Myth busting on buy-to-let

There’s been a lot of negativity flying around about buy-to-let, with commentators reeling off lists of woes facing landlords in today’s market.


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Tuesday 9th April 2019

Alan Cleary Precise

But I’m not sure that’s fair. From where I am sitting the buy-to-let market is going great guns, with volumes growing steadily and appetite from landlords for both purchase and remortgage holding strong.

So I thought I’d take this chance to bust some of the myths that seem to have grown around the market in recent years.

Myth #1: Landlords can’t remain profitable

This is utter fantasy. Some landlords won’t remain profitable as they feel the impact of losing tax relief on their mortgage interest. But to be honest, the number of landlords for whom this is true is low and getting lower.

The vast majority of landlords knew where their weak properties were and have already made adjustments to their portfolios to protect their profitability. We’ve seen a range of approaches to improving yields where the tax changes have bitten, including selling up one or two properties from a portfolio to pay more equity into their remaining properties, thus bringing down LTV and mortgage costs.

We’ve also seen portfolios rebalanced to include more properties in areas of the country where prices are lower and rental incomes proportionately larger. Popular property types have also shifted away from single units to multi lets and HMOs.

Myth #2: There aren’t opportunities for landlords anymore

House price inflation may be subdued at the moment, but landlords invest for both capital and income purposes and there are still plenty of opportunities for growth and profit.

Lower capital outlays are a good thing for landlords. In fact, we are seeing strong appetite on the purchase side of our business for exactly this reason. Rents are also traditionally resilient in the event of a property market downturn, so income is insulated.

The removal of tax relief has had an impact on how much income landlords can retain but as already mentioned, we’ve seen a shift away from individual buy-to-let towards the use of limited company buy-to-let on purchase lending. Recent research we conducted with BDRC1 and found that almost two in three (64%) landlords with more than four properties plan to buy using a limited company structure this year.

Myth #3: Limited company buy-to-let is the only way to buy

Our research found that only 17% of landlords with one to three properties plan to use limited company status. This makes perfect sense to us. Landlords with one or two properties can still be professional but their financial situation is likely to be very different from portfolio landlords with 100 properties.

It’s possible that these landlords are those who’ve opted to use buy-to-let as part of their pension planning; setting up and running a company for this type of landlord is almost certainly not going to be the right approach.

Tax advisers will consider their income position all around, as well as the income position of their partner and if overall income is less than £100,000 between partners, a limited company may not offer any financial benefit. Basic rate tax is now payable up to £50,000. A couple’s combined allowance is therefore £100,000.

That means the ‘loss’ of tax relief may not hit them – as even when the full changes come in, they will still be able to claim a tax credit of 20%. The change in regime does mean this is applied to revenue not profit as tax relief has been, but nevertheless, that’s a sizeable level of income annually to earn.

While this is oversimplifying the scenario considerably, what this highlights is just how important it is for landlords of all shapes and sizes to take professional tax advice from a specialist as well as taking mortgage advice from their broker.

Author:
Alan Cleary Precise Mortgages
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