Independent property expert Nigel Lewis looks at what recent legislation changes mean for investors.
It’s been a period of significant change for residential landlords over the past 18 months.
Stamp Duty for buy-to-let purchases has increased1, mortgage interest relief2 and other tax perks have been reduced3 and, most recently, buy-to-let lending rules4 have been tightened. The result? Most landlords will soon be receiving higher tax bills, squeezing their profits5.
The first of the new buy-to-let regulations, introduced early this year by the Prudential Regulations Authority (PRA), brought in more robust rules for affordability testing. There were also tougher ratios for rent-versus-mortgage calculations and affordability stress tests4.
The measures are partly aimed at deterring amateur landlords who may want to take out riskier, high loan-to-value mortgages6.
But by September this year, lenders must also have applied a second tranche of rules to their lending4.
These include measures aimed directly at portfolio landlords, which the PRA defines as those with 4 or more buy-to-let properties.
The lending watchdog says these landlords should be treated in a different, more sophisticated way by lenders, largely because they have more market experience, property knowledge and are ‘formal’ businesses.
These attributes usually help to give lenders more confidence in portfolio landlords, as those with greater business experience and a stronger track record could be seen as more attractive to lend to compared to their smaller-portfolio counterparts.
The wording of the rules suggests that ‘hobby’ landlords are more likely to be part-time, non-professional or ‘accidental’. As single-property landlords make up 60% of all landlords7, they’re a greater lending risk to the overall stability within the mortgage market should there be a downturn – something intermediaries and introducers need to consider when reviewing their client portfolios and assets.
Portfolio landlords are also more likely to own their properties through limited companies. However, many others are now considering this way of owning property – particularly single-property landlords looking to mitigate the recent personal tax relief reductions.
By buying a property through a limited company, smaller landlords gain access to higher tax relief levels and tax-free dividend payments, although there are costs involved in setting up and running a company, and lower Capital Gains Tax benefits8.
The number of landlords owning property through a limited company has increased by 6% year on year and 20% of buy-to-lets are now owned this way9.
The government’s recent actions could indicate that it wants to encourage more ‘professional’ landlords in the buy-to-let sector and dissuade the smaller, often single-property investors. And lending is one of the latest ways the government is achieving this.
Make sure your clients are aware of the recent changes, and the benefits of talking to a Real Estate Manager who can review portfolios, offer guidance on how to structure cases, share knowledge and help navigate through the process and any potential pitfalls.
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