In an attempt to help first time buyers and boost home ownership, numerous policy changes since 2015 have made it clear that the government is targeting the buy-to-let market and the purchase of second homes.
The 2015 Autumn Statement saw the then Chancellor, George Osborne, announce a 3% stamp duty land tax on such purchases, which came into effect in April 2016.
In addition to private investors, including those purchasing a second home either for themselves or another family member, those hit by the SDLT changes included large-scale investors.
Added to this, as of April 2017 mortgage interest relief has been gradually reduced from 45% to the basic rate of tax for second homeowners, along with buy-to-let landlords.
However, this change does not affect limited companies, which can still offset 100% of their mortgage payments. Furthermore, no income tax is payable on retained profit, meaning more money is available to reinvest. Although corporation tax is payable, this is still lower than the higher rate of income tax payable by an individual. It currently sits at 19%, and will be reducing to 18% in 2018, and 17% in 2019.
It is perhaps not surprising that limited companies have therefore grown in popularity.
In October, Mortgages for Business found that in Q3 2017, 79% of buy-to-let mortgage purchase applications were being made via a limited company. According to the latest edition of the Limited Company Buy-to-Let Index, this represented an increase of 6% over Q2.
Commenting on the figures, Steve Olejnik, COO at Mortgages for Business, noted that: “There was, unsurprisingly, a spike in SPV registrations last year.”
He added: “The 2015 Summer Budget has noticeably sped things up, with 2015 and 2016 showing the strongest growth in registrations in the sample, whether proportionally or in absolute terms.”
They do however come with some disadvantages. For starters, only a limited number of lenders offer mortgage products for limited companies. In Q3 2017, the Limited Company Buy-to-Let Index showed that of the 36 buy to let lenders on the market, only 42% were offering products for limited companies.
In addition, although the number of buy-to-let mortgage products on the market increased by an average of 13 products across the quarter to 1,233, the number of products available to limited company borrowers fell to 26; lower than Q1 and Q2 of 2017.
The Index also noted that the rates available to limited companies were “still somewhat above the market average, as the cheapest products are typically offered by lenders without the systems or underwriting skills in place to offer products to limited companies.”
Nonetheless, the index found that “the softer affordability testing that is commonly applied to limited companies” led to higher than average loan amounts.
In June, independent broker Private Finance highlighted the danger that landlords setting up limited companies could be left out of pocket due to higher interest rates. It found that only landlords with four or more properties benefited from a limited company structure.
Shaun Church, director of Private Finance said: “Landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.”
The latest bit of bad news for the buy-to-let market came in the Autumn Budget, with Chancellor Philip Hammond announcing changes to the way capital gains tax (CGT) is calculated. Indexation relief, which allows a reduction in CGT depending on the length of time the property is owned, will be frozen from January 2018.
Titlesolv policies can be instrumental in enabling the buy-to-let deals to progress where mortgage lenders are being cautious about those transactions in respect of which there are question marks over the title.