I fear there are quite a few landlords out there who are either burying their heads in the sand or really don’t know what is coming next year.
So, here’s what’s going down: in April 2020, big tax changes (that first started being phased in from April 2017) come into full effect and these particularly affect portfolio landlords.
What is a portfolio landlord?
If you’ve been in property a little while and you own more than four properties, as soon as you purchase the fourth property with a mortgage, you are classified as a ‘portfolio landlord’. If you are a portfolio landlord it also means that the mortgage on each property cannot exceed more than 75% of the property’s value.
What are the tax changes?
Effectively, the government is removing tax relief on interest-only mortgage payments.
To put all this in context: if you were a private landlord before April 2017 with a mortgage on your property, any interest you paid towards the mortgage payments could be deducted from your rental income before you paid tax on it.
For example, if you made £10,000 a year in rental income and your annual mortgage interest payment amounted to £9,000, you could deduct the £9,000 from your rental income.
This meant you would only pay tax on the remaining £1,000 – so if you were in the 20% tax bracket, your tax bill on rental income would have been £200.
Since the start of the 2017-18 tax year, the new buy-to-let tax system has started to be phased in. Rather than an immediate change, the new rules are being introduced gradually year-by-year until they are fully in place by 2020.
This means that every tax year during the transition period, the percentage of your mortgage interest payments that you can deduct from your rental income will decrease by 25%, and the portion of those interest payments that qualify for the new tax credit will increase by 25%.
By 2020, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax. Instead, the entire sum of your interest payment will then qualify for a 20% tax relief.
This means that a landlord receiving £10,000 in rent and paying £9,000 in mortgage interest payments will end up paying tax on the full £10,000 (although the amount will still depend on their tax bracket.)
They will then be able to deduct £1,800 from their tax bill due to the 20% tax credit, leaving them with the final overall tax bill on their rental income.
Landlords in higher tax brackets could then end up paying much more tax than before, because they’ll be paying a percentage of the total rental income rather than the rental income minus their annual mortgage interest payments. And the only tax relief they’ll receive is 20% of their interest payment, instead of the entire amount.
Changes to Wear and Tear Allowances from 2020
As an aside, April 2020 will also see a change in the ‘wear and tear allowances’ that will affect landlords.
Since I am a mortgage broker and not a tax expert, I recommend that you speak to your tax professional to see how these tax changes will affect you, your portfolio, your properties, and your future strategy.
But here’s what’s going to happen: instead of being able to claim 10% of your rental income under the current rules, as of April 2020, landlords will only be able to claim their actual expenses.
How will the April 2020 tax changes affect basic rate taxpayer?
As a basic rate tax payer, all it will likely mean is your accountant will charge you more because you’re going to have more professional fees. Ultimately, this is unlikely to affect your profit.
How will the April 2020 tax changes affect higher rate taxpayers?
As a higher rate tax payer, you’ll likely see some major effects because you’re no longer going to be able to claim tax relief at the marginal rate.
You’re going to get 20% tax credit and this will be capped at 20% as a percentage, which means it could affect your profit and loss.
So, if you’re currently a basic rate tax payer but on the cusp of becoming a high rate tax payer, you could see an increase in your tax and this will therefore hit your profit.
What are your options from April 2020 if you’re buying a lot of property?
A Portfolio Mortgage
As you start to buy more property, you can look at what’s called a portfolio mortgage. For example, we currently have a client who is remortgaging a number of properties and we’re assessing whether it’s better to look at each property on its individual merits and then remortgage each property individually, or whether it’s better to opt for a portfolio mortgage.
The advantage of a portfolio mortgage is that the lender considers the whole portfolio, and so they actually pre-agree a set limit the borrower can borrow up to.
This means there are fewer fees to pay. Plus, it’ll likely make it easier for the investor to buy in the future because the lender assessing the whole picture as part of that one property that he is remortgaging.
The alternative which involves a lot more work is a review of the whole portfolio – an individual assessment of each mortgage and property. The interest rates could be more favourable, but bear in mind it will be more work than a portfolio mortgage.
Purchasing new property after April 2020 as a Portfolio Landlord
When you come to purchasing new property and look at getting better mortgage or finance deals in order to buy additional properties after April 2020, the assessment process is going to become harder and some UK mortgage lenders are going to require additional information.
Some lenders are going to request a full blown business plan detailing what you want to do, your overall aims and objectives with your property portfolio.
Some are going to want assets and liability statements to feed into this. The amount of documentation that you’re going to need is going to increase. And some lenders are even going to limit the number of properties that you can have with them.
What does all this mean for property investors, and for those who want to buy property going forward?
Many landlords, particularly if they own a lot of property, are likely to reassess their strategy as a result of the April 2020 tax changes.
The first thing a landlord might consider is increasing the rents they charge because that will potentially offset the tax and the loss in profits due to the changes.
The second thing we may well see is property investors refinancing their portfolio.
At Active Mortgage we see large numbers of people who do not consistently appraise their portfolios and pay what’s called the lender’s
‘standard variable rate’. However, they’re likely to be paying far too much for the mortgage, and that will affect your profit.
We could also potentially see a lot of landlords actually exiting the mortgage market or exiting their property strategies.
But this ultimately means there could be some great property deals available.
We could see some landlords selling their entire property portfolios, which means that you might be able to buy a whole portfolio. There could be some opportunities around about 2020 to pick up some big deals with landlords with big portfolios who want to offload their properties.
The income tax liability could affect the amount that you’re going to be able to borrow. Buy-to-let mortgages are assessed in terms of the rental income the property receives. It’s not so much taking into account your actual own income. So what that means is if you’ve got an increased tax liability that could affect the amount that you’re going to be able to borrow based on the rental income that you’re actually going to be receiving.
Buying property through a SPV
I have seen a big increase over the last three years in the number of people looking to buy properties within limited company SPVs (Special Purpose Vehicles).
A lot of the people I look after are limited company business owners, sole traders, or self-employed individuals who want to use their company profits to invest in property and it can be useful in this instance to do this via a limited company SPV.
If you’re a high rate tax payer, you could benefit from buying your property in an SPV because under an SPV, you have no income tax on the rental income – which could save you money.
As a limited company, you’re going to pay corporation tax, which is currently set at 19%, so you could see some savings on your tax liabilities, and therefore you could see more profit.
Within an SPV also enables you to offset the mortgage interest against the whole portfolio and against the limited company. As this has been restricted, as I mentioned, for individuals by 2020, if you’re within a limited company, you’re going to potentially be able to benefit from offsetting those mortgage interest rate payments.
Your tax burden could also be reduced because when you own them personally, that is going against your personal tax liability.
When your profits are within a limited company, you only pay the tax on what you withdraw out of the limited company. You’re going to pay corporation tax.
If you choose to leave the profits in the SPV, you’re not going to pay dividend tax. You’re not going to pay personal tax and therefore this could be more beneficial to you.
One thing I massively advocate is using the profits you leave in your property portfolio to assist you in buying your residential home.
Most of high street mortgage lenders generally want to see salary and dividends. However, in my personal experience and why I niched my business in 2015, there are a huge number of lenders that would consider your net profit plus any salary you draw from your limited company.
If your strategy is buying property through an SPV and leaving the profits in there so you can keep further investing and growing your portfolio, that could be a massive advantage for you.
However, buying property in a limited company SPV is not all a bed of roses and there are some potential downsides to consider.
The downsides to buying property through an SPV
When you buy the property as a limited company it you’re going to find that your accountant’s fees are likely to be higher because having a limited company means you have to submit formalised accounts to the Inland Revenue, the HMRC and to Companies House.
Another thing to consider is that if you currently own properties in your individual name and you move those properties into a limited company SPV, it will mean you’ll have to pay stamp duty again.
This is because you are changing ownership from a personal name to the limited company name, which affects land registry and therefore Stamp duty which could be costly. There’s a chance that you might have to pay some capital gains tax as well.
I am a mortgage advisor (in fact Active just won Britain’s Best Small Broker 2019), I’m not a tax specialist. This is just baseline information and does not constitute professional tax advice. For that you’ll need to speak to a relevant tax professional. If you want mortgage assistance, that’s my bag.
Whether mortgages within a limited company SPV are the way forward for you will ultimately depend on your individual circumstances and it’s ultimately your decision whether you choose to buy personally or whether you choose to buy within a limited company. There are fewer lenders who will still consider giving mortgages to those buying property through an SPV and these do often command both higher interest rates and higher arrangement fees. Again, you do need to speak to your accountant or a tax professional about the implications considering your property
Professional accountancy and tax advice is crucial because your future strategy will depend on your finances. And your best strategy will depend on the number of properties you have, the number of mortgages you have as well as the exit strategy for your portfolio.
April 2020 will be here in just 12 short months, so you need to start making plans and thinking about these changes now. Don’t be one those who are shocked by a loss in profits because of tax changes they didn’t fully understand. Make sure you find out how it’s going to affect you.
My name is Gary Das. I hope you’ve found this article useful. As I’m in the mortgage sector, I must remind you: your home may be repossessed if you do not keep up your payments on your mortgage. None of this article constitutes advice. It is for information purposes only.
Your home may be repossessed if you do not keep up payments on your mortgage.
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