In September 2016, The Prudential Regulation Authority (PRA) – those responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms – announced expectations of firms’ underwriting standards to apply to the Buy to Let market.
What you need to know
The PRA changes mean that landlords:
face tougher affordability assessments which take into account borrower’s costs including tax liabilities, verified personal income and possible future interest rate increases.
must provide evidence that rental income covers their mortgage payments by a minimum of 145% at an interest rate of 5.5% for all products other than longer term (five years plus) fixed rates.
with four or more properties, will have their whole portfolio assessed for affordability by the lender – even where other Buy to Let mortgages are held with different lenders.
With all of these changes many landlords may find their portfolios are less profitable.
If you hold a property in a company, your profits are liable for Corporation Tax, however, if you hold an investment property personally, your rental earnings are combined with your other earnings (such as income from your job) and taxed as Income Tax.
At first glance a company structure could look more tax efficient, especially if you are a higher rate tax payer. But before you consider incorporation you should take into account the cost of commercial mortgages.
There’s no doubt the changes in the Buy to Let sector can cause some confusion but we can help find the most appropriate solution for you.
This information does not constitute tax advice. For more details on how this will affect your circumstance you should consult with an independent tax adviser.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Commercial and some Buy to Let mortgages are not regulated by the Financial Conduct Authority.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.