BTL Regulatory Changes
Here you will find any regulatory changes that have come from the PRA (Prudential Regulation Authority) and the FCA (Financial Conduct Authority).
Lenders buy to let matrix
Lenders have been busy implementing changes and all the details have been updated on our Buy to Let Matrix.
Underwriting process for portfolio landlords
Lenders are now required to adopt a specialist underwriting approach for Portfolio Landlords, e.g. those landlords with four or more mortgaged buy to let (BTL) properties.
One of the reasons behind the 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.
Portfolio Landlords may experience a tougher process on their next BTL purchase and find that the specialist underwriting process requires a lot more information.
Changes to tax relief for residential Landlords
The tax relief that landlords of residential properties get for finance costs will eventually be restricted to the basic rate of Income Tax, this started to roll out 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 These will be gradually withdrawn and replaced with a basic rate relief tax reduction.
|Tax year||% Of financial costs deductible from rental income||% Of basic tax reduction|
The finance costs that will be restricted include interest on:
- Loans - including loans to buy furnishings
Other costs affected are:
- Alternative finance returns
- Fees and any other incidental costs for getting or repaying mortgages and loans discounts, premiums and disguised interest
Who will be affected?
Those affected are
- UK resident individual that lets residential properties in the UK or overseas
- non-UK resident individual that lets residential properties in the UK
- individual who let such properties in partnership
- trustee or beneficiary of trusts liable for Income Tax on the property profits
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:
- UK resident company
- non-UK resident companies
- landlord of Furnished Holiday lettings
They will continue to receive relief for interest and other finance costs in the usual way.
The first tax year that finance costs were reduced was the 2017 to 2018 tax year. 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% = -£400
Final Income Tax = £3,300
The tax reduction is calculated as 20% of the lower of:
- Finance costs not deducted (25% of £8,000) = £2,000
- Property Profits = £4,500
- Adjusted total income (exceeding Personal Allowance) = £18,500
The lowest amount us finance costs, so £2,000 x 20% = £400 Tax reduction
Buy to let taxation changes
New taxation changes are being phased in from 2017 and will be fully implemented by 2020. These will have a significant impact on most landlords.
The previous 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.
What has changed
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 was 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 and 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:
- Current corporation tax is 19% and will be 18% by 2020.
- Every individual will have a tax free dividend allowance of £5,000. After that dividends will be taxed at 7.5%, 32.5% or 38.1% depending on whether the individual’s income falls into the tax bands.