Buy-to-Let Watch: No need to panic | Mortgage Strategy

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As we all finally settle in to the full impact of Section 24, the recent government tax shake-up has thrown another spanner in the works for buy-to-let (BTL) landlords.

While certainly not at the industry-altering scale of the aforementioned interest relief changes, the alterations to dividend tax, corporation tax and National Insurance (NI) will impact many of our BTL landlord clients.

Don’t worry — I’m not going to get into the nitty-gritty of the recent tax changes; I’ll leave that to our esteemed professional tax adviser colleagues. However, there are some key points that I feel we brokers need to be aware of.

For those of us in this industry pre-Section 24, we’ve noticed a marked increase in the number of landlords investing through special-purpose vehicle limited companies. A quick look at our data shows that, in the fourth quarter (Q4) of 2016, just 29% of BTL cases were limited company transactions.

This isn’t so catastrophic that anyone should consider selling up

Compare that to Q2 2021 and 53% of BTL purchase and remortgage cases completed through a limited company structure.

Tax efficiency

Although there are many benefits to a limited company investment structure, tax efficiency is typically the leading motivation for most landlords. And so, with more landlords using limited companies to invest in BTL property, the chances are that increasing numbers of them are drawing income, in part, from dividends. Therefore the 1.25% increase in dividend tax is likely to have a negative impact on any landlords who take more than the £2,000 allowance in dividends per annum.

However, although the government estimates that this change won’t affect 60% of individuals with dividend income outside Isas, I imagine it will impact a lot of limited company landlords who draw most of their income through dividends.

Nevertheless, I don’t think there’s any need to panic.

Of course, the rental income of incorporated BTL properties is subject to corporation tax. As announced in the Budget back in March, corporation tax is changing from April 2023 for those companies with profits exceeding £50,000; those below that threshold (estimated at 1.5 million businesses) will remain at the current 19%. Companies with profits between £50,000 and £250,000 will be subject to the marginal rate of 26.5%; and, for those above £250,000, 25% corporation tax will apply.

Should clients have any concerns, point them firmly in the direction of a professional tax adviser

Therefore we expect only those landlords with substantial property portfolios to feel any adverse change in their post-tax profits. And it’s worth reminding them that, even after these changes come into play in 2023, the UK will still have one of the lowest corporation tax rates of the G7 countries. In Italy, corporation tax is 24%, while France and Canada are at 26.5%, the US is at 27%, Germany is at 30% and Japan is at 30.62%.

Furthermore, the UK’s new rate is a far cry from the 28% that some of you may remember from 2010, or the 52% our own finance director recalls from longer ago than that (he wouldn’t admit when).

Ultimately, how these changes, combined with the NI/Health and Social Care Levy adjustment, impact a landlord will depend entirely on their individual tax position. It’s unlikely the changes will alter whether limited company investment is less or more tax efficient than owning BTL property personally for the majority of clients. And, goodness knows, this isn’t so catastrophic that anyone should be considering selling up. Should clients have any concerns, point them firmly in the direction of a professional tax adviser!

All-time lows

If you’re still with me at this point, I’d like to turn briefly to the considerably more exciting matter of BTL mortgage rates.

Having worked with mortgages for more years than I care to admit, I have never seen BTL mortgage rates this low. Every week I think the lender race to the bottom must be over, and yet someone somewhere finds a way to keep going.

Even after these changes come into play in 2023, the UK will still have one of the lowest corporation tax rates of the G7 countries

Most excitingly, the gap between individual and limited company BTL interest rates has shrunk considerably; at the time of writing, one could secure rates for the latter from 2.59% at 75% loan-to-value! However, I know such good things cannot last forever and, with inflation the way it is (3.2% for August), I’m confident the inevitable market correction is approaching.

I thoroughly doubt we’ll see a sudden hike, but keep a weather eye on the lender rate cards as we get deeper into autumn.

Jeni Browne is business development director at Mortgages for Business


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