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Joint borrower, sole proprietor model useful for BTL tax efficiency – analysis

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  • 08/06/2017
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Joint borrower, sole proprietor model useful for BTL tax efficiency – analysis
Tax changes in the buy-to-let market are forcing lenders to be creative in their product solutions.

Last month Family Building Society became the latest lender to launch a buy-to-let offset mortgage product. However, brokers and lenders suggest joint borrower, sole proprietor (JBSP) mortgages may be a better option for those wrestling with the tax environment who don’t want to have a limited company.

Moneyfacts data shows there are four buy-to-let offsets on the market. Clydesdale Bank and Yorkshire Bank products are available at 5.10% variable, while Hinckley and Rugby Building Society offers a 2.89% discounted variable at 75% LTV with fees of £1,500.

Family’s product is a two-year discount at 2.99% with a product fee of £999. The maximum loan to value is 65%.

Keith Barber, director of business development at Family, said: “We were getting feedback that this is something the market needed more of. There were a couple of providers and we are keen to offer products in niches that larger lenders don’t see as sufficiently attractive.”

Barber said he did not expect the product to be used extensively, but it offers an option for smaller landlords that do not want to register limited companies because of buy-to-let tax changes.

“This enables people to use their savings in the same way as owner-occupier mortgages.”

Landlords using the mortgage would receive a lower tax credit because they would be paying less interest but the lower interest charge means improved net cash flow, said Barber. The lender has estimated that an individual buy-to-let landlord would need to offset around a quarter of the mortgage balance to achieve neutral cash flow.

Barber suggested this would be effective for landlords setting aside money for future additional properties, for example. “We have been receiving applications on a regular basis since we launched the product.”

Niche offering

Steve Olejnik, COO at Mortgages for Business, said the offset buy-to-let is unlikely to become large-scale. “It’s an innovative product and one a small minority of landlords would take up, but there are not many landlords sitting on piles of cash. It’s a nice addition to the toolbox for the buy-to-let broker but how often they use it is another thing.”

Carolyn Thornley-Yates is head of intermediary sales at Hinckley and Rugby, which introduced its product in October last year. She said demand has been consistent since then but the building society does not expect it to increase.

Hinckley and Rugby’s offset buy-to-let product is not primarily marketed nor designed for its tax impact. Changes to tax relief on buy-to-let mortgage interest and removal of tax payable on most savings accounts have also both affected its previous tax efficiency.

“The main advantage of offset on a buy-to-let account is the reduction in the interest charge, which is good news, given the lower tax relief. But any individual’s circumstances are likely to be complicated and so this may not apply generically,” she said.

The ‘notional’ interest rate on the linked offset savings account is the same as on the mortgage account. This gives landlords an easy access savings account at a competitive 2.89%.

“This is the primary reason our offset product is attractive to landlords with savings, rather a specific link to tax efficiency,” said Thornley-Yates.

She added that, in terms of tax efficiency and buy to let, there is more demand for a JBSP proposition. “We have received anecdotal feedback that this is a viable alternative to limited company buy to lets,” she said.

“We make no representations that this is a tax efficient method, however there is a level of demand for the mortgage to be in the joint names of what is typically one higher rate taxpayer and one basic rate taxpayer for affordability purposes, but for the title deeds only to be in the name of the basic rate taxpayer.”

Joint borrower sole proprietor

Gareth Lowman, associate director at SPF Private Clients, agreed that while the offset option is an interesting niche, there is more demand for the JBSP style of offering.

He pointed to some lenders with no minimum income requirement, such as Bank of Ireland on the owner occupier side. “More lenders are looking into the joint borrower sole proprietor route – it’s a growing trend in the market and there is definitely demand for it.”

L&C Mortgages associate director David Hollingworth said for buy-to-let offset to gain traction, more providers would need to come in and develop a more competitive proposition.

He said the JBSP proposition is more interesting as it could be expanded from a primarily owner-occupier base. Metro Bank already offers this on buy to let and New Street is another alternative to Hinckley & Rugby.

However, he added that lenders are facing a challenge in developing portfolio landlord propositions and will need to decide where to target their innovation.

“You could see lenders already set up for that with owner occupiers considering it,” he said. “Limited companies are also a big question for a lot of lenders: do they make the move to that or not? If you are a lender not going to consider limited company lending, these routes are another string to your bow.”

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