September 16th, 2016
Since George Osborne’s decision to reduce tax relief on buy to let mortgage interest payments from April 2017, buying to let has become a less tax efficient proposition to contractors. However, there could well be an option open to contractors to combat these changes.
Under current legislation, Landlords can deduct the running cost of their investment property and the monthly interest only element from the mortgage against the year-end tax bill. This gives contractors the option to vastly reduce their tax bill on the income derived from their property investments. From April 2017, contractors who pay higher or additional rate tax will be unable to offset the full mortgage interest payment for tax purposes, with the reduction in tax relief phased in over the next three financial years. This will reduce the profitability of many contractors’ investment properties that are owned personally rather – properties owned by a limited company will not be subject to this punitive tax change.
What’s the solution?
By utilising a company, rather than owning the property personally, contractors can declare the mortgage interest as a business cost and in doing so benefit from full tax relief on those payments.
This year alone limited companies make up 38% of mortgages for business applications according to This Is Money. These figures will increase further as buy to let lenders have cut their limited company mortgage rates in anticipation of increased demand.
How would this work for me?
From a mortgage perspective, the purchase of a property through a company is largely the same as if you were purchase personally. It is worth noting, however, that your conveyancer will need to be experienced in commercial mortgages in order to cope with some additional legalities involved, as extra work is required in order to satisfy the mortgage lender, such as securing a personal guarantee from the directors of the limited company, but really this is no different to buying it in your personal name.
Can I choose any lender?
Not every lender offers company buy to lets, however there is now a decent choice of lenders operating in this space providing some competition and in turn decent interest rates.
How much deposit will I need?
The deposit required for a company buy to let is just 15% for landlords who own at least one property already, or 20% if you’re new to buy to lets, so funding your property investment won’t require you to tie up an excessive amount of capital.
The average buy to let loan to value in the UK is 47% and with all-time low interest rates available on buy to lets, now is a great time to release capital and add to the portfolio, or even re mortgage and take advantage of the fantastic rates.
Buy to let remains a credible investment for contractors provided that some simple steps adhered to. To find out more, download our free guide to buy to lets, or contact your mortgage consultant.
Article by: Jon Hatfield, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Sarah Middleton, Public Relations Manager
Tel: 01489 555 080