Here you will find any regulatory changes that have come from the PRA (Prudential Regulation Authority) and the FCA (Financial Conduct Authority).
Lenders have been busy implementing changes and all the details have been updated on our Buy to Let Matrix, which can be found here.
Try our new Rental Calculator here.
As set out in the Prudential Regulatory Authority’s (PRA) Supervisory Statement 13/16 Underwriting standards for buy-to-let mortgage contracts, lenders will be required to adopt a specialist underwriting approach for Portfolio Landlords, e.g. those landlords with four or more mortgaged buy to let (BTL) properties. This new approach should be in place by 30 September 2017 at the latest.
One of the reasons behind the new process is that the PRA has found that the rate of arrears increase as a landlord’s BTL property portfolio increases.
The PRA does not prescribe exact requirements but provides guidance, which includes:
Portfolio Landlords may experience a tougher process on their next BTL purchase and find that the new specialist underwriting process requires a lot more information.
The tax relief that landlords of residential properties get for finance costs will eventually be restricted to the basic rate of Income Tax, this will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.
Some financial costs will still be deductible in the transition period. These will be gradually withdrawn and replaced with a basic rate relief tax reduction.
% of Financial costs deductible from rental income
|% of basic tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
The finance costs that will be restricted include interest on:
Other costs affected are:
Those affected are:
All residential landlords with finance costs will be affected, but only some will pay more tax.
Those who won’t be affected by the introduction of the finance cost restriction are:
They will continue to receive relief for interest and other finance costs in the usual way.
The first tax year that finance costs will be reduced is 2017 to 2018. This example shows the withdrawal of 25% of finance cost deduction and given as a basic rate tax reduction.
Bob has employment income of £25,000 and rental income from residential property of £11,000 per year. His mortgage interest is £8,000 per year.
|Salary before Tax =||£25,000|
Property Income Calculations:
|Rental Income =||£11,000|
|Finance Costs (£8,000 Mortgage Interest x 75%) =||- £6,000|
|Other allowable expenses =||- £5,000|
|Property Profits =||£4,500|
|Total Income =||£29,500|
Income Tax calculations:
|£11,000 x 0% =||£0|
|£18,500 x 20% =||£3,700|
|£0 x 40% =||£0|
Less 20% Tax reduction for remaining finance costs calculated on 25% of finance costs
(£8,000 x 25% = £2,000) x 20% =
|Final Income Tax =||£3,300|
The tax reduction is calculated as 20% of the lower of:
The lowest amount us finance costs, so £2,000 x 20% = £400 Tax reduction
The Prudential Regulation Authority (PRA) has agreed on a phased implementation process for the new BTL underwriting standards.
In their supervisory statement issued October 2016, lenders will be required to implement the affordability and interest rate affordability stress tests by 1 January 2017, with the remainder of the required changes by 30 September 2017.
For BTL applications, lenders will be required to determine:
When assessing affordability, future interest rate increases should be taken into consideration over a minimum period of five years, unless the rate is fixed for five years or more at the start of the contract, and the borrower’s refinancing risk at the end of the fixed/capped rate period.
The minimum ICR industry standard remains at 125%.
A minimum borrower interest rate of 5.5% must be used during the first five years of the BTL mortgage.
Portfolio Landlords (those with 4 or more mortgaged BTL properties) will be subject to a specialist underwriting approach based on their knowledge of the borrower, their portfolio, experience, assets and liabilities, cashflow and alternative sources of income.
Exclusions to the new standards include:
Some lenders have already made changes to their BTL calculations. To help you understand what lenders are currently offering we have produced a Buy_to_Let_Matrix (PDF: 166KB) which will be updated over the coming months.
Are you aware of the up and coming taxation that were unveiled in George Osborne’s Summer Budget on 8 July?. These changes are being phased in from 2017 and fully implemented by 2020 and will have a significant impact on most landlords.
The current tax relief available on buy to lets has historically made them an attractive investment for any investor, however the new rules may make both new and existing investors think carefully when purchasing an investment property, in particular their tax position.
Landlords can deduct qualifying expenses and mortgage interest from any profits gained before paying tax.
Tax relief is at 40% for a higher rate tax payer, and a top rate tax payer would receive 45% tax relief on their interest costs.
From 2020 Tax relief will be restricted to 20% for everyone - the reduction will be phased in over the four years.
The wear & tear allowance of 10% generally calculated as 10% of the gross rents will be abolished in April 2016 - Investors will only be able to deduct the actual cost of replacing furnishings in the tax year of the replacement.
This (especially as interest rates rise) for investors with significant levels of debt will see an overall significant increase in costs.
An example of this:
A top rate tax-payer owns an investment property worth £2m financed by a loan of £1.2m with interest charged at 3%. This generates a gross income annually of £80,000.
|Wear & Tear||(£8,000)|
|Less loan interest||(£36,000)|
|Tax at 45%||£16,200||£36,000|
|Less interest at 20%||(£7,200)|
Other changes that may have an effect on the market are:
George Osborne made some significant changes to taxation for all second home or buy to let purchases in his budget this year.
The first of these changes is on stamp duty. Currently if you buy a residential home you pay stamp duty on the value, at a stepped rate that depends on the value of the property. You pay nothing on the first £125,000, then at each of four value thresholds a higher rate of tax is applied on the portion of the price above that level, up to 12 per cent on anything above £1.5m.
But from April 2016 anyone buying a second home or buy-to-let property will pay a 3 per cent surcharge on their stamp duty.
|property value||standard rate||buy-to-let/second home rate from april 16|
|Up to £125,000||0%||3%|
|£125,000 - £250,000||2%||5%|
|£250,000 - £925,000||5%||8%|
|£925,000 - £1.5m||10%||13%|
Rate applies to that portion of the purchase price (2) Properties up to £40,000 are exempt from stamp duty. Properties between £40,000.01 & £125,000 will be charged stamp duty on the full purchase price.
*Please Note: This document does not constitute tax advice, investors should not rely on the information given and should investors have any concerns/queries then they should contact their tax advisor.
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