21 0%

100%

Other implications of the changes 

These new rules mean that the way taxable income is calculated will change, and that could have other implications for some. For example, if you or your partner receive child benefit and your income is over £50,000, the high income child benefit charge may apply.

These changes were announced in the summer Budget 2015 and are contained in Finance (No. 2) Act 2015, as amended by Finance Bill 2016.

A Landlord’s Guide to the Mortgage Interest Tax Relief Changes

Published On: May 30, 2016 at 8:03 am

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Many buy-to-let landlords are set to see their profits decline after Chancellor George Osborne revealed plans to reduce mortgage interest tax relief in the summer Budget.

At present, landlords can reduce their taxable income by deducting the cost of certain expenses from their rental income. Until now, these allowable expenses have included costs such as repairs, letting agent fees and mortgage interest.

Under the new rules, landlords will still be able to deduct repairs and other legitimate expenses from their taxable income, but will only be able to offset a portion of their mortgage interests costs against tax, if they are a higher rate taxpayer.

Example

To demonstrate exactly how this will work, London estate agent Portico has calculated the impact of the change for a higher rate taxpayer. The firm assumes that they purchased the property for £500,000, are renting it out for £400 per week, and have a 75% loan-to-value (LTV) mortgage with a 3.5% interest rate.

A Landlord's Guide to Mortgage Interest Tax Relief Changes

A Landlord’s Guide to the Mortgage Interest Tax Relief Changes

Under the new rules, this landlord would end up being £2,625 worse off, with their profits falling from £4,000 to little over £1,000.

Although there is no doubt that this change will make things more difficult for landlords, the majority of buy-to-let investors will not be affected quite as severely as this example, explains Portico.

To begin with, landlords that are still classed as basic rate taxpayers after the changes are introduced will not be affected at all.

Secondly, most landlords have a lower LTV than 75%. Additionally, landlords in London have enjoyed substantial capital and rent price growth in the past decade. This means that interest payments represent a much smaller proportion of rental income than shown in the example above. Therefore, landlords with lower mortgage costs will lose less under the change.

Another bit of good news is that the change will be phased in gradually. In the current tax year (15/16), there will be no change at all. The tax change will begin with four equal increases over the next four years. For the example above, this means that the landlord will be unaffected this financial year, around £650 worse off next year, £1,300 the year after, £2,000 the year after that, and finally £2,625 by the time they pay their tax bill at the end of 2021.

Putting it simply, the current rules give most landlords a 40% discount on their interest costs. Under the new system, this drops to 20%.

Portico advises landlords to cut their interest costs by remortgaging.

With buy-to-let mortgage interest rates falling significantly since the financial crisis, current deals are substantially better than those arranged a few years ago.

Portico also suggests having your rental property re-valued to take house price growth into account. This would make your mortgage lender recalculate your LTV, and a lower LTV means a better interest rate.

Ahead of the tax change, ensure that you protect your rental income with Rent Guarantee Insurance, which covers rent payments if your tenants fall into arrears.

Preparing for Future Economic Changes in the Buy-to-Let Sector

The Government’s clampdown on the buy-to-let sector will continue into next year, alongside economic changes that will have an effect on the property market. How should you prepare for any financial difficulties you may face?

Just next month, the country will vote in its first European referendum since 1975. It is believed that the EU vote will cause house prices and sales to drop, due to uncertainty in

Preparing for Future Economic Changes in the Buy-to-Let Sector

Preparing for Future Economic Changes in the Buy-to-Let Sector

the market. However, property professionals have called for a Brexit in a recent poll.

So should you continue to invest in property at this volatile time?

Nova Financial’s Managing Director, Paul Mahoney, explains: “Our advice to our clients is that property is a long-term investment and therefore isn’t about timing the market, but rather time in the market.

“All too often we meet with people in their 60s who have always had a reason not to invest, whether it’s a property bubble, tax changes, Brexit, Easter or Christmas, and unfortunately, these tend to be the people with little to no investable asset base, because they’ve always had a reason to wait. Those that invest in quality properties in areas with strong fundamentals ride out the short-term blips and achieve strong growth over the mid to long-term.”

He adds: “My point is that regardless of the EU referendum outcome, property will remain a strong investment over the long-term and it should not stop people from positioning themselves to take advantage of that fact.”

Additionally, many landlords are considering forming limited companies to avoid the gradual reduction in mortgage interest tax relief, from April 2017.

The latest data from mortgage lender Foundation Home Loans claims that landlords will favour limited company mortgages in the future, as this type of property business will be exempt from the cut in how much tax relief landlords can claim against mortgage interest payments.

Mahoney comments: “We have been advising on and forming limited companies for many of our clients, given the recent tax changes. When running the numbers and accounting for a slightly higher interest rate payable for limited company buy-to-let mortgages, we find that it is certainly worth considering for anyone on the highest tax rate with mortgage loan-to-values above 50%. This affects anyone earning over £43,000 per annum currently and £45,000 as of next year. Those that are borderline on the threshold need also be careful, as if they are landlords receiving rental income, the recent changes may push them above the bracket. It is very important to seek tax advice on this matter and if they haven’t already, all landlords and prospective landlords should be getting personal advice.”

If you are thinking of investing in the buy-to-let sector, or are considering changing your business model, remember to seek professional advice from a leading expert.

Landlords Rushing to Avoid Buy-to-Let Tax Changes

New research suggests that landlords are rushing to invest in the sector ahead of key buy-to-let tax changes.

As the 1st April Stamp Duty surcharge deadline approaches, many property investors are seeking to avoid the hike.

Landlords Rushing to Avoid Buy-to-Let Tax Changes

Landlords Rushing to Avoid Buy-to-Let Tax Changes

Meanwhile, more individual investors seem to have turned their lettings businesses into limited companies in order to be exempt from Chancellor George Osborne’s clampdown on the buy-to-let sector.

Limited companies accounted for 43% of all buy-to-let deals in January, up from 38% in December, according to specialist broker Mortgages for Business.

The total number of buy-to-let mortgage applications – by both individual investors and limited companies – increased by 27% in January from the previous month.

From 1st April, buy-to-let landlords and second homebuyers will be subject to a 3% Stamp Duty surcharge when they purchase a property worth over £40,000.

The Managing Director of Mortgages for Business, David Whittaker, explains how this is changing the market: “The increase is due to landlords trying to get as many purchases as they can completed before the Stamp Duty surcharge comes into effect on 1st April, after which I would expect transactions to return to more considered levels.”

Additionally, landlords face the forthcoming change to buy-to-let mortgage interest tax relief, which will be cut to the basic rate. However, limited companies operating lettings businesses are exempt from this change.

Whittaker comments: “Landlords have woken up to the fact that transacting via a corporate vehicle is a feasible option, and in many cases, the most prudent route going forward.

“I wouldn’t be surprised if the percentage continues to rise as landlords, especially those paying the higher tax rate, prepare for the forthcoming changes to relief on finance costs.”1

Have the planned changes affected the way you are investing in the buy-to-let sector?

1 http://www.mortgageintroducer.com/ltd-buy-to-let-takes-43-share-in-january/#.VrHGmFtLH8s

Extra 3% Stamp Duty Charge Comes Under Attack

Published On: February 1, 2016 at 12:53 pm

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Categories: Finance News

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The extra 3% Stamp Duty charge to buyers of buy-to-let properties and second homes has come under attack, as the consultation on the proposal comes to an end.

A consumer group, the HomeOwners Alliance, says the additional tax will bring “massive unintended consequences”.

Today, the official consultation on the extra Stamp Duty ends, after just seven weeks.

If the charge is approved, it will apply from 1st April this year.

The HomeOwners Alliance calls the measure “dangerously flawed” and insists the Government goes “back to the drawing board”.

It says it supports the charge on second homes, but believes the way the Government plans to introduce the surcharge is “overly complex and flawed”.

The group is especially concerned over the surcharge’s 18-month window; those buying a new home before selling their first must pay the extra 3% Stamp Duty, then, they have an 18-month window to sell their first home in order to receive a refund.

If they do not sell within 18 months, they lose the right to a refund.

The policy would also affect people relocating, for example for work, and who might normally rent out their first home while buying in a new area. If they do this, they must pay the surcharge.

Extra 3% Stamp Duty Charge Comes Under Attack

Extra 3% Stamp Duty Charge Comes Under Attack

The Chief Executive of the HomeOwners Alliance, Paula Higgins, states: “It is great the Government is trying to use Stamp Duty to help homeowners, but they have made a real hash of it.

“The ridiculously complex way they are planning to introduce the scheme will end up harming many of the very homeowners it is meant to help, and lead to widespread confusion among homebuyers.”

She continues: “We are already being contacted by distressed homeowners who have worked out they will be caught by it and not be able to buy the home they want to.

“Rather than push ahead with a well-intentioned but dangerously flawed scheme, it should go back to the drawing board and put it right.”1

Meanwhile, the Intermediary Mortgage Lenders Association’s Peter Williams has criticised the short consultation period, which is too short by the Government’s criteria.

He believes the Government has “no view about how this tax will impact on the market as a whole, let alone the buy-to-let market.”

He says that buyers will eventually be able to absorb the extra tax, but it will push rent prices even higher.

“It doesn’t seem at all sensible,”1 he adds.

Furthermore, the Council of Mortgage Lenders (CML) has also voiced its concerns.

Paul Smee, the CML’s Director General, says: “There is a risk of overkill in dampening investor sentiment to the extent that the flow of available private rented property could be disrupted, without any necessarily corresponding increase in the ability of households to become homeowners.

“In addition, with around a fifth of households currently renting in the private sector, there is the perverse risk that the SDLT increase could cause landlords to charge higher rents, and so actually make it harder for tenants who want to buy to save the deposit needed to do so.

“We urge the Government at least to move away from a position where people will have to pay and then potentially claim back to one where payment is deferred, and only triggered if the buyer genuinely falls into the intended target category.”1 

For further information about landlord finances, here is a round up of forthcoming changes to buy-to-let: /contrary-to-popular-belief-buy-to-let-is-not-dead-insists-finance-firm/

1 http://www.propertyindustryeye.com/stamp-duty-surcharge-comes-under-savage-attack-ministers-told-to-turn-back/

Property Professionals Believe Osborne’s Plans Won’t Work

Published On: December 18, 2015 at 12:06 pm

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Categories: Property News

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The majority of property professionals believe that Chancellor George Osborne’s plans for the housing market, as announced in the Autumn Statement, won’t work, with 57% stating that they will have a negative effect on the industry.

Property Professionals Believe Osborne's Plans Won't Work

Property Professionals Believe Osborne’s Plans Won’t Work

Experts believe that consequences could be: lack of confidence in the market; unachievable house building targets; and limiting the supply of rental property.

These findings are the result of a survey of 570 property professionals by specialist recruiter Deverell Smith.

Even most of the 21% that believe the measures will have an overall positive impact on the sector think that to create an affordable market means that other areas will take a hit.

Just under two thirds (66%) of respondents do not believe that the house building targets are achievable, while 58% think the extra 3% Stamp Duty charge for buy-to-let investors and second home buyers will restrict the supply of rental homes.

The biggest concern for the majority of experts is the long-term effect on private, smaller landlords and whether they will be forced out of the market, leading to more institutional landlords that offer higher prices to tenants.

Many professionals feel that the tax increase will have a positive effect on existing landlords, as a limited supply will increase rents. However, this will not benefit the many private renters in the country.

The firm’s Andrew Deverell-Smith comments: “With property playing such a vital role in our economic growth and the welfare of our society, it is understandable that it is a big focus in George Osborne’s latest plans.

“These opinions are from leading property industry experts who know and understand the market, and this highlights that there is a gap between expert industry estimations and Government strategy.”

He continues: “There are so many facets to the industry that a change in one area will always impact another. There is clearly no silver bullet.

“As a property recruiter, we know first hand not only of the shortage in construction workers, but the project managers, planning and surveyors required to deliver these ambitious housing programmes.”1

1 http://www.propertyindustryeye.com/osbornes-plans-for-housing-wont-work-say-almost-6-in-10-property-professionals/