If I were ever to be invited on Mastermind, buy-to-let legislation would be my specialist subject (stop yawning, you at the back).
I know my Housing Act 1988 from Housing Act 2004, my Section 24 from Article 4 and everything in between.
I also know a great deal about the buy-to-let tax regime, which is very useful in my line of work, as it is to you in yours.
But I also know all too well that I am in no way qualified to advise any landlord on their tax affairs. And, as a mortgage broker, neither are you of course. It is simply not allowed.
It feels somewhat counterintuitive to spend the time required mugging up on a subject without being able to overtly show off our knowledge. But that is exactly what is required of a good mortgage broker when it comes to buy-to-let tax.
I’d highly recommend UK Tax Relief on Finance Costs* as a handy educative guide. You need to understand the tax framework in order to understand your clients’ business. But when it comes to advice you are obliged to hand them on to a qualified tax adviser – not an accountant – a point I’ll come back to.
As we’ve just passed the fifth anniversary of the imposition of a tighter tax regime on the nation’s landlords, let’s take a canter through what has happened.
The 2021/22 tax year was the second tax year in which landlords only got a 20% tax credit on their interest payments, instead of being able to deduct mortgage (and other) expenses from their rental income.
When the changes started being introduced in 2017, everyone predicted that the squeeze would push up rents as buy-to-let profits fell, prompt more landlords to transfer their properties to limited company ownership and force some out of the market for good.
Did that happen? Yes, yes…and maybe. First the maybe. The number of landlords in the UK dropped from 2.88 million in 2017 to 2.66 million in 2019, a seven-year low, according to letting agency Hamptons. A harder tax environment probably played a part in some of those sales, but with so many variables in the mix it is impossible to come to a decisive conclusion.
Were rents pushed up? My word, yes. The average UK rent soared from £777 in Q4 2017 to £1,068 in Q4 2021, according to Rightmove.
Again, there were other factors to take into account, such as inflation and severe supply shortages in some areas. But a squeeze on landlords’ margins had to be a big push factor in them increasing rents.
Did more landlords transfer their properties to limited company ownership? Yes, with bells on. The move to limited company buy to let has been a seismic shift. Hamptons calculates that over the last four years, the number of landlords who have put their buy-to-let properties into a company, rather than holding them in their personal name, has doubled.
In total, there were 47,400 new buy-to-let companies incorporated in 2021 across the UK according to Companies House data, reaching a new high of 269,300 by the end of last year.
The reason for this shift is plain and simple: transferring properties to, or buying properties through, limited company ownership brings a range of financial benefits including a corporation tax level significantly lower than a higher rate tax payer’s income tax level, at 19% compared to 40% or 45%.
But whether or not any one particular landlord would benefit from transferring to or buying within a limited company is rarely plain and never simple – hence the need for a tax adviser, who will have a specialism in tax matters that goes beyond the advice an accountant can provide.
*UK Tax Relief on Finance Costs is an educative guide for buy-to-let brokers, produced by EY and Kent Reliance for Intermediaries, part of the OSB Group.
Roger Morris is group lending engagement director at Kent Reliance for Intermediaries (part of the OSB Group)
