Landlords putting buy-to-let through companies to keep tax breaks targeted by State Bank of India
12-24-2016
Landlords putting buy-to-let through companies to keep tax breaks targeted by State Bank of India
By Sarah Davidson For Thisismoney.co.uk
State Bank of India has confirmed ambitious plans to become a go-to buy-to-let mortgage lender for UK landlords who own their properties in a limited company.
From April next year, landlords will start to lose the ability to offset all their mortgage interest against rent before they pay income tax, but those with properties held in a company will still be able to do it
The bank's plans to expand follow a series of tax changes brought in by the Government over the past 18 months that make buy-to-let less profitable for many.
State Bank of India is a Fortune 500 company, is India's largest and already provides some of the most competitive savings rates available to UK savers
The bank, a Fortune 500 company, is India's largest and already provides some of the most competitive savings rates available to UK savers.
Shifting properties to company ownership involves hefty set-up costs and other tax complications but is something that thousands of landlords are expected to set up in order to maintain profits when they start to lose tax relief on mortgage interest in just over four months.
Those landlords will be able to offset all mortgage interest against rental income before they are charged corporation tax at 20 per cent on profits.
If they want to take money out of the company they will face further tax on dividends or earnings, or they can roll up profits within the company over the years.
Earlier this year State Bank of India launched a small range of buy-to-let mortgages and began lending to UK landlords whose circumstances were slightly out of the ordinary.
From the start, the bank focused on providing competitive mortgage rates to landlords who own slightly larger buy-to-let portfolios with multiple properties held in special purpose vehicle limited companies.
Since then, they have seen demand accelerate and have now confirmed plans to ramp up limited company buy-to-let lending significantly.
Sanjiv Chadha, regional head at State Bank of India's UK operation, says: 'When we started offering limited company buy-to-let mortgages it was a niche product - it's been fortuitous that we have found ourselves in a good position to help serve the growing demand from landlords who now need to use this type of arrangement.'
Chadha describes the bank as having 'a willingness to look at complicated deals where a cookie cutter approach doesn't work'.
'Our approach is very much to look at each proposition on an individual basis - if we think a deal makes commercial sense then we will make the loan,' he says.
Currently State Bank of India has 12 branches across England, offers savings online and mortgages mostly through brokers but Chadha confirms it is in the process of setting up a UK retail bank, which should be complete in April next year.
This would allow the lender to offer residential mortgages eventually if it chooses, although Chadha says it's more likely to develop a commercial mortgage range before that happens.
'We're more focused on lending to more landlords outside London at the moment,' he explains. 'Changes from the Bank of England mean that landlords borrowing in areas where the yield is lower will be able to borrow less from next year.
'We'd like to help landlords to expand their portfolios in areas where the margins are better, such as the Midlands and North of England.'
While Chadha is reluctant to call State Bank of India a 'challenger bank' , it is fast becoming one in the buy-to-let market in Britain. In fact, in terms of the number of mortgages it lends, it is one of the bigger small banks.
'It's certainly an ambition that I'd like to entertain,' says Chadha. 'We want to grow next year and help landlords who approach buy-to-let as a business.'
What's on offer from State Bank of India?
In the past, limited company buy-to-let mortgages have tended to be priced around one percentage point higher than ordinary buy-to-let deals but State Bank of India has made a point of keeping its complex rates as low as possible - currently its limited company rates come in from just 0.5 per cent higher than straightforward buy-to-let rates.
It is not the only lender that has tried to keep the price differential to a minimum - various other specialists also price deals similarly and offer flexible options for landlords with more complex mortgage needs.
Rates from State Bank of India start from 2.69 per cent for a three-year fix up to 60 per cent loan-to-value with a £995 arrangement fee for landlords purchasing or remortgaging in their own name.
For those looking for finance through a limited company the same product charges a rate of 3.19 per cent. All lending to limited companies incurs a 1.25 per cent arrangement fee - £1,250 on a £100,000 loan.
Loans are available between £50,000 and £3,000,000 for both purchase and remortgage up to 70 per cent loan-to-value.
Why choose a challenger bank for buy-to-let?
Former Chancellor of the Exchequer George Osborne launched a crackdown on buy-to-let at the start of this year when a 3 per cent stamp duty charge was levied on landlords
There are lots of smaller banks, building societies and specialist buy-to-let lenders serving the increasingly complex needs of landlords. In fact the Council of Mortgage Lenders has reported a 56 per cent growth in lending by challenger banks and specialist lenders during 2016, while building societies and banks increased activity by just 9 per cent and 5 per cent respectively.
This is particularly good news as the giants of buy-to-let have traditionally not wanted to lend too much to larger scale landlords.
This has left many thousands of landlords, who are considering incorporating in order to stay profitable after the tax changes come into force next year, worrying about where they will be eligible to remortgage.
Liz Syms, of buy-to-let broker Connect, says there are plenty of options but warns: 'It is important to seek specialist property tax advice if you are considering transferring an existing portfolio held currently in a personal name.
'A transfer is actually considered as a sale by the individual and a purchase by the company. This in turn could trigger capital gains tax on the sale and stamp duty on the purchase, which could be a costly exercise. A specialist tax adviser should be able to help you consider if it is worthwhile to pay these costs or if there are any alternatives.'
If you decide to move existing properties into a limited company or buy any future properties this way, then the mortgage options fall into 'complex buy-to-let' and 'commercial' lending.
Many of the lenders that specialise in these types of loan do not have a high street presence and their products are only available via mortgage brokers.
'Some names may not be familiar and some of the lenders are fairly new to the market such as Axis and Vida Homeloans,' says Syms. 'Lenders such as Precise Mortgages, Aldermore and Shawbrook have been around for over five years and Paragon and Kent Reliance for considerably longer.'
WHY USE A LTD COMPANY FOR BUY-TO-LET IN 2017?
The buy-to-let market has undergone widespread changes over the past 12 months with more to come in 2017.
From April this year, purchases have incurred a 3 per cent stamp duty surcharge and from April next year, landlords will start to lose tax relief on their mortgage interest.
This is the critical change driving landlords to incorporate: currently landlords are taxed on their profit because existing mortgage payments can be deducted from rental income before that income is declared.
A higher rate tax payer paying 40 per cent income tax can deduct their mortgage costs (buy-to-let loans tend to be interest-only) and therefore they pay only income tax on their rental income above that.
From next April this tax relief - currently available up to 45 per cent for top tier taxpayers - will be reduced over four years down to 20 per cent.
It also won't be a relief. It is being replaced with a tax credit which must be claimed back meaning landlords will pay find 100 per cent of their rental income is taxable and they are then in line for a credit payment of 20 per cent back.
It's estimated that the changes will push half a million landlords into a higher income tax band - hitting their profits even harder.
In a bid to stop costs spiralling as a result of the changes, landlords are incorporating and selling their properties back to themselves in a company structure.
This allows them to claim back expenses including the mortgage cost and pay a lower rate of corporation tax, currently 20 per cent but falling to 17 per cent by 2020. However, it also incurs a hefty stamp duty charge.