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 £2m worth of mortgages secured against it charging a two per cent 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.
If the same portfolio remortgaged onto a rate of 3.75 per cent, net profit would almost halve to £50,344, according to Less Tax 4 Landlords’ calculations.
At 5.5 per cent, 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 per cent, 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 per cent in December last year to 1.25 per cent today. Speaking at the annual Mansion House dinner in London last night, Bank governor Andrew Bailey suggested a further 0.5 per cent rise is on the cards in August. And there are predictions the base rate could reach 3%.
Data from Moneyfacts shows the best buy two-year fixed rate buy-to-let mortgage up to 65 per cent loan-to-value currently sits at 2.69 per cent, available from Nationwide’s broker arm, The Mortgage Works. However, the average rate comes in at 4.01 per cent.
Landlords needing to borrow up to 80 per cent LTV face rates starting from 3.54 per cent for a two-year fixed rate, also from The Mortgage Works. The average rate here stands at 4.43 per cent.
Meanwhile, on five-year fixes, a 65 per cent LTV stands at an average 4.14 per cent, while at 80 per cent LTV, the average is 4.84 per cent.
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In 2015 former chancellor George Osborne announced that generous tax reliefs available to buy-to-let investors would be withdrawn over four years, finally being removed altogether by April 2020.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 per cent to 40 per cent or 45 per cent, and for those whose income falls between £100,000 and £125,000, 60 per cent.
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.
Chris Bailey said: “The limited company structure means finance and mortgage costs qualify as allowable expenses and with corporation tax currently at 19 per cent 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 per cent 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, as well as stamp duty payments and necessitating the remortgage of properties transferred.
There is also the fact that former chancellor Rishi Sunak – in the running to become Britain’s next prime minister – is pledging to raise corporation tax to 25 per cent next April.
Chris 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.
See YourMoney.com’s full run down on tax and regulatory changes affecting the buy-to-let market for landlords.
