Now that some of the dust has settled from George Osborne’s Emergency Budget particularly the announcements affecting the buy-to-let sector, it seems the right time to look at how the tax relief changes in particular might impact on investors/landlords’ decisions going forward. Of course, we also have potential for further regulatory intervention via greater powers for the FPC in the market, and we have the European Mortgage Credit Directive (MCD) changes to be implemented next year around ‘accidental landlords’, so there is plenty overall to consider.
My own opinion is that in light of what Osborne could have announced, i.e. the abolition of personal tax relief on mortgage interest payments completely, then we have probably got the best outcome – apart from of course the status quo – that we could have wished for. Don’t think I’m in anyway suggesting that it’s a policy I am happy to see introduced because I’m not, however in light of the pressure being brought to bear in this part of the market and in particular the growing media furore about a so-called unlevel playing field between potential homeowners and landlords, then the likelihood of some action was always going to be high.
Let’s also consider what the Opposition were planning to introduce in terms of rent caps and the like – this would have been utterly disastrous for the market and one can’t help feeling, ‘There but for the grace of God…’ So, the Government obviously felt it had to act but it has done so in a measured way – higher-rate taxpayers will see their tax relief eroded but only starting in a couple of years’ time and then at a staggered rate until 2020/21. This, rather importantly, does give existing landlords the chance to prepare themselves and it also allows new borrowers to review how they might wish to continue building portfolios and the vehicles they use to do this.
The big anticipated move of course is likely to be the purchase of buy-to-let properties via a limited company structure because of the ability to keep the tax relief benefits, plus you have falling corporation tax, the ability to take income as dividends – the list goes on. This of course isn’t a new option – many professional and semi-professional landlords are already operating in such a way and the incentives to continue doing this have just got significantly better.
However, what of those landlords/investors who are not in this situation? What are their options going forward? Well, I can certainly speak from experience in this regard, because I am one. Personally, if I could go back in time and house my portfolio within a limited company structure I would do so. Now, however there is more to consider and a potentially significant cost in moving personal properties into a limited company, not least the fact that they are technically sold to that vehicle and thus could come with capital gains tax and stamp duty costs.
This is certainly going to be a dilemma that each individual landlord is going to have to confront, with the support of their accountant, tax adviser and mortgage broker. Every situation will be different – for example, we might find some landlords selling part of their portfolios to pay off the mortgages on the others and also cover the costs of moving the remaining properties to a limited company structure. Others might find that the cost of moving properties is too much and they will just have to suffer the tax relief hit. Only by doing the sums will they be able to make an informed decision.
What is indisputable however is that interest in limited company vehicles for this purpose will grow and therefore brokers need to be clued up about what the benefits and potential pitfalls of this option are. Indeed, they will also need to inform their clients about the lending situation when it comes to limited company borrowing – even with Fleet Mortgages’ major focus on this area, and a few other lenders as well, it could never be said to be the most well-served lending sector. More lenders might follow but don’t expect a major rush because it needs to be fully understood – you cannot simply transfer residential buy-to-let sensibilities and practices to the limited company arena.
In that sense, it could be an interesting period for the buy-to-let market as both lenders and brokers react to how borrowers want to purchase property in the future. My belief is that, for example, a semi-professional landlord with a few properties who wishes to expand, may well find a special purpose company vehicle ideal for the job, and we as a specialist lender are happy to consider them. Brokers therefore need to know the lenders who can facilitate such deals and those who have the appetite to lend in this sector – despite the changes, it will not suit all.
Bob Young is chief executive officer of Fleet Mortgages