Advice for portfolio investors on how to expand their portfolio, written by our Director, Karl Griggs, has been published by key industry publication “What House”. You can see the article on the “What House” website here, or read the full article below.
When the time comes to expand your portfolio, whether you already have one property, or five, there are certain things to bear in mind, namely the recent and upcoming changes to the tax and lending environment for landlords.
1. New stamp duty levels for landlords
On April 1st 2016, the government raised stamp duty on additional property including buy-to-lets. Each band of property transaction is now subject to an additional 3% tax (except those worth under £40,000). If you would like details of each band, see our guide to stamp duty for landlords for full details of the changes. Landlords now need to be aware of this extra cost when buying and make sure the finances are there to cover it.
2. Reduction of tax relief for landlords
From 6th April 2017 landlords who purchase properties as individuals will lose higher rate income tax relief on loan interest and other property finance costs, while still paying tax at their highest rate on the profits generated from their rents. Over the following four years, the relief allowed will reduce until in 2020 and 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
However, because this is a tax on individuals, those landlords who choose to buy property as a limited company will be exempt. This could prove a tax advantage but will also restrict the number of lenders that currently provide finance on a loan. The high street BTL lenders do not currently provide finance to limited companies for property mortgages so going through down this route will limit your mortgage options to more specialist lenders. This may fit with some landlords’ plans but it may give others pause for thought.
It is therefore a personal decision whether to buy a property as an individual and budget for the reduced tax relief or as a limited company but to have a smaller pool of lenders to go to. Ultimately, property investors should consult their accountants and determine what will be the best course of action for them.
3. Upcoming increased stress testing and changing affordability rules
Due to concerns about the stringency of stress testing of landlords by lenders, the Bank of England has proposed in a consultation that lenders should be stricter when deciding whether or not to provide a loan. Due to end in June, the impact of the consultation could be felt as soon as August.
As well as looking at rental income, lenders may need to review investors’ wider financial situation, where personal income is used to support monthly interest payments. The Bank of England is also encouraging lenders to stress test using a minimum interest pay rate of 5.5% as opposed to any historic lows. As a result most investors will probably be able to borrow less and need to find more of their own money to meet that shortfall when investing. The stress testing calculation will also apply to remortgages, so will limit the amount of capital raise for re-investment from within your own portfolio.
This is something that will affect all property investors and should be taken into account when next talking to your broker or a lender about finance.
Although the landscape for investors is changing – keeping everyone on their toes – growing a portfolio can still be a profitable exercise. However, with the current environment, there are more factors for investors to consider and we always urge seeking professional advice regarding your individual situation.
By Karl Griggs, Director, CPC Finance