George Osborne’s recent tax reforms have sparked a surge in landlords buying property through a company in order to safeguard tax reliefs, according to new findings.
Mortgage applications via a limited company, made through the lender Kent Reliance, increased by 300% in September 2015, compared with the same month in 2014, representing the highest level on record.
Incorporation is one way landlords can avoid the cuts to tax relief on mortgage interest unveiled by the chancellor in last year's Summer Budget.
These will be phased in between 2017 and 2020 and will limit the relief available to 20% for individual buy-to-let owners, down from as high as 45%.
With the stamp duty changes coming on top of earlier tax reforms, there is likely to be a surge of acquisitions made by landlords through limited companies.
However, incorporation is just one of many options available, to help landlords protect their profits.
Landlords need to do a serious portfolio review and work out how the tax changes affect them and what options there are to save, or make more money.
For example, remortgaging to get a better deal; renovating some old stock – these costs will be tax deductible; selling some properties; or increasing the rent.
The traditional buy-to-let model of using leverage to buy a property and hold it for the long-term has taken a big knock and the market is definitely less attractive than it was this time last year.
I do believe, however, that the recent tax changes alone won’t have a massive impact on the property market as a whole.
If you can buy either in cash or with far less leverage, then there will remain decent long-term money to be made.
Certainly the recent changes have made it a lot harder to make money in buy-to-let.
But where there are challenges, there are opportunities if you can think outside the box.
I have put together some options that landlords can consider to protect their profits:
- Review your properties and see if you can get planning on an existing property to increase its value, by adding an extension, or converting the cellars
- If you have a one-bedroom property, make it into a small two-bedroom property
- If you lack building skills/knowledge, but have equity or cash, partnering with someone more skilled in building/renovation work would be profitable
- Consider changing a house into a House in Multiple Occupation and increase the rental income
- There is a real shortage of properties right now and prices are at a record high, so consider selling some stock
- The tax changes don’t affect Limited Companies. Consider setting up a Limited Company and using this structure to hold your properties.
- Are you an active or passive investor? Passive investors will be hit hardest by the changes. Active investors can find deals for other investors and create income streams there
- It will become far more important to buy property below market value. You can’t just buy £1 of property for a £1 anymore. Buying with a built-in discount will help ensure your investment is just that
- Consider other specialist areas of property investment which compliment traditional buy-to-let. For example, can you manage properties for other landlords and charge a fee for that service?
*This article was written by Peter Armistead, a property investor with over 80 properties in Manchester and managing director of Armistead Property