Refinancing buy to let properties – Section 24 issues

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Before we go into the
details please allow me to point out that Simon Misiewicz nor Optimise
Accountants are financial advisors or mortgage brokers. The information
provided below is for educational purposes from a tax perspective. The
information contained in this article does not constitute as financial advice.

1. Can
you remortgage on a buy to let?

It is entirely
possible that a property may be refinanced. An extra amount of equity will have
been built up if the property increased in value. A property may have increased
in value for a number of reasons:

– Property values in
the area have increased over time

– The property owner
added value to the property (more bedrooms, extensions, additional garages etc)

– The property may
have originally been purchased below market value

Data from UK Finance
shows that landlords remortgaged 14,700 properties in July.

A buy to let landlord
may be able to pull more money out of their existing mortgage provided that
there is equity in the property and the mortgage holder has a good credit
rating.

The
stress test criteria when refinancing your buy to let mortgages

The last thing to
consider is the % of mortgage interest repayment rate. Some lenders wish to see
an interest cover (stress testing) of 145%. This means that your net rent needs
to be 1.45 times more than the mortgage interest charges. Lenders may not lend
to you if the net rent does not meet or exceed their % criteria.

£10,000 net rent

£6,000 mortgage
interest costs

The above shows that
there is 1.67 times cover to meet the stress test condition of 145%. A buy to
let landlord wanted to increase the mortgage and the interest charges increase
as shown below:

£10,000 net rent

£7,500 interest rate

The stress test
criteria is no longer met. This is because the cover is reduced from 1.67 to
1.33 (£10,000 divided by £7,500). It is unlikely that the lender would approve
the remortgage application.

2. 
Do I need a deposit for a remortgage?

You will need to find
a deposit on any property that you pay. The amount of deposit that you require
will be from 10% to 50% (or even more) based on the below

– Your credit report
and credit rating, which you can investigate using Experian or Equifax

– The condition of the
property. The greater the disrepair the greater reassurances bank will require

– The risk profile of
the investment. The greater risk to the banks will mean more deposit

– How you are going to
buy the property. If the property is in your name or in a company with other
Joint Venture partners. The amount of deposit needed may be less if the buy to
let property is purchased in your own name.

– The age of the
mortgage holder. The greater the age the more equity the banks will want to
see.

Refinancing
a buy to let mortgage to release cash for a deposit on a property
investment 

Let us look at an
example. John has identified a property in Birmingham. It is a four-bedroom
house and is near the university. The property will be rented out to students.
There is a high demand so renting the property that is refurbished to a high
standard should not be a problem.

£200,000 house price

£50,000 deposit being
25% of the property value

The £50,000 can come
out of John’s savings account. John could refinance an existing buy to let
property that is just down the road in Birmingham, which is also let out to
students. He purchased the property 8 years ago when the house price was
£140,000. John knows that the property is in even better condition than the one
he is looking to buy. He speaks with his mortgage broker and they agree to
re-finance the existing property

£140,000 original
house purchase

£200,000 latest valuation on the
property

£60,000 increased the
value of the property.

The £60,000 allows him
to take out 75% as a re-mortgage. John decides to proceed with this
re-mortgage. John is now able to use the £45,000 for the deposit on the new
house.

£50,000 deposit
required

£45,000 released as a remortgage in
the existing buy to let property

£5,000 more required
for John to complete the purchase

John now only needs to
pull out £5,000 from his savings account to buy the new property because he
refinanced the existing Birmingham buy to let property.

The mortgage interest
cost associated with the refinancing is allowed to be offset against his
property income as it is used for investment/business purposes. 

3. What
are the implications of refinancing a buy to let property because of Section 24
mortgage interest relief cap?

Landlords from 2020/21
will not be able to offset the mortgage interest costs against their property
income. From 6th April 2020, buy to let property investors will only receive a
tax reducer of 20% of the mortgage interest costs. This means that high rate
taxpayers will lose 20% tax relief on mortgage interest costs. Additional rate
taxpayers will lose 25% tax relief on the mortgage interest costs.

You may not be able to
offset the full amount of mortgage interest costs if you refinance a property
and a high rate / additional rate taxpayer.

From the above
example, we could see that John already has one property in Birmingham and
looking to buy another. The first property had the following characteristics

£140,000 property
value

£105,000 mortgage

The mortgage had an
interest rate of 2%. This means that the mortgage interest costs per year were
£2,100. In 2016/17 John’s tax return looked like this from the one property in
Birmingham.

£15,000 income

£2,100 mortgage
interest costs

£5,000 other costs

£7,900 profit

As a high rate
taxpayer, he knew that 40% of the profits would be paid to HMRC. The amount of
tax that John had to pay on his Birmingham property was £3,160. This leaves
John with £4,740

6th
April 2020 mortgage interest relief cap impact in John’s property

If we roll forward a
few years we will see that the mortgage interest costs will not be allowed to
be offset against his property income.

£15,000 income

£5,000 other costs

£10,000 profit

£4,000 tax

(£420) tax reducer at 20% of the
mortgage interest costs of £2,100

£3,580 net tax to pay

We can see that John
now has £420 more tax to pay.

If John were to
refinance the original property and increase the buy to let mortgage by £50,000
the following would apply

£1,500 additional
interest because of the remortgage.

£300 tax relief

£300 lost tax relief
because of the tax changes

In this instance, John
is paying more tax as a result of the original mortgage. He is also paying more
interest on the remortgage without the benefit of the full tax reliefs.

To read more property tax saving ideas visit Optimise
Accountants blog page

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Refinancing buy to let properties – Section 24 issues | LandlordZONE.

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ARLA – Do not charge tenants for arranging repairs

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ARLA Propertymark has sought Counsel’s Opinion from housing barrister Erol Topal to clarify for it’s agent members if the tenant fees ban allows for a charge or commission to be made for arranging repair works. This has been a common and frequently asked question by agents since the legislation came into force on the 1st June 2019.

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“Incoherentâ€�, the Government’s approach to rental market says expert

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Renting Policy:

Perhaps not surprising with all that’s going on in Government that they’re eye is being taken off the ball with the rental market, but as it’s a crucial housing and election issue there’s really no excuse.

According to a former member of the Bank of England’s
Monetary Policy Committee, David Miles, the Government’s approach to the
private rented sector is “incoherent�

Mr Miles, now a Professor of Financial Economics at Imperial
College London, is arguing that “contrary to the Government’s stated aims,
there are ‘few signs’ that tax increases on the sector have benefited those
hoping to become homeowners. He argues that they are, meanwhile, left in a
rental sector with reduced choice and where rents are likely to be higher as
supply gradually shrinks.�

Since 2015 the Government has introduced measures to
restrict mortgage interest relief on the private rented sector to the basic
rate of income tax and imposed a stamp duty levy on the purchase of new homes
to rent out, says the Residential Landlords Association (RLA) in a press release.

In an exclusive article for the Residential Landlords
Association Professor Miles attacks the Government’s approach, which has sought
to cut investment in the rental market to support aspiring first-time buyers.
He argues that such buyers “are hardly helped by squeezing the supply of rental
property and driving rents up.�

He goes on to say that there is nothing “intrinsically wrong
with people being in the rented sector for an extended phase of their life. We
should want to avoid a situation where people feel pressurised into taking big
mortgages relative to their income early in life because the rental option is
so poor.�

Professor Miles goes on to conclude:

“In a world where house prices might be consistently higher
relative to incomes than in the past we might naturally expect the period in
which people are in the rented sector is longer. And there are good economic
reasons for believing that in a country with a rising population and where real
incomes tend to increase over time house prices might well rise at least as
fast as incomes. To have then introduced measures that reduce the supply of
rented property is perverse.�

David Smith, Policy Director for the Residential Landlords
Association, said:

“Professor Miles hits the nail on the head. Choking off the
supply of rental properties does nothing to help aspiring home first-time
buyers who need somewhere to live now.

“It is time to change tack and recognise that we need more
homes to rent as well as to buy in order to meet growing demand and have policies
that support investment.�

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – “Incoherentâ€�, the Government’s approach to rental market says expert | LandlordZONE.

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Bank of England economists base theory on Generation Rent claptrap

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They helpfully link to articles quoting industry experts who predicted that higher property taxes would lead to higher rents in their article:

“Higher property taxes needn’t mean higher rents…

Some argue that taxing rental income or buy-to-let transactions will lead some landlords to sell up, 

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Landlords now charging rents for pets…

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Lets for Pets:

The introduction of the tenant fees ban has also introduced uncertainties for landlords and tenants around the issue of letting with pets.                                                                                 

Letting to families or individuals with pets has always been
a controversial issue for both landlords and tenants. Some landlords would prefer
not to let to tenants with pets full-stop, but an outright ban on pets is
illegal.

However, a landlord has the right to refuse pets when they
would be deemed unsuitable for the accommodation or the lifestyle of the
tenants. For instance, a dog being left unattended in a flat for long periods
may interfere unreasonably with neighbours’ lives.

Depending on the pet, wear and tear may be increased
considerably, and it’s difficult to assess in advance if this will be the case.
A cat can cause scratching to furniture and horrendous smells when urinating on
carpets, which would necessitate full replacements. Replacement costs can be
considerable and something which can become a big issue between landlord and
tenant.

For these reasons, landlords have traditionally accepted
increased deposits to cover for increased risks and they have separate pet agreements
which contractually bind the owners, not only to pay for any additional damage
caused and cleaning costs, but also to ensure that animals are properly looked
after, including proper exercise, all injections, worming, de-fleaing etc.

The fees ban puts a cap on deposits which prevents landlords
taking an additional amount for pets, and also bans cleaning fees, which leaves
the only legal option of charging an additional amount of rent – in effect a “pet
rentâ€� – for the increased risk.

The Guardian
newspaper has identified what it says is an attempt to “recoup losses from a
ban on unfair letting fees,� by landlords charging excessive “pet rents� of hundreds
of pounds a year for the thousands of tenants who own a cat or a dog.

The Guardian says
the “new practice means tenants with animals are being charged up to £50 a
month additional rent for a single pet, adding considerably to the cost of
housing at a time when more and more families are priced out of buying and rely
on rented homes.�

The newspaper cites one landlord from Bicester in Oxfordshire asking £40 per pet per month on top of the £995 pcm rent, meaning that (in theory) a family with a dog and two cats would face paying and additional £1,400 per annum. Several other landlords are said to be seeking “pet rent� for “clawed� pets only.

One tenant is cited by The Guardian as saying it is ridiculous for landlords / agents to ask for pet references, when in fact the DogsTrust recommends this practice – see http://www.letswithpets.org.uk/find-a-pet-friendly-property/top-ten-tips

Letting agents are saying that the “pet rent� issue is one
that has emerged since June when the fees ban came in and one which it seems is
likely to be a cause of contention between landlords and tenants in the future.
One of the unintended consequences of introducing new legislation perhaps, and
an issue which may need to be addressed in the legislation?

David Cox, chief executive of ARLA Propertymark, has
commented that the practice of charging pet rents is the only legal way for
landlords to cover the potential cost of damage by pets.

“This practice is a direct result of capping deposits under
the tenant fees ban, as this problem didn’t exist before June 1.

“There’s been a long-standing campaign from the Dogs Trust,
called Lets with Pets, which encouraged landlords and letting agents to take a
couple of weeks extra deposit to cover the cost of a pet.

“But this practice is now unlawful under the ban and
landlords are charging additional rent as it’s the only lawful avenue to
mitigate the risk of damage from pets.�

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Landlords now charging rents for pets… | LandlordZONE.

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Are you managing your rented property within the law? – Landlord Law

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Are you managing your rented property within the law? Many landlords think they are – only to find to their cost later that they are not.

There are four traps that landlords’ tend to fall into:

1.

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£3.6 billion Towns Fund

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The 100 places invited to develop proposals for a new generation of multi-million-pound Town Deals have been announced by Local Government Secretary Robert Jenrick.

The towns eligible for support from the £3.6 billion Towns Fund include places with proud industrial and economic heritage

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Victory for RLA as Hounslow Council u-turns on licensing

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Hounslow Council has u-turned on plans to bring in a licensing scheme for landlords following representations by the RLA and Safeagent. Plans for an additional licensing scheme for landlords were passed by the local authority’s cabinet in July. In response to this the RLA threatened the council with judicial review on the basis that the […]

The post Victory for RLA as Hounslow Council u-turns on licensing appeared first on RLA Campaigns and News Centre.

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Fusion appointed as exclusive tax partner to LandlordZONE

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Fusion Consulting, a
leading tax advisory firm in London and winner of the “Best New Practice� in
the Tolley’s taxation awards 2019 have been selected by Landlord Zone, the
leading authority on Landlord and Property matters to be its exclusive tax
partner and to offer its portfolio of taxation and legacy planning services to
its client base.

Paul Shamplina,
Brand Director of LandlordZONE said, “We selected Fusion as our tax partner
because of its track record working for landlords in helping them reduce tax
and ensure they remain compliant in the ever-changing tax landscape.�

He also added
“Landlords are under immense scrutiny and understanding tax is not easy, so educating landlords
on this site is very important, as well as offering a professional service for
their Tax needs with Fusion Consulting makes sense’..

Mitch Young,
Director of Fusion Consulting said “We are delighted to partner with Landlord
Zone to provide tax advisory and compliance services to its client base.
Landlord Zone are regarded as the go-to resource for landlords and we are very
much looking forward to working with them to help their clients become fully
compliant and get the advice they need to make informed decisions about their
portfolios�

For more information, please contact Fusion Consulting PR department on +44 203 841 7010 or info@fusionconsult.co.uk

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Fusion appointed as exclusive tax partner to LandlordZONE | LandlordZONE.

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Tax survey for landlords

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The Office of Tax Simplification (OTS) is asking for landlords’ opinions on tax reporting and payment arrangements. The OTS is an independent adviser to government suggesting changes that will make the tax system easier to navigate and reduce red tape. The survey is running until September 20. To share your opinion on the current system […]

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