The changes started to take effect in the current tax year and will be in full force by 2020.
We asked this week’s marketwatch panel how landlords and the market have reacted to the change, as well as the opportunities and challenges it presents.
The buy-to-let mortgage market has weathered a lot of storms recently, with tax changes making landlords think twice about expanding their portfolios.
I’d say the market feels around 75/25 in terms of those who are and aren’t in favour of remortgaging.
Some landlords have left the sector or reduced their portfolio, which has impacted the shape of the market, and although the private rental sector (PRS) plays an important role in ensuring the availability of rental properties, the longer term impacts are unknown. And this is something I worry about.
There are also questions about whether landlords are getting the information they need.
The HM Revenue and Customs website explains what the mortgage interest tax changes mean, but I hear stories every day about landlords only now beginning to see the impact of these changes on their businesses.
We ran a series of UK-wide workshops ahead of these changes, reaching around 4,000 brokers to help them explain what this would mean for their landlord clients, but it’s still important that landlords seek expert tax advice before making any decisions.
The buy-to-let market has certainly become more complex than it needs to be, as lenders have reacted differently to the changes.
The downside to this is that it creates complexity through inconsistency across the sector, although on the plus side, it also creates opportunity for a greater choice of lending solutions for landlords.
Customers need advice more than ever and a good broker who really gets to grips with these changes and explains the options to their customers will be in a position of strength as the landscape continues to shift.
Since the buy-to-let tax changes there has been a shift towards limited company buy-to-lets, aided by the increased availability of finance for these set-ups.
There is no question that there are advantages in many cases but is it right for everyone?
Sure you get better tax relief on your mortgage costs and benefit from the lower corporation tax rate of 19% (compared with personal tax rates of up to 60%).
But often there are higher interest rates and fees to set up the mortgage, as well as the annual compliance costs of the company, such as accountancy fees etc, which may reduce any potential benefits.
If you need to spend the rental profits, then there is another layer of tax to draw money from the company as dividends, taxable on you personally, so this model works best if you can retain the profits in the company to reinvest or repay the mortgage.
Depending on your circumstances, the limited company model can help with inheritance tax planning.
If the landlord ever needs to use the property personally or make it available to friends or family then the limited company model may not be right.
The motivation for many when using a limited company is to take advantage of the ability to borrow more, but this may be short-sighted considering the additional costs that will be incurred.
It is clear that there is not a one size fits all approach.
Anyone considering this route should consult their accountant to consider other factors: your need for income, family circumstances and long-term goals.
The advice needs to be holistic and not focused only on the ability to borrow more.
If you look at the buy-to-let tax changes in the context of the problem they were trying to solve, the policymakers got them absolutely right.
Based upon evidence to date, landlords are leaving the buy-to-let market in their droves, which is reflected in the reduction in the number of buy-to-let mortgage approvals.
If the holy grail for the government was to increase available housing stock for owner occupiers, particularly first-time buyers, it’s a home run.
But where does that leave those who have invested in bricks and mortar as their retirement fund, and the brokers who have helped with this and are now trying to evaluate whether their buy-to-let back-books are worth anything?
The reality is that our clients have to seek advice from tax professionals about whether they should sell their investments, but it’s important the tax adviser knows about the limited company option for before they advise ‘sell’.
The tax changes have triggered a raft of new limited company buy-to-let products from lenders who had traditionally avoided them.
The choice for some of these lenders has been to adapt to the new needs of the borrower – or write off buy to let as a driver of profit.
Thankfully, lenders like Precise and Kensington, among others, chose the latter.
The more lenders that enter this area, the more competitive the pricing will become for the consumer, which should mean the humble broker’s buy-to-let back book retains its value.