Buy-to-let investors – is Landlord Ltd. the answer?

As far as buy-to-let landlords are concerned, April 2017 is not so much a red-letter date as a red ink one. That’s the date when a series of tax changes start to come into force which are going to decrease their profits and increase their tax liability.

Until now, landlords have been able to subtract mortgage interest from rental income, before calculating how much tax they owe. Not after April. Changes will be phased in from April onwards which by 2020, will result in landlords paying tax on the entire rental income their property earns. If the fat-cat landlord ever really existed, they are certainly a thing of the past.

Needless to say, given the world-beating complexity of the UK tax regime, the changes aren’t that simple. The landlord will be due a tax credit of 20% of the total interest they pay, but the entire rent will be taxable. Higher rate tax payers will be much harder hit because the rent will be taxable at the higher rate. And of course, a landlord who is paying 45% tax, will be worse off still.

The people at MoneySupermarket.com have been busy crunching the numbers and they reckon that if you are a higher-rate taxpayer and the mortgage interest is 75% or more of your income from the property, the tax changes will eliminate your return on the investment. For someone paying the additional rate of tax, this will happen when the interest is at 68% of the rent.

If you are a small landlord with just one property, you may be breathing a sigh of relief, if you are on the basic rate of tax. But wait a moment. Since your taxable income will go up as a result of the changes, you may well become a higher rate tax payer.

Is there any way to protect yourself from the changes?

Companies which own property and let it out are not affected by the rental tax changes. They can carry on paying corporation tax on the profits and paying dividends and salaries to the company directors. But before landlords rush to become limited companies, they need to be aware of the many tax complications and possible pitfalls in taking this step. They certainly need to take professional advice.

The company needs to be set up properly to buy the property, and this has to be achieved with the correct paperwork. So don’t necessarily assume the cheapest set-up that you find is the best choice. It is better to get an accountant to do this for you.
And although companies aren’t affected by the tax changes on rents and interest, they are affected by the stamp duty changes which mean that there’s 3% extra stamp duty payable by any person or company buying a second property when they already own one.

As for transferring properties you already own into a company, there are a host of tax complications.

Buy to let investments still competitive

The fact is that many people, not just those on very low incomes or on benefits, need to rent property and in Manchester lettings agents are as busy as ever. Tenants need landlords to provide a stable and active property rental market.

Professional landlords, holding large portfolios of property can probably look after themselves but the small landlord with one or two properties is going to be more adversely affected. One of the effects may be that the average age of landlords rises, as people in work are not going to want to be pushed into higher tax bands by the income from a rental property. They may wait until they retire to move into buy-to-let.

For retired people looking for additional income, even though the tax benefits of buy-to-let have been greatly reduced, given the woeful returns on savings, the income from owning rental properties looks very attractive and there is always the possibility of increases in property values.

Furthermore, mortgages for buy-to-let are becoming increasingly available for older people. For many retired people with lower outgoings and perhaps no mortgage left on their own home, the affordability criteria for these mortgages are not stumbling blocks to anything like the same degree as they are for younger borrowers.

The Chancellor has done his worst, but buy-to-let is still with us and while interest rates on savings are below 1%, landlords are unlikely to give up on their investments.

When Even The Guardian Thinks Landlords Have a Case…

You might expect The Guardian to be lining up and cheering at the woes of the buy-to-let sector, as its young readership is probably heavily composed of tenants renting from private landlords. However it recently ran a piece quoting a buy-to-let landlord who said that landlords were being “vilified”. The piece gave a sympathetic hearing to those who are being hit hardest by the tax changes.

One of the landlords quoted will be paying £3,000 more tax from April 2017, and another will find that his personal tax will pretty much double. Other landlords are quoted as saying that their tax bill will, in effect, go up to 100%. As a Moston letting agent, we’re hearing the same story from landlords here.

Rob Hill, one of the landlords quoted, has three buy-to-let properties in London and is furious that the government’s tax changes are wreaking havoc on people’s retirement investments. The numbers quoted are interesting. He lets two houses and a flat, and gets just over £40,000 in rent each year, after he’s paid letting fees and service charges.

Out of that £40,000 he has to pay £13,770 in mortgage repayments. Until now, that has meant that he has a residual profit of £27,042. He pays 40% tax, so he owes the taxman £10,816 on his rental business.

Let’s look at what will happen to Mr Hill and many like him after the government has withdrawn tax relief at 40%. At the moment, landlords can offset all the interest on the mortgage as an expense that reduces their tax bill. In Mr Hill’s case, since he is paying 40% tax, that means that the expenses he is claiming are being allowed at the rate of 40%.

However, starting in 2017 and concluding in 2020, Mr Hill’s rate of relief will be changed. Despite being a 40% tax payer, he will only be allowed to deduct expenses at a 20% flat rate.
If you want to see a fully worked out example of this, The Guardian provides one at https://www.theguardian.com/money/2016/dec/10/buy-to-let-landlords-vilified-lending-crackdown-tax-hike-profit-loss

However, the plain fact is, that instead of being taxed on his profit as nearly all businesses are, Mr Hill will now be taxed on his turnover. From paying tax on his profit of £27,042, he will now pay tax on his turnover (all the income he receives in rent) of £40,813. He can take off the basic 20% tax relief (£2,754). The net effect of this is that instead of paying £10,816 tax on his business, he is now going to pay £13,571.

This must be one of the steepest rises in taxation ever implemented, and Mr Hill is actually more fortunate than many other landlords because he doesn’t have very large mortgages on his properties.

Many landlords feel that the government is well aware that buy-to-let is being used to fund future retirement because of the decline of final salary pension schemes, the lack of confidence in financial companies, and the fact that interest rates are at an all-time low. They feel that the government should have taken this into account before taking such drastic action against the sector.

Furthermore, it’s highly likely that those people who are trying to fund retirement in the absence of any other way of doing it are the very people who are going to be hit hardest. They are the ones who are likely to be pushed into paying 40% tax because the government is going to tax their turnover rather than their profit. They are also the ones who are most likely to have large mortgages on their properties, because they will have moved into buy-to-let in the past 10 years.

Those who will be least affected are the very large estates and families who have, for generations, owned property that they rent out. Many of these landlords have no mortgages on their properties. Some of these estates are no longer acquiring property, so the rise in stamp duty will also not affect them.

For other buyers in England and Wales, however, the stamp duty on a £200,000 house bought with a buy to let mortgage is going to rise from £1,500 to £7,500.

And that’s always supposing that the landlord can get a mortgage. The Bank of England has decided to clamp down on buy-to-let borrowing and apply stringent affordability tests. Net result of all this? Everyone, including tenants, is going to get poorer.

Why was s24 introduced?

This story was taken from the recent publication by Property 118 titled: “SECTION 24 of the Finance (no.2) Act 2015: “The unjust legislation that will make the UK housing crisis much worse”

When the former Chancellor, George Osborne announced in his Summer Budget speech of July 2015 that he would ‘restrict finance cost tax relief for ‘individual’ landlords,’ it wasn’t clear to most observers what this actually meant.

 

The method of describing the change was so opaque that only tax experts would have understood it initially. Landlords across the country had no idea what it meant. This was because to fully understand what ‘Section 24, of the Finance (no.2) Act, 2015’ signified, one would need to understand the concept of ‘sophistry.’

 

‘SOPHISTRY’.

The Oxford Dictionary definition: a subtle, tricky, superficially plausible, but generally fallacious method of reasoning.

The Cambridge Dictionary definition: the clever use of arguments that seem true but are really false, in order to deceive people

 

There are various theories regarding why the Government introduced this punitive tax regime for ‘private’ landlords (corporate landlords are exempt). It really was a bolt from the blue. As no-one outside of the Treasury was party to the discussions, we can only speculate on the motives. These may include:

 

  •  It’s a tax grab, pure and simple (and landlords are an easy target), and George Osborne was under a self-imposed pressure at the time to eliminate the budget deficit.
  •  It’s to help first time buyers or at least give them the illusion they were being helped (according to this, attacking one group helps another) and also to further favour owner-occupiers in the tax system, as increased owner-occupation levels are a Conservative Party goal (this group has been fiscally favoured for decades).
  •  It’s to eliminate the ‘small-time’ landlord, so that ‘institutions’ can take over the market. This is justified publicly as a move which will improve rental conditions, but institutions also happen to donate to the Conservative Party coffers.

 

One thing cannot be in doubt, however, and that is that it was a populist move, yet one which landlords were shocked to see a Conservative Government introduce, as it is such a ‘hard-left’ policy.

 

Logically, it will lead to the effective confiscation of assets in many cases. This is because landlords will be forced to sell at a time not of their choosing, possibly in a falling market and in many parts of the country properties are still in negative equity. It will therefore bankrupt many landlords who will not have the funds to repay the mortgages (they will have planned to keep the properties for many years and would not have priced in having to suddenly sell them because of retroactive legislation).

 

The groundwork for the measure was laid by anti-landlord organisations such as Shelter and Generation Rent and fuelled by biased media coverage of ‘rogue landlords’ over several years. Because of this it passed through Parliament very smoothly. Indeed the Labour Party did not oppose it, as to do so would have placed them to the right of the Conservatives, politically. It therefore went unchallenged by the Opposition and other parties, with the Labour MP, Siobhain McDonagh, even suggesting that this extreme measure be made more extreme

 

It is worth mentioning how since then, the Labour Party has continued to attack the sector by distorting the truth. In Jeremy Corbyn’s keynote speech to close the Labour Party conference in Liverpool in September 2016, for example, he accused the Government of ‘subsidising’ private landlords by spending £9 billion of housing benefits in the sector, not mentioning that the total cost to taxpayers for Government social housing had been £15.2 billion. As one landlord commented:

 

‘The word ‘subsidise’ means to help by giving money, to pay part of the cost of something. It is not landlords who are being subsidised, it is the people who are given the welfare money.

They are being subsidised for not being able to command an income high enough to support their households.

The purpose of the subsidy is to prevent people becoming homeless and having to be housed by councils at greater cost than the private sector rents…

[Corbyn said:]“Instead of spending public money on building council housing, we’re subsidising private landlords.”

This suggests to his gullible audience that a government could stop paying housing benefit and divert the money instead towards building houses.

This is another example of either sophistry or economic illiteracy. Where would the people on housing benefit go once they had been evicted en masse for non-payment of rent? How much would it cost to put them in “temporary” accommodation – which might become permanent?’

 

 

 

 

You can read the full report here, please share this information

 

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