With tax relief for buy-to-let mortgage interest due to be slashed come 2017, it is more crucial than ever that landlords stay on top of their costs.
Earlier this month, the government announced that 2017 would see the beginning of a phased withdrawal of tax relief for buy-to-let finance costs. The move struck a blow for landlords in the UK, particularly those on the higher or additional tax rates, who research suggests could suffer losses of up to £780 per year if interest rates were to rise by just 1% by the time the new rules come into effect .
With less than two years to go until withdrawal begins, it is important to start planning now in order to have the best chance of reducing costs and minimising the impact on your business.
Should you raise rents?
This may be the first instinct for most landlords; indeed, industry professionals have predicted that, in many cases, the lion’s share of the tax bill will probably be passed on to tenants.
It isn’t quite that simple, however. If necessity was the primary factor in determining rents, rather than the local market, then every landlord would run at a profit – when in fact an estimated fifth of smaller landlords either break even or make a loss .
While some markets might be receptive to rental increases, others – particularly those comprising lower-income households whose finances will already be stretched – will not, and landlords hoping to recoup their losses by charging their tenants more might find they lose more through lack of business.
What about reducing debt?
Though interest-only mortgages and heavy leveraging still have their uses, it has arguably become far less appealing to maintain high levels of interest-only debt. By reducing some of this debt, you will reduce your borrowing costs and may be able to recoup some or all of what you lose through higher tax bills.
First off, check whether your mortgage lender permits overpayments. Many allow 10% per year as a standard, and others provide flexible loans that allow you to overpay more. This allows you the freedom to reduce your debt when you are able, without having to commit to regular capital repayments.
Alternatively, regular repayments might be a commitment you’re happy to make. If you switch to a repayment or part-repayment loan, you will repay a portion of your debt each month; a strategy that is more expensive in the short term, as it increases your monthly repayments, but pays off in the long term as it reduces the interest you ultimately have to pay.
Remember that some lenders levy early repayment charges if you terminate your loan early, so always be sure to discuss the cost of switching mortgage with a professional buy-to-let mortgage advisor.
More on remortgaging
It can already be worth switching mortgage regularly in order to capitalise on the best rates available. Now, with the potential for rocketing monthly costs around the corner, this has become truer than ever. By switching to a cheaper loan, you can reduce your monthly repayments and possibly offset some of the added tax costs.
Because rising interest rates could also be on the horizon, locking in to a long-term fixed rate could be tempting – though this can be counterbalanced by the (often) higher switching fees and limited availability of long-term products. You could find that a low-rate tracker deal remains competitive even as rates begin to increase; the Bank of England has said that eventual rate rises will be measured and gradual, and will plateau at a far lower level than those seen prior to the financial crisis.
A further benefit to switching mortgage is the potential for equity release. If some of your properties have performed better in terms of capital growth than others, for example, you could use a remortgage to release equity from them in order to reduce your debt elsewhere. This could bring down your overall level of borrowing and potentially reduce the interest cost of your entire portfolio.
As always, make sure that you discuss your options with a mortgage advisor before taking action.
Becoming a business
You could argue that transferring the UK’s rental stock from the hands of private individuals to limited companies is the government’s long-term goal – particularly given that a reduced rate of corporation tax has counterbalanced the decision to withdraw higher-rate relief from individual investors.
Companies will continue to pay tax on profits alone, and will pay corporation tax at a rate of just 20% (19% from 2017; 18% from 2020). There are, however, a number of other tax implications when incorporating a property company – including a potential double-taxation on profits that are withdrawn as dividends – and you might find it harder as a company to secure mortgage finance.
Buying to let as a company is vastly different to doing so as an individual, so be sure to discuss the choice in depth with a professional financial advisor or tax accountant before making a decision.
- White, A. “How today’s budget will affect landlords”. The Telegraph. 9 Jul 2015.
- “Research suggests many UK landlords don’t break even”. Property Wire. 9 Sep 2014.