Landlords and brokers face headache as tax changes bite

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Landlords who fail to declare accurate income to HM Revenue & Customs have been warned they are likely to be caught out as their tax affairs come under greater scrutiny thanks to regulatory changes in 2017.

The buy-to-let market has seen a raft of new regulation and tax changes, which started in April 2016 with the introduction of a 3 per cent stamp duty surcharge for those buying second properties. Following on from this, next April, landlords are set to see the tax relief on mortgage interest scaled back. Also coming in 2017, the Prudential Regulation Authority will require buy-to-let lenders to apply stricter underwriting standards that may reduce the amount some landlords are able to borrow.

Now landlords are being warned that they must make sure their tax affairs are in order as any discrepancy between the income they declare to HMRC and that they declare to their mortgage lender is likely to be spotted as part of the tougher affordability checks that are coming into force.

Mortgages for Business managing director David Whittaker says: “From 1 October 2017, lenders will be required to look much more closely at ‘true’ income data for landlords owning four properties or more. This will probably mean looking back at the tax returns for 2014/15 and 2015/16, the latter of which have yet, in many instances, to be filed. We all have until 31 January 2017.

“Traditionally, lenders – and thereby brokers – have shown little, if any, curiosity about stated rental income matching up to a high degree with what is declared to HMRC. Those days have effectively gone and thinking about educating landlords, lenders and brokers on what ‘acceptable’ may look like come next October should be happening now, not in 2017.

“It may just be coincidence that, on 21 September this year, HMRC indefinitely extended its Let Property Campaign, the tax amnesty for landlords. But fluke or not, it is surely a sign that the ongoing scrutiny of the buy-to-let sector will continue unabated for the foreseeable future.”

The systemic changes to the buy-to-let sector have left some brokers in a quandary as to how much they dare educate their clients on tax changes without straying into the arena of tax advice.

Brightstar chief executive Rob Jupp says: “Advisers should not be giving tax advice to their clients at any stage, nor should lenders be giving tax advice to intermediaries as this achieves the same thing. A current or prospective landlord should only receive tax advice from a qualified tax expert. Well-meaning advisers need to appreciate that advice, whether intended or anecdotal, may result in them being surrounded by an unpleasant amount of hot water.”

But John Charcol senior technical manager Ray Boulger says: “We are not tax advisers but it’s incumbent on mortgage brokers in the buy-to-let sector to be able to give basic advice in terms of outlining the best products for a client, such as if they should look to limited company products or put the property in their spouse’s name. It’s important to have an understanding of tax change implications to provide the best advice.

“Also, in terms of the affordability rules brought in by the PRA, when lenders perform the interest cover ratio check, they need to take into account the higher rates of tax. There is a difference between advising on tax and having an understanding of how it will impact clients.”