Brokers will soon need to supply buy-to-let clients with two sets of quotes, for individual and limited company structures
When the Chancellor announced last summer his intention to make the tax regime less favourable for individual landlords, it was inevitable investors would seek ways to overcome the challenge.
The proposed changes mean landlords will no longer be able to offset their mortgage interest payments against their tax bill and receive tax relief at the higher rates of 40 per cent or 45 per cent.
The new regime, being phased in from April 2017 to be fully in force by the start of the 2020/21 tax year, means individual landlords will be able to claim relief only at the basic rate of 20 per cent. For higher-rate taxpayers the changes have the potential to turn profitable businesses into loss-makers.
A potential solution is for landlords to hold their properties within a limited company structure, thereby taking them out of the personal tax regime and subject to corporation tax instead. It is thought about a third of all buy-to-let mortgages are now being issued to companies, compared to just 15 per cent last October, and it seems inevitable this trend will continue.
In light of the proposed new regime, many lenders have revisited their buy-to-let criteria and some have made changes to their rental stress tests to reflect the impact of the changes on borrowers’ ability to service their loans.
For example, one lender has introduced a higher notional rate for individuals rather than limited companies, meaning less gearing is available to individual investors.
At the time of writing, that lender had a rental stress test of 125 times 5 per cent for limited companies and 125 times 5.35 per cent for individuals. Others have adjusted their stress tests to reflect different borrower scenarios.
Some lenders, including Paragon, Foundation Home Loans, Aldermore and Shawbrook, are also no longer applying a pricing premium on limited company buy-to-lets, which is making brokers and borrowers more aware of the options available to limited companies (see table below).
I have no doubt there will be more competitive deals offered to limited companies as time ticks on.
So the time is fast approaching when it makes sense for brokers to supply their buy-to-let clients with two sets of quotes: one for an individual buy-to-let and one for a limited company buy-to-let. Clients should then seek advice from a specialist property accountant to determine which is the most advantageous option.
Deciding whether a limited company structure is right or not is a complex issue with a range of factors to consider, not least the cost of setting up and running a limited company and the various exit strategies available when it comes to winding up the business.
Brokers should therefore regard themselves as part of a larger advisory team, rather than the only professional advising the client about the best course of action.
The changes taking place in the buy-to-let market are throwing up opportunities for brokers willing to understand the implications for property investors and to tailor their advice accordingly.
Doug Hall is director at 3mc