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Buy-to-let property has the potential to be a great investment opportunity, and especially attractive to people who prefer tangible assets rather than stocks and shares. However, it is worth noting that the financial landscape is changing, and so it is worth considering how a portfolio of properties might best be managed.
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Tax changes that affect buy-to-let landlords
As of April 2017, changes to taxation announced in the government’s 2015 Budget began to be phased in. These are likely to have an effect on cash flow and overall profitability for landlords, especially those with large portfolios. By 2020, landlords will only be able to claim tax relief for mortgage interest at the basic rate of 20%. This replaces the system whereby higher rate (40%) and additional rate (45%) taxpayers were able to claim tax relief for mortgage interest payments on buy-to-let properties at their prevailing tax rate. The change is being phased in gradually and is already underway.
At the same time, changes are being introduced to corporation tax. In the 2017 Budget it was cut to 19% and it will drop again to 17% in 2020. If you choose to operate your buy-to-let business as a limited company, then that rate will apply to annual profits up to £300,000.
Advantages of Limited Company Buy to Let
The main advantage to be gained is in relation to tax efficiency, as mentioned above. While any money you draw out of the business will be taxed at the prevailing rate, by leaving money in the business and using it to renovate, refurbish or expand your portfolio, you will pay the lower rate of corporation tax.
Disadvantages of Limited Company Buy to Lets
On the flip side, not all lenders offer limited company buy-to-let mortgages. In the case of those that do, most require the company to be set up as a special purpose vehicle (SPV) rather than a trading company. Also, a limited company buy-to-let mortgage can be more expensive than an equivalent personal buy-to-let mortgage.
You should also bear in mind that there could be additional administrative costs related to operating as a limited company and that property sold via a limited company will be subject to corporation tax rather than capital gains tax.
A further consideration is whether to utilise a buy-to-let portfolio mortgage.
What is a buy-to-let portfolio mortgage?
Buy to let portfolio mortgages are intended for those landlords who have – or who plan to have – more than one buy-to-let property.
Although a portfolio mortgage can incorporate mortgages for several properties, some or all of which might attract different interest rates, it is treated as a single mortgage account by the lender. Rental income and the loan-to-value ratio are averaged out across the portfolio, meaning any surplus may be leveraged to extend the portfolio.
Say, for example, that the total value of the portfolio is £2.5 million and the outstanding loan amount is £1.5 million. Assuming that the maximum loan-to-value ratio of the total portfolio is 75%, that means you potentially have access to additional borrowing of £375,000 which you can use to extend your portfolio.
Say you purchase a property worth £200,000; once that has been added to your portfolio, you still have available credit of £325,000. That is derived from a new total portfolio value of £2.7 million (£2.5 million plus the new property valued at £200,000) with an outstanding total loan amount of £1.7 million (the previous loan amount of £1.5 million plus the mortgage against the new property).
The more properties are owned, the more any risk is spread. It becomes easier not only to draw on the revolving credit facility the portfolio mortgage offers, but also to accommodate periods when rental properties are untenanted; the overall income from the tenanted properties will make up the shortfall.
How we can help
Anyone wanting to know more about portfolio landlord mortgages should seek specialist advice. Here at Just Mortgage Brokers we have a team of specialists with the necessary depth and breadth of experience to guide you through your options and find the best solution for your needs. Contact us today for expert advice with regard to managing your buy-to-let portfolio.