2016 Budget changes to the mortgage interest tax shield. What are the strategic considerations and moves you can make?
- Like many other buy to let strategic operators, we were all left in awe by the sudden surprise of the buy to let mortgage interest rate relief change as part of a seemingly left wing 2016 budget delivered by the incumbent Conservative party. Mortgage interest rate relief is now only taxable at the basic rate of 20% as opposed to 45%.
- Mortgage interest rate relief supposedly costs the government £6.3Bn a year, thus driving the proposed policy. Did the Conservatives impose this new policy to placate an overwhelming number who wished to blame their lack of success in the property market on the so-called greedy BTL property landlords? Maybe, and maybe it works well as a less punitive budget impact response to harsher policies being advocated by the Labour party and the Greens wishing for longer tenancies, limited rental hikes and the full removal of interest rate relief.
- BTL landlords may very well argue that the entire strategy is like a business and debt interest costs should benefit from a tax shield. However, we need to be practical in a dynamic market such as property in which legislation with regards to planning, lease contracts and tax changes are frequent.
- The proposed change will be staggered however, over a 4 year period commencing from April 2017. But how exactly does this work? We have analysed the proposed change here to see the potential effect that have left many pondering a mix of new ways around this strange new policy.
The potential budget impact on the market…
- A flood of properties coming on to the market for sale? Some have suggested this, which may be favourable for first time buyers in terms of increasing housing stock available for residential purchases and in a current environment of high property prices versus average incomes. Whether the increase in property stock results in a lowering of house prices is debatable but it may very well serve to be a depressing factor in any strong house price inflation that may otherwise occur.
- Landlords retaliate with a hike in rents? Some have said that BTL landlords will simply seek to compensate for net cash flow losses due to the increased tax contributions by increasing headline rents for tenants. Will this method actually work? We believe that the property market is suitably fragmented to avoid the majority of landlords colluding to raise prices. Basing decisions on this potential move by landlords is not believed to be wise. We would propose in not being reactive collectively but look to be proactive individually.
The strategic moves BTL landlords are contemplating…
- The correct tax efficient number of BTL properties held as an individual: One way to be proactive is analysing the correct amount of cash flow and buying the correct number of buy to lets that fits the basic rate of income, thus being tax efficient. This assumes that your primary career if you are a full time property investor. The income generated will hopefully face the same amount of income and tax that is faced under the current system. If you have another career, then it may make sense to look at other methods to be tax efficient, such as buying properties via a company vehicle.
- Switching properties into a company: This proposed move may be beneficial for many who seek passive rental income and enjoy a hold strategy. The cost of transferring existing property into a company may be punitive and prohibit such a move (with capital gains, stamp duty etc). Therefore, it may be more worthwhile for many BTL portfolio landlords to sell existing portfolios and start over via a new property holding company. Please note that commercial mortgages are required for companies and these have typically been more expensive than personal mortgages. It is asserted that the mortgage market will enjoy an influx of new BTL commercial mortgages due to an expected increase in BTL landlords seeking to acquire via company vehicles. (Click here for a useful link to commercial mortgages)
- Incorporate more development opportunities: Another way to tackle the proposed tax changes is to look again at development opportunities as opposed to the simple passive income BTL strategy. The positive cash flows would be less consistent as a result but could be lucrative if performed in the correct manner. Please be aware of property flipping being recognized as trading, thus if you are a higher rate tax payer you could end up paying 40% on the profit rather than the typical 28% capital gains tax rate (or 18% if you are a basic rate tax payer). Thus, you may end up having to look at doing so via a company in any case.
London Property Analyst is not a qualified tax advisor and the above does not purport to be and should not be relied upon as tax advice.