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Buy-to-let and the business protection opportunity

15 February 2016 | News article

Buy-to-let has seen a resurgence in recent years: historic low interest rates and increasing house prices offer landlords attractive rental incomes and capital gains. However, investors are under threat from impending tax hikes and an increase in stamp duty. Savvy landlords keen to protect their investments have a number of options, offering advisers additional business protection opportunities.

Buy-to-let tax changes: what your clients need to know

In an attempt to “level the playing field” between Britain’s two million private landlords(1) and ordinary house buyers, the Government is slashing the amount of tax relief private investors can claim on mortgage interest payments. Currently, landlords can fully deduct mortgage interest costs from their rental income, and only pay the tax on the difference at the highest tax rate they personally pay. This gives the highest rate tax payers an effective rate of relief of up to 45% on their mortgage interest payments.

Under new arrangements due to be rolled out from 2017, private landlords will owe tax on the full value of their rental income (not just the difference between the income and their mortgage interest payments), and by 2020, they will only get a tax credit worth 20% of their mortgage interest payments, which will be deducted from the tax due.

For example, your client is a private landlord and has a £150,000 mortgage on a £200,000 property, and a 40% taxpayer. The rental income is £800 a month (£9,600 a year) and the interest on the mortgage is £500 a month (£6,000 a year). Currently, tax is due on £3,600 difference (at 40% or £1,440). By 2020, your client will be taxed on the full £9,600 income (£3,840 at 40%) – minus a 20% tax credit for the mortgage interest (£1,200) meaning a tax bill of £2,640.

Other implications as a result of the changes include:

  • Many basic-rate taxpayers will pay the highest tax rate – despite earning no additional income
  • Tax will still need to be paid on zero rental income and even losses (where mortgage payments are higher than rent)
  • All buy-to-let properties and second homes will be subject to an additional 3% stamp levy duty (except those owned by companies with 15 properties or more, although the Government is expected to close this loophole(2)).

How clients can potentially side-step the changes

Private landlords have a number of options to protect their rental income and reduce their tax bill, including:

  • Increasing rents to offset a loss in income
  • Paying down mortgages (to pay off the mortgage quicker)
  • Creating limited companies to manage a portfolio of properties tax efficiently as businesses are unaffected by the changes

Managing properties through a limited company could lead to significant savings: mortgage interest can still be deducted when calculating rental profits, which would be taxed at corporate rates (20%).

Creating limited companies: the pros and cons

Buy-to-let mortgages are typically more expensive, although interest rates are continuing to fall. And although there are costs associated with setting up limited companies and ongoing administration fees, rental income is separate from PAYE salary and can offer substantial tax advantages.

However, clients considering this route will need to ‘sell’ the property to the company, which could result in a capital gains charge for the individual, as well as a stamp duty charge for the new business. Your client might also have to pay an exit charge on their existing mortgages, and there will be costs to the company for transferring the loans.

Clients should understand forming a limited company isn’t suitable for all buy-to-let landlords – it is only an appropriate route for those who own multiple properties and are planning on keeping them over the long-term(3). It’s essential clients speak to an accountant before making any decisions.

The business protection opportunity

Clients who decide to manage properties through a limited company offer advisers a number of sales opportunities, including funding and mortgage advice.

Additionally, advisers can also recommend protection products designed specifically for businesses. These include:

  • Relevant Life Cover
  • This is a tax-efficient, life insurance policy that allows companies to offer death-in-service benefits to salaried employees and salaried directors. It is set up by the company, and then placed in trust to pay out a tax-free, lump sum on the death or diagnosis of a terminal illness of the employee to their chosen beneficiaries. Because the premiums are generally considered by HMRC as a business expense (so paid free from income and corporation tax) this type of cover can be significantly cheaper compared to your client taking out personal life insurance. Many advisers often find Relevant Life Cover opens the door to other business protection conversations.

If the landlord (the business owner) dies, the company will continue to exist as it a separate legal entity. Your client’s loved ones will have a number of responsibilities, including valuing the business and meeting existing tenancy agreements. This may require (costly) specialist help. The proceeds paid from Key Person cover (life insurance that can include critical illness cover, written on the life of the landlord) can also be used to clear outstanding debt (including mortgages), allowing the family to draw a significant rental income from the business. Alternatively, the mortgage-free properties can be sold - at significant value, and the business wound down.

Some business protection policies include a number of value-added benefits, including free access to legal helplines and regulatory advice. These resources could be invaluable to landlords who have set-up limited companies to manage their property portfolio.

The number of buy-to-let mortgages owned by companies is soaring. Latest figures show nearly half of mortgage applications are made by businesses(4) – demonstrating landlords are taking action to protect their buy-to-let investments. Advisers looking to support clients should prepare by understanding how they can best protect landlords and make the most of this growing opportunity.

Marcus Primhak is Business Protection Manager at LV=

(1) Daily Telegraph, October 2015

(2) HM Treasury, December 2015


(4) Mortgages For Business, January 2016 figures

Liverpool Victoria Financial Services Limited, registered in England with registration number 12383237. County Gates, Bournemouth, BH1 2NF, UK