Buy to Let The impact of tax & other events By David Whittaker, Managing Director April 2016
George Osborne s Recent Activities Summer Budget 2015 8 th July Loss of wear & tear allowance, wef. 5 April 2016 Reduced mortgage interest offset of higher and high rate tax payers - tapered from 5 April 2017 - fully from 5 April 2020-25% loss of offset
George Osborne s Recent Activities Autumn Statement 2015 25 th November 3% additional SDLT on purchases of additional residential property from 1 April 2016 For properties of 40,000+ Must have exchanged on or before 24 November 2015 to avoid
George Osborne s Recent Activities Spring Budget 2016 16 th March No major negative impact for landlords/investors BUT CGT reduced from: - 18% to 10% - lower rate tax payers - 28% to 20% - higher & high rate tax payers For all assets EXCEPT residential property
Incorporation Setting up a Special Purpose Vehicle Ltd Co A company that holds property only Form a company - 30 (Companies House) Appoint director and issue at least one share Open bank account
Incorporation Legal and taxation implications Company is separate legal entity from its owners Transfer is actually a sale of assets - CGT on individual - SDLT in SPV - New mortgage required
Incorporation Capital Gains Tax s.162 Relief Ramsey decision in 2013 Business not passive investment Gain is rolled over into cost of shares in SPV
Incorporation: s.162 Relief Individual s Position SPV Initial Purchase At Date of Sale At Date of Purchase Value of property 600,000 950,000 950,000 Mortgage 450,000 450,000 450,000 Initial equity 150,000 150,000 500,000 Unrealised gain 350,000 s.162 Relief 350,000 Base cost of shares for future CGT 150,000
Incorporation Stamp Duty Land Tax relief Most sales will requirement payment of SDLT SDLT calculated using market value at date of sale 3% surcharge automatically applies Only surcharge exemption: formally constituted partnerships
Incorporation Trusts Various schemes to avoid CGT and SDLT Require landlords to transfer beneficial ownership to SPV but without transferring legal ownership Done without approval or consent of lenders
Incorporation Buy to Let Mortgage Lenders H2 2015 Buy to Let Mortgage Products H2 2015 Lenders offering products to Ltd Co borrowers Lenders with no Ltd Co products Products available to Ltd Co borrowers Products available to Individuals
BTL Lending Year Volume Lenders (average) Products (average) 2014 27.4bn 28 (6 offering Ltd Co) 762 (79 for Ltd Co) 2015 37.5bn 33 (10 offering Ltd Co) 914 (99 for Ltd Co) 2016 (projection) 43bn 37 (14 offering Ltd Co) 1,040 (155 for Ltd)
BTL Lenders: Security Overview Security Lenders First Charge & PGs Foundation Home Loans, Kent Reliance, Keystone Property Finance, Precise First Charge, PGs Fixed & Floating Aldermore Bank, Axis Bank, Fleet Mortgages, Norwich & Peterborough, Paragon Mortgages First Charge, PGs Fixed & Floating Debenture MetroBank, Shawbrook Bank, State Bank of India
Future Stress Tests Current model 125% @ 5.5% Stress tests for immediate future: - Ltd Co / lower rate tax payers 5.5% @ 125% - Higher rate tax payers 156 @ 5.5% - High rate tax payers 167 @ 5.5%
Data Set Analysis > 200m Av Loan Yield % of Data Reduction at Stress Rate 125 156 167 <5 yrs 181,250 6.2% 69% 3.8% 14.0% 17.9% 5 yrs 237,802 5.9% 31% 8.0% 20.9% 25.1% Combined 195,703 6.1% 5.1% 16.2% 20.1% Ltd Co percentage is 35% on 5 years and 31% overall No difference in average loan size in Ltd Co cf overall
Future Stress Tests PRA CP11/16 - Consultation until 29 June 2016 - More visibility of other income - Stress tests above 5.5% Mortgage orphans Basel III proposals on risk asset weighting - 38% to 91%
BTL: Things to Avoid Do NOT give advice on incorporation: - Sale NOT transfer - Ltd Co structure (shares, director s loan account & mortgage) - SDLT exemption (specific rules) But do illustrate you can fund either personal or Ltd Co BTL
BTL: Things to Avoid As lenders show more curiosity on income: - Watch out for irregularities on Tax Returns vs. portfolio ownership - Do NOT accept clients asking you to arrange finance on bank statements and AST evidence only
Thank you For a copy of this presentation please contact: David Whittaker, B.Eng (Hons) Tel: 01732 471601 Email: davidw@mortgagesforbusiness.co.uk