Cause and effect
Journalist, market expert and show panellist Sarah Davidson summarises Chris Bailey’s thoughts on the current BTL outlook.
Buy-to-let landlords who need to remortgage towards the end of this year and throughout 2023 face a serious mortgage payment shock as the Bank of England continues to raise interest rates.
Analysis carried out by tax planning consultancy Less Tax 4 Landlords reveals that just a small uptick in buy-to-let mortgage rates could wipe thousands of pounds off landlords’ profits, with those who own properties in their own names most at risk.
A privately owned portfolio with £2million worth of mortgages secured against it charging a 2% rate of interest, earning a gross rental yield of £240,000 annually with £48,000 of tax deductible expenses would produce a net profit of £92,344 based on 2021/22 tax year rules.
Were the same portfolio to remortgage onto a rate of 3.75%, net profit almost halves to £50,344, according to Less Tax 4 Landlords’ calculations.
At 5.5%, net profit drops to £8,344 and, in the less likely case that the portfolio had to be remortgaged at a rate of 7.25%, landlords would face a net loss of £33,656.
Buy-to-let mortgage rates have been rising steadily since the Bank of England began hiking the base rate from 0.1% in December last year to 1.25% today. Speaking at the annual Mansion House dinner in London last night, Bank governor Andrew Bailey suggested a further 0.5% rise is on the cards in August.
Moneyfacts data show the best buy 2-year fixed rate buy-to-let mortgage up to 65% loan-to-value currently sits at 2.69%, available from Nationwide’s broker arm The Mortgage Works.
Landlords needing to borrow up to 80% LTV face rates starting from 3.54% for a 2-year fixed rate, also from The Mortgage Works.
Speaking at London’s National Landlord Investment Show this month, Less Tax 4 Landlords’ group director Chris Bailey warned that unless landlords who owned property in their own name paid down some of their debt or were prepared to sell up, they face a dramatic fall in profitability.
“This is the effect that the previous government’s decision to scrap tax relief for landlords, replacing it with a tax credit, has for landlords who own property as a sole trader,” he said.
In 2015 former Chancellor George Osborne announced that generous tax reliefs available to buy-to-let investors would be withdrawn over four years, finally being removed altogether by April 2020.
Landlords who had paid income tax on their profit only, have had to pay income tax on their revenue since. The change pushed many landlords into a higher rate tax band, upping tax payable to the Treasury from 20% to 40% or 45% and for those whose income falls between £100,000 and £125,000, a whopping 60%.
It prompted a major shift in how landlords opted to hold portfolios, with many choosing to use limited company structures to make new purchases in order to pay less tax.
Bailey said: “The limited company structure means finance and mortgage costs qualify as allowable expenses and with corporation tax currently at 19% payable on profit and capital gains, for landlords with portfolios over a certain size it can save them considerable money.”
Money taken out of the company as dividends incur 33% tax, but even so, used in the right way limited company ownership can now make more sense for landlords investing further, he added.
However, moving existing properties into a limited company poses problems as landlords have to sell a property to the company, triggering capital gains tax and stamp duty payments and necessitating the remortgage of properties transferred.
There is also the fact that former Chancellor Rishi Sunak, the current favourite to become Britain’s next Prime Minister, is pledging to raise corporation tax to 25% next April.
Bailey urged landlords to consider using a limited liability partnership as a mechanism to minimise the capital gains tax payable, adding that because the property ownership remained with the individual, existing mortgages were unaffected.
The limited company structure means finance and mortgage costs qualify as allowable expenses and with corporation tax currently at 19% payable on profit and capital gains, for landlords with portfolios over a certain size it can save them considerable money.
Chris Bailey | Less Tax 4 Landlords