If you are considering moving into buy-to-let, there are a host of new regulations that have been introduced for landlords and more are on the horizon, writes Joanne Atkin
The government wants to dampen down the interest in buy-to-let investment so is introducing a number of measures to put people off. If you have any buy-to-let properties or are thinking of investing, here is the lowdown on what you need to be aware of before making any decisions.
On the financial side, tax relief for landlords is being slashed and anyone buying a second home or buy-to-let property will have to pay a hefty 3% extra in stamp duty.
Plus, there are new laws insisting landlords must now install smoke and carbon monoxide alarms and check the immigration status of tenants.
Stamp duty increase
The biggest shock is the rise in stamp duty land tax announced by Chancellor George Osborne in his Autumn Statement.
Buy-to-let investors and anyone buying a second home in the UK, including holiday homes, will have to pay an additional 3% in stamp duty. The new rate will not apply to caravans, mobile homes or houseboats.
At the moment, when purchasing a £100,000 property to let out or to use as a second home, a buyer would not pay any stamp duty under rules that were brought in just over a year ago in the previous Autumn Statement of 2014.
However, from April 2016, this same property will be subject to the 3% stamp duty fee, meaning an additional £3,000 cost.
The rate for a £200,000 property is currently 2% so this will rise to 5%, while the rate on properties of £1 million and above will leap from 10% to 13%.
In the table above, Jeremy Morcumb from Mortgage Advice Bureau in Swindon, has summarised what the extra tax costs will be.
The government is consulting on exemptions for this extra 3% stamp duty which is likely to be for commercial property investors with 15 or more buy-to-lets.
Tax relief
Another change that will hit buy-to-let investors is tax relief for individual landlords who will be restricted to the 20% basic rate of tax. This will be phased in from 6 April 2017 until relief is completely restricted to the basic rate by 2020/21.
Islay Robinson, chief executive officer of Enness Private Clients, a high value mortgage brokerage, explains: “Landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when calculating a profit on which to pay tax. Ensuring the maths works out correctly on every new purchase is essential, as the tax relief you are able to claim on monthly interest repayments has reduced compared to the existing 45% – regardless of your personal top tax rate. For higher-rate tax payers, this means effectively paying tax on mortgage interest, in addition to the interest itself.”
One way around this is to become a limited company and radical changes to the tax treatment of landlords have already triggered a surge in landlords borrowing through companies, according to a report from Kent Reliance – Buy To Let Britain.
The former building society says that buy-to-let lending to limited companies has doubled to 5,000 per month following the Budget announcement last March.
A company structure means investors are taxed on profits at lower corporation tax rates, and can offset finance costs against rental income. The lender says that one quarter of all buy-to-let mortgage finance demand is now through limited companies, up from 13% a year ago.
However, there are costs and other considerations when setting up as a limited company so you would need to get advice from a good tax accountant as whether it is worth going down that track.
Smoke alarms and other rules
New rules were introduced on 1 October 2015 stating that all privately let properties must have a smoke alarm on any living space level and these alarms must be tested before a new tenancy starts.
David Lawrenson from lettingfocus.com and author of Successful Property Letting, says: “In all rooms where solid fuel can be used, there must also be a carbon monoxide alarm fitted too. There are additional and existing fire safety rules for houses in multiple occupations (HMOs) to comply with. These are unchanged.
“Before a tenancy starts, tenants must be given an Energy Performance Report (EPC), a copy of the gas safety certificate and also now, in England, they must have seen the (in my view, rather over the top and lengthy) new document issued by the government called ‘How to Rent’.
He advises: “We suggest all three are included with the tenancy agreement and when tenants sign this they also agree they have seen all these documents. They should also sign a statement on the tenancy agreement to say they have seen proof that the smoke alarms work.”
Immigration status
From 1 February 2016, private landlords must check the immigration status of tenants. This includes reviewing evidence of the tenant’s identity, citizenship, passport or biometric residence permit.
The scheme was piloted in five West Midlands council areas from 1 December 2014 and can now go fully live.
If landlords allow tenants without a so-called ‘right to rent’ to occupy their property, they could face penalties of up to £3,000 per tenant. The new law also applies to people who sub-let or take in lodgers.
Will the 3% stamp duty surcharge be a barrier to buy-to-let?
Chancellor George Osborne has announced a 3% stamp duty surcharge on purchases of additional residential property. What does this mean for landlords and those looking to get into buy-to-let? Jeni Browne, head of residential & buy to let lending at Mortgages for Business, explains
“… people buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be 3 percentage points higher on the purchase of additional properties like buy-to-lets and second homes.”
These are the words of George Osborne, Chancellor of the Exchequer, in his recent Autumn Statement. The new surcharge will be effective from 1 April 2016 – no joke. So, if you are thinking of getting into buy-to-let you could save yourself a whole heap of money if you act quickly.
This does not mean you shouldn’t take the time to carry out research to ensure that investing in property is the right thing for you, but it does mean that if you complete the purchase a buy-to-let property before the deadline, you won’t incur the surcharge.
How much could you save?
On a property bought for £200k you would pay stamp duty of £1,500 up to 31 March 2016 but from 1 April 2016 the stamp duty payable would be an eye-watering £7,500. That’s a difference of £6,000. Not an insignificant amount which means that from spring time the upfront costs will increase considerably.
My guess is that it will deter some would-be investors from entering the market and that is a good thing. Traditionally buy-to-let lending has accounted for 10-15% of all mortgage lending – even at the height of the buy-to-let boom in 2007. In July 2015 this figure had crept up to 18% which, many feel, is just too much and puts the entire market out of kilter.
It is unlikely that the changes to stamp duty alone will be enough to rebalance the market; however, the surcharge was not the only kibosh George Osborne imposed on buy-to-let investors last year.
Buy-to-let mortgage tax relief to be restricted
In his Summer Budget, the chancellor proposed to restrict relief on buy-to-let mortgage interest (and other financing costs) to the basic rate of tax (20%) for higher tax rate paying individuals.
The relief restrictions will be phased in gradually from 2017 to 2020. For many investors this restriction could severely affect the profitability of their portfolios and may encourage some to leave the sector.
If you are not a higher rate tax payer you may not be affected by the changes but I do recommend that you check. Some investors who are currently just below the higher rate threshold, may find that the changes tip them over into the next bracket.
At Mortgages for Business, we have been recommending that all of our clients seek professional tax advice in this regard. Getting it wrong could be a costly mistake.
Using a limited company to invest in buy to let
If you are still thinking of becoming a residential property investor with the help of a buy-to-let mortgage, then you could consider purchasing property through a limited company as there are currently no proposals for restricting the deduction of financing costs within companies. Also, over the next couple of years, corporation tax is set to be reduced to 18%.
Investing via a limited company may sound complicated but it need not be and we are already seeing many existing investors make new purchases this way. Setting up a Special Purpose Vehicle (SPV) limited company from which to trade in property is extremely cheap and easy. It can be done online at Companies House in a few minutes or you could get your accountant to do it for you.
Currently, around 10% of the 1,000 or so buy-to-let mortgage products are suitable for limited company applicants, especially SPVs (including new ones with no trading accounts), which means that there is quite a bit of choice, albeit from just eight or nine lenders. Expect pricing to be slightly higher than for individuals because more time and knowledge is required to underwrite the case.
Finally, remember, on average it takes around six to eight weeks to process a mortgage application from start to finish, so don’t delay making a purchase.
We anticipate that lenders may be swamped with applications in January and February, so if you’re serious about investing in buy-to-let you need to act now. Even February could be too late.