Buy-to-let and the self-employed
By Paul Brett, Managing Director, Intermediaries, Landbay
For many landlords, property investment is a full time job. For others it is a side-line, a way to earn some extra income or as a form of pension.
In the UK there are around 2.7 million landlords and 13% of them are self-employed as a landlord while 15% are self-employed but not just as a landlord as they have other work. That equates to around 756,000 landlords who are self-employed in some capacity.
These figures come from the English Private Landlord Survey 2021 (most recent survey) which also found that landlords with five or more properties are more likely to be self-employed as a landlord (39%).
Some landlords are cash buyers but many rely on mortgages. While prudent lending requires buy-to-let borrowers to have regular income, this is not usually taken into account to prove affordability. They do, however, need to prove that the rent they receive can comfortably pay the mortgage each month, this is to cover things like maintenance and void periods. So the affordability assessment is based on the income cover ratio, which, at Landbay, is either 125% or 140% depending on the applicant’s tax status.
Landlords and income
Different buy-to-let lenders have their own rules so some may want to see evidence of income for all applications but we don’t feel that is always necessary. For professional landlords who have been landlords for more than 24 months we don’t need a specific income. What we are more interested in is a proven track record for maintaining mortgage payments regardless of income. Usually this will be portfolio landlords and rent might be their only income.
The situation is different for new landlords and those who have had less than 24 months experience as we require a minimum income of £25,000. This is not used for affordability purposes, it’s just a reference point for the type of client we are lending to. We will accept up to two applicants and the combined income must be at least £25,000. It doesn’t matter whether the borrower or borrowers are employed or self-employed as we do the usual checks on income. Our criteria for self-employed is standard and we require two years of accounts (SA302) and three months of bank statements.
Many landlords hold their property in a limited company and this has become significantly more popular since the government started to remove tax relief on mortgage interest payments in 2017. Individuals buy-to-let landlords pay income tax on all income, including rental income of 20%, 40% or 45% depending on which tax bracket they are in. Limited company landlords pay corporation tax on their profits, which is 19% for companies with an annual profit below £50,000 but profits above this are taxed at 25% (raised in April 2023 from 19%).
Tax status has been the reason why incorporations have more than doubled in five years. In 2017 there were 148,874 buy-to-let companies in the UK rising to 309,643 at the end of 2022, according to the estate agency Hamptons. Around 40% of new buy-to-let purchases are through a company structure, up from about 10% in 2016 when tax relief on mortgage interest payments could still be claimed.
But it’s not just new purchases, some landlords have moved properties from their personal name into a company. However, this can be expensive as you are selling the property from an individual to a company so could be liable for stamp duty again and potentially capital gains tax. Intermediaries should advise their clients to seek specialist tax advice so they don’t make any expensive mistakes.
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