Over the last year or so, the ex-chancellor has attempted to cool the housing market by increasing fiscal policy and focusing on the buy to let market.
We have recently seen the stamp duty surcharge of 3% occur in April, impacting those with additional residential properties and consequently having a huge effect on the buy to let market overall. In addition to this, there is the change in the tax relief that landlords will get on the interest of their mortgage payments, which will mean higher and additional rate tax payers paying additional tax out of their own pockets if the rent income margins are low.
This will have the biggest effect on clients with medium to large portfolios in their personal name, as their income tax liability will increase without making any changes to their rental income or total outstanding mortgages.
These changes in taxation have now meant that buy to let lenders are changing the way in which they assess mortgages. We have seen a trend of lenders increasing their rental calculation from 125% at 5% to 145% at 5.5%. This means that for some clients, their rental income is simply not strong enough to obtain the mortgage required.
Another option for owning investment property, however, is to have it legally owned within a limited company or a SPV (Special Purpose Vehicle) where its only purpose is to hold investment property. There are many benefits of a limited company for buy to lets, such as the taxation and also the rental calculation.
If you are a higher rate or additional rate tax payer, you can manipulate how you take your income from the limited company, of which the company can get full tax relief on the interest of its mortgage payments. This will mean you can control how much additional personal tax you pay, while the company pays corporation tax on it profits it makes. (Corporation tax is currently at 20% but will be falling to 18% in 2018-2019).
Additionally, the rental calculation for most buy to let lenders allowing for limited company buy to lets is 125% at 5%. The only downside to this is that there are fewer lenders who do allow limited company buy to lets, however this number is growing and as more clients look into this option. Finally, limited companies are not exempt from the stamp duty surcharge – another one of the benefits of a limited company.