Many landlords have benefited from the stamp duty incentive but this was always a temporary reprieve, with or without an extension.
Where there is no reprieve is with the changes to mortgage interest relief, which from the 2020/21 tax year will be fully phased in. It will not be long before all landlords feel the full effects of the tax changes introduced in 2015.
A table produced by Kensington shows that a higher-rate taxpayer generating £12,000 a year in rental income with £8,400 a year of mortgage interest will have seen profits erode from £2,160 to just £480 a year. Many smaller landlords have left the market, but professional portfolio landlords in the main have stayed and adapted their strategies to accommodate the tax changes.
Some of those strategies include turning to different property types such as commercial and holiday lets, both of which sit outside the tax changes. Before the pandemic there was a surge of buy-to-let lenders introducing holiday lets to their criteria. However, this sector has been particularly affected by the lockdown, meaning a few lenders paused their offering. With an opening again on the horizon, there is an expectation of a UK holiday-let boom due to international travel restrictions. So, as we move towards the holiday season, it’s good to see lenders reopen their offerings.
For example, West One launched a range to 70 per cent LTV using the PRA holiday-let exemption with a reduced rental calculation at 5 per cent, and Ipswich has a new 80 per cent holiday-let offering.
HMO property has also become more popular because the higher rental income can cover the extra tax costs. Lenders such as LendInvest have recognised the opportunity and recently increased the maximum number of letting rooms to 15, and Masthaven will consider HMO property for first-time landlords.
Limited companies
Holding property inside a limited company is another strategy. Moving an existing portfolio into a limited company is not right for every landlord, but more and more new purchases are being set up this way.
Research by Hamptons shows that during 2020 there was a record number of new limited companies, known as incorporations, set up to hold BTL properties. There were 41,700 BTL incorporations, a rise of 23 per cent on 2019.
Excluding commercial providers, more than 30 BTL lenders consider limited companies. Although mainly a specialist domain, some more mainstream names are willing to look at it. However, less than half consider trading businesses, most favouring SPVs.
Many building societies have entered the limited company market. Often overlooked, they offer niche criteria as they look to areas like this for greater margins. Mutuals such as Bath, Mansfield, Monmouthshire, Newbury, Nottinghamshire, Saffron and best-buy Buckinghamshire all have limited company offerings.
Another benefit of purchasing via a limited company is the rental calculation. If a higher-rate taxpayer purchases a BTL property in their personal name, most lenders require the rent to be 40-45 per cent higher than the notional mortgage payment. When the property is purchased via a limited company, they offer a more competitive margin, typically 25 per cent. This, the tax benefits and landlord awareness of increasing costs will ensure that limited company BTL continues to grow.
Some of the best limited company offerings can be seen in the below table:
| Lender | Rate | Type | Lender fee | LTV |
| Precise | 2.79 per cent | 2-year fix | 1.5 per cent | 75 per cent |
| Habito | 3.04 per cent | 2-year fix | £1,995 | 65 per cent |
| Buckinghamshire | 2.99 per cent | 3-year discount | £1,195 | 75 per cent |
| LendInvest | 3.29 per cent | 5-year fix | 1.75 per cent | 65 per cent |
| Landbay | 3.34 per cent | 5-year fix | 1.5 per cent | 60 per cent |
| Vida | 3.34 per cent | 5-year fix | £3,750 | 75 per cent |
*Rates correct as at 22/02/2021
Liz Syms is chief executive of Connect Mortgages
