Not all landlords are being advised correctly on the impact of the impending tax changes, which requires immediate action
We recently hired an experienced case manager from a modest brokerage that undertakes some buy-to-let mortgage transactions. When asked how she was adjusting to her new role with us, she commented on our considerable volume of limited company buy-to-let business.
On quizzing her further, she revealed her previous employer had not yet taken the time to understand the pending changes to tax relief on buy-to-let mortgage interest or the implications for personal borrowers. It had planned to get to grips with it all next year, presumably when the changes began to be phased in.
If this situation is typical of smaller brokerages, I worry that landlords are not being advised correctly. They should already be preparing for when the tax changes take effect; it could mean the difference between success and failure. And brokers should be proactive in assisting that preparation right now. At the very least, brokers need to push clients into seeking professional tax advice to help them understand how the changes will affect them.
For some landlords, the changes will mean a substantial reduction in net profit; some may even go from profit to loss. But it is not just higher-rate taxpayers that will be affected; some basic-rate taxpayers will lose out too because the changes could push them into the next tax bracket.
For many landlords in this position, the solution has been to switch to a limited company structure that attracts corporation tax (which is lower and charged post-interest deduction) rather than income tax. So brokers that have not yet done so should take the time to understand the limited company buy-to-let sector, or to align themselves with a broker to take on this aspect of business for them.
Range of products
Borrowing options in this sector are increasing and our data shows that, in the first half of 2016, 42 per cent of buy-to-let lenders offered products to limited companies and, by the end of June, 16 per cent of all buy-to-let rates were available to limited company borrowers. This equates to nearly 200 products, most of which are available just to special purpose vehicle limited companies. Only specialist providers accept trading companies.
Sixty per cent of our buy-to-let mortgage completions for purchases are now made using corporate vehicles. If we factor in remortgages, this falls to 30 per cent, but it is still a high and increasing figure. From conversations with 3mc’s Doug Hall and The Buy to Let Business’s Ying Tan, they too have seen a steep rise in clients switching to corporate vehicles.
One of the reasons why so many clients are switching is that we are pushing them to seek professional advice on their tax affairs before they proceed with any more buy-to-let finance. I know 3mc and the Buy to Let Business are doing the same, as are many others. But not all are, and that is the problem.
By not ensuring clients are in possession of the facts, brokers could open themselves up to misselling claims later. We not only talk to our clients but also ask them to sign a declaration indicating they have taken independent professional advice and/or they fully understand the impact of the tax changes on their future tax position.
3mc is providing brokers with two buy-to-let mortgage product illustrations to send to clients: one for personal borrowing and one for borrowing in a limited company. This is an example of best practice we should all follow.
David Whittaker is managing director at Mortgages for Business