Paragon – Landlords taking action to mitigate higher tax costs

Landlord action to mitigate higher tax costs will lead to a lower level of buy-to-let remortgage transactions going forward according Paragon’s PRS Trends Report for Q1 2019. Nearly six out of ten (58%) landlords reported an increase in their 2017-18 tax bill.

Paragon’s latest quarterly survey, which tracks the experience of more than 200 landlords with an average of 12.8 properties and over 20 years’ experience in the UK’s Private Rented Sector (PRS), shows that while landlords in this group remain engaged in the sector, they are now prioritising measures to bolster financial strength over portfolio expansion.

Specifically, the survey shows how landlords have scaled back their buying intentions, reduced their reliance on mortgage debt and improved affordability by spending less of their rental income on mortgage payments.

For example, the proportion of landlords looking to purchase property has fallen from between 15-20% before the announcement of tax and regulatory changes in 2015 to just 7-10% today.

Average portfolio gearing – which measures the proportion of debt finance relative to a portfolio’s overall value – has fallen from 40% in 2014 to 33% today, with landlords who have three or more properties borrowing 36% of their portfolio value on average.

Meanwhile mortgage costs as a proportion of rental income are down from 30% at the beginning of 2017 to 27%, also aided by landlords re-mortgaging onto lower interest rate and longer-term fixed mortgage deals.

Latest figures from UK Finance highlight the extent of the switch in focus from house purchase to remortgage, with buy-to-let house purchase transactions in 2018 down by 34% to 66,400 compared with 2014 and remortgage transactions up 76% to 169,100 – some £27 billion in value – over the same time frame.

John Heron, Director of Mortgages at Paragon said:

“The shift in focus from portfolio expansion to financial strength has driven a surge in buy-to-let remortgaging, with lower interest rates and longer initial fixed periods helping landlords reduce finance costs and lock in greater certainty. However, it also extends the product maturity cycle, guaranteeing a reduction in the scale of opportunity to refinance buy-to-let mortgage deals over the next few years.”

Landlord Incorporation Checklist

If you’re contemplating a transfer of your rental property business into a Limited Company, this checklist will prove extremely useful for you.

1. Does the operation of your rental property business occupy at least 20 hours a week of time, including that of agents and contractors whose services you engage? If so, you may well be able to claim incorporation relief, which rolls the capital gains in your properties into shares in the company you are transferring the business into.
2. Do you share ownership, income, risk and expenses with at least one other person? If so, you may well be a partnership by de-facto, whether you are registered as such with HMRC or not. When a company takes over the whole business of a partnership a form of Stamp Duty relief applies, often meaning the company pays no Stamp Duty at all on the properties transferred into it.
3. Are the total liabilities of your business lower than the acquisition costs of your properties? If they are, then a pre-and-post incorporation Capital Account Restructure could facilitate the subsequent withdrawal of funds from the company without further personal tax consequences, e.g. net proceeds of property sales, retained profits or net funds resulting from remortgaging.
4. Decide whether or not you wish to refinance or retain your existing mortgage terms. We can assist you with either scenario.

Reasons to consider transferring your rental property business into a Limited Company structure include the following:-

• The ability to offset finance costs against rental income as a legitimate business expense
• Limited Liability
• More opportunities for inheritance tax planning
• The ability to raise capital though share sales and new shares issues
• Easier access to funding
• Retain profits for reinvestment, paying down debt or simply to accumulate cash at significatly lower tax rates than the higher rates of personal taxation

Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

Professional advice from a qualified Barrister-At-Law, insured up to £2,500,000 per claim.

There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. The presentation below provides a useful overview of some of the options you might like to discuss with us.

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