New Buy To Let Mortgage Tax Changes: A Basic Guide

The new buy to let mortgage tax changes may affect you in lots of different ways. Here we look at what it is, what it means for you and what to do next.

In April 2017 it was announced that new tax changes would come into place affecting the way buy to let mortgages are taxed. This change came into place last September.Since then it has caused all kinds of disruption amongst landlords holding multiple properties. It has caused such a worry in fact, that accountant services have been holding meetings especially for their landlord clients to explain how it works, how it will affect them, and to explain what can be done about it.

The effects are thought to be very far reaching. So far in fact that it may well cause a property boom in the near future as landlords are forced to sell up their properties to avoid the crushing cost of tax on their properties.

What Does The New Law Mean?

It means that investors with buy to let mortgages on properties are unable to offset their mortgage interest against the money they make from the property. Within three years they won’t be able to deduct tax from any interest at all, and they will have to pay more tax.

This change has been put in place to try and avoid buy to let investors purchasing all the available properties. This is to try and help first time buyers have more of a choice in affordable properties they can get a mortgage on. Currently there is a problem with buy to let investors buying all new properties within a first time buyer price range, and renting them out to first time buyers who can’t afford to save a deposit. Thereby would-be first time buyers end up being unable to join the housing market.

Previously those paying a higher rate of tax from their investments could offset all mortgage interest against the money they get from renting the property before their tax bill was calculated. Which means that now investors will see a higher tax bill. Ssome so high that their properties are not even profitable any more.

When Does The New Property Tax Law Come In?

It was announced in April 2017 and officially started in September 2017. It is being phased in throughout the next three years to give landlords time to adjust properly, and to potentially sell some of their portfolio if they need to. Within the next three years the amount that can be offset by landlords will gradually decrease, until they aren’t able to decrease any by 2020.

Who Does The New Law Affect?

The law is directly targeting higher rate taxpayers who are private landlords. However it will affect some lower rate taxpayers in that it may cause they to be into a higher rate tax bracket once the rental income they make has been considered. Some people may find that they lose some benefits if those benefits are provided on a means tested basis.

Is There Any Way To Avoid The Effects Of The New Law?

Most accountants are fully aware of how much the new law will affect their property investor clients. So they are helping with preparation and planning. All landlords need to be prepared and plan ahead for this law change. At the very least, an excellent start is to seek financial advice to find out exactly how badly you will be affected. This allows you the time to decide if you need to sell any properties in order to avoid crippling tax bills. Some people are looking to purchase properties elsewhere through a company which enables them to avoid the tax law.

For those who are not going to be completely put out by the changes, with fewer properties or where the changes bring less of a financial blow, a focus on costs is a good idea. Reducing the mortgage or getting a lower mortgage rate could be useful. Or, possibly increasing your rent enough to cover the costs if this is viable.

Landlords are taking all kinds of other routes to avoid the law putting them out of business. Remortgaging the house they live in to pay off mortgages on buy to let properties, paying upfront costs to move their properties inside the protection of a company.

Moving Properties Under The Protection Of A Company

Only private landlords are affected by the new laws. So anybody (a person or a couple) who owns a property in their name rather than through a company.

As it stands, setting up a company that is the owner of the buy to let properties avoids the new tax laws. Because the properties are no longer privately owned. However, this isn’t a straight forward option and isn’t right for everyone. It is important to remember that the laws can be changed again at any time. So it is possible that the government will pick up on this loophole and change the law to include properties protected by company ownership.

As well as the potential for law changes, there are other risks with this potential move. One main one is that mortgage rates for companies are much more expensive than those for private landlords. This means you could end up paying out more than you would actually save by setting up the business in the first place. There would also be more stamp duty to pay and your tax process would be much more complex which could be more costly and time consuming.

Buy To Let Regulation Changes For Lending

From October 2017 further laws affecting buy to let landlords came into place affecting the mortgages on the properties. The law means that any landlord with four or more properties has to provide more extensive information to their lender even if they only have a mortgage on one of the properties in their portfolio. The laws are specifically to get to landlords who have an extensive portfolio, as mentioned above, to stop first time buyers losing out on the opportunity to get on the property ladder.

The law is applicable regardless of whether your portfolio is entirely private or run through a company(which you may have done to avoid the new tax laws). Lenders will take all of the financial information and decide whether or not you are eligible for a loan. They will want to see equity amounts, rental income, property locations and other costs on all of the portfolio.

Because of this change, loans will take a lot longer to be considered and there will be a lot more paperwork to go through before a loan is agreed. The paperwork required is extensive and could call for:

Information on all your properties including proof of ownership
Details of any mortgages you currently hold
Information and proof of rental income
Any tax returns from current income you receive from other sources
Information about your business and your business plans

Your mortgage company may need more or less than this information. So ask in advance so you are able to prepare the information, saving time in the long run.

Taking Steps Moving Forward

These new laws are designed to crack down on those making money from property portfolios via buy to let mortgages. Although it is an entirely legal and viable way to make money, it can freeze out first time buyers who are already struggling to save, on top of struggling to find a house within their bracket, because they tend to get purchased quickly by investors. The knock-on effect of first time guyers being unable to get on the property ladder is felt by everyone else who owns a home. It affects all of us and subsequent generations.

However, as it stands if you are a property investor and you do have a portfolio of buy to let properties then these laws are not helping your business and its profits in any way. A business owner struggling to know how to go about ensuring their business survives these changes will be helped by these tips:

Don’t Hide From It

Naturally, some business owners are very busy and may feel they don’t have the time to address the new laws. Perhaps you think that you can easily find a way around it when it comes to the end of the tax year. Often accountants can help with tying up loose ends and guiding you through complex financial situations when it comes to the end of the tax year. They can provide you with all the information you need, they cannot make the decisions for you. Property owners need to take the information they are given and make decisions based on that. So the very first step in working through these new changes, is to face the fact that these laws are coming into place and they will affect you.

Seek Advice

Unless you are completely aware of tax laws and specifically the new law, you will need advice. It may be you can speak to your accountant and make a decision based on that conversation. It may be that you need to speak to your financial advisor and accountant in order to get the best route forward. You may also need to speak to your lenders to see about paying some mortgage off, or about remortgaging your home to help pay off properties. You might need to speak to a company about moving your properties under their ‘umbrella’, and also any business partners or investors in your company, as well as your partner.

Seek Help Moving House

A lot of investors will need to sell at least some of their portfolio because of this new law. These sales may need to happen very quickly in some instances to avoid crushing tax bills. Because of this, you will need to clear homes quickly. Having various aids in place to help with this process will ensure it happens quickly and smoothly. For example: cheap self storage is a really useful temporary investment. You can quickly move goods from your houses into the space whilst you arrange to sell them. Cheap self storage will also allow you the flexibility to move goods from one house to another if you are investing in properties held under a limited company. Or to hold items you need to prepare properties for sale.

Keep Everything Legal With Tenants

By sticking to tenant contracts rigidly you will be able to avoid legal action being taken. You might well be in a rush to sell a property but remember that your tenants have made a life in that property and they have laws to protect them and their rights to remain there. If you need to seek legal advice in ending your tenants contracts, then do so quickly but always stick to the law. Operate in a fair way to ensure your tenants have adequate notice for moving out and understand fully why their tenancy has been terminated.

Don’t Make Decisions Based On Panic

You do have time to make a measured decision. You may have to act extremely quickly when you do get the information you need. But making a decision based on panic will never end well. Take an extra day to breathe and carefully consider your options. Allow yourself the time to make the right choice for your future. The wrong decision could cost you a lot of money. So taking a bit of extra time to avoid panicked decisions is really important.

If you need more information on the tax changes affecting buy-to-let properties then take a look at these helpful resources:

In all instances, make sure you always seek professional advice when it comes to anything related to property and tax before you take any action.