Jo Breeden

Buy-to-let changes begin to bite




Since the start of the 2017/18 tax year, the new buy-to-let tax system has been rolled out, and now the realities of how much more these changes ultimately cost the average landlord is being realised in 2018’s HMRC tax returns (due for payment in January and July 2019).

We are witnessing the real-time shakedown of the buy-to-let market.

Even just five years ago, an individual who built or had access to a pot of finance considered buy-to-let to be an exceptional investment. The strategy was very simple: buy a suitable home and rent it out for as much as possible to deliver maximum yields while the house price hopefully increased.

These small, early entrepreneurs simply had very little desire to become portfolio landlords and considered one to three properties a great financial strategy.

But that was then, this is now…

Tax is always taxing

The so-called ‘amateur landlords’ have just received a major shock in the form of their 2019 tax returns and will be left wondering how a great little business is now being chewed-up by HMRC.

But don’t be fooled into thinking these are the only people affected, because many ‘professional landlords’ – those with much larger portfolios and much more to lose – will have been caught unaware as to just how much the legislative changes will leave them out of pocket.

And let us not forget that this is just the start; the new rules are being introduced year-by-year until full implementation in 2020.

The percentage of mortgage interest payments that can be deducted from rental income decreases by 25 percentage points and the portion of those interest payments that qualify for the new tax credit will increase by 25 percentage points.

It ultimately means that every landlord needs to consider income tax, corporation tax, stamp duty land tax (SDLT), inheritance tax and annual tax on enveloped dwellings (ATED), as all of these could affect the tax efficiency of a property business.

What are the solutions?

Since the start of last year – but more so in the last quarter leading into this January – our phones have been ringing off the hook with landlords looking for solutions.

For the first time, we have seen a substantial number of amateur and professional landlords looking for a bridging loan to cover their January tax payments while they look to sell off properties. I would expect to see a similar demand in July due to a slowing purchase market.

Others are asking what steps they can take to minimise HRMC payments going forward. I have implored them to create an advisory team which works in unison to review the current portfolio and look at each and every possible eventuality, whether that be buy or sell.

At a minimum, I would expect to see the following professionals in place: mortgage broker, accountant, solicitor and financial planner.

For the sole trader or self-employed, it may be that there are benefits to continuing in the sector and they should look at how best to set up until 2020 and beyond. For portfolio landlords, it may mean the creation of a limited company.

Teamwork

The buy-to-let market is still an active space and there are many opportunities to be had, but business set-up is now more important than ever. Whether building portfolios from scratch or reviewing existing portfolios, a professional team is needed.

The industry is changing, however, there are still great results to be gained if you surround yourself with the right people.

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