Buy to Let Mortgages and tax relief changes 2017 to 2020

From April 2017 tax relief available on buy to let mortgage interest will be restricted from the current full relief on all tax bands, to maximum relief limited to the rate of basic income tax.

This reduction will take place between April 2017 and April 2020.

What does this mean for buy to let investors who are higher rate taxpayers?

A higher rate tax payer paying £12,000 a year in interest can currently offset the full amount against their higher rate tax ( leaving a net cost of £7,200 ).

By 2020 the same interest can only be offset up to the level of basic rate tax (currently 20%) meaning our investor has a net (post tax relief) cost of £9,600 for their interest.

This is a rise of £2,400 or one third in real interest costs.

An additional rate rate taxpayer paying tax a 45% is hit harder with their current post tax costs of £6,600 rising by over 40%.

What is the answer?

These changes may make mortgage interest less palatable for the higher tax paying investor but very few build their portfolios without them.

Limited Companies

Many buy to let investors already hold their properties within Limited Companies rather than personally as this gives several advantages.

  • The Investor is protected from loss by the limited guarantee
  • The Investor can manage their tax bill by leaving profit within the Limited Company
  • The Investor can sell, or transfer shares in the company without disturbing mortgage arrangements
  • Succession planning is assured within families as the death of the investor does not mean that mortgages need be settled or properties sold
  • The more mature investor is not restricted on mortgage options through age
  • Holding investment property in a Limited Company would appear to be more attractive for higher and additional rate taxpayers from 2017 as it gives them move control over their income tax bill

Should new buy to let investors buy through a Limited Company?

There seems to be little benefit in this for basic rate tax payers, as it adds a level of cost and complication without offering any taxation benefit under current legislation.

For higher rate tax payers with a modest income need, it is worth considering. If income from the property can be left in the company, the tax bill is restricted to the Corporation Tax level of 20%.

A higher rate tax payer needing the income from the property however, has further complication from the recent changes in how company dividends are taxed and may find a tax rate of 32.5% on the bulk of their dividends less palatable than the current 25% on all of their dividends.

Limited Companies and mortgage lending

Few buy to let mortgages Lenders currently offer funding to Limited Company property buyers and owners.

Limited Companies are a more complex borrower for the mortgage lender and all but the specialist buy to let lenders stay clear.

However if the buy to let market moves from mainly personal ownership to a high level of corporate ownership, Lenders will have to rethink their offerings.

Complications of arranging buy to let mortgages for Limited Companies

Although there are a number of mortgage lenders offering buy to let mortgages for Limited Companies, in the current market there are a number of complications that borrowers should be aware of.

Trading company or special purpose vehicle?

Don’t not assume you can purchase your buy to let property through any Limited Company. Many Lenders will not let you buy through a trading company and insist you use a special purpose vehicle set up only to own the property.

How many Limited Companies do you need?

Some mortgage lenders insist on a separate special purpose vehicle for each property which can get messy.

Call us now for buy to let mortgage advice on 020 8979 9684

Further information on buy to let mortgages

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