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How will the spring Budget impact BTL finance?

Philip Hammond

In what could be seen as the latest in a string of blows against landlords, last week’s spring Budget featured a raft of measures designed to increase the tax payments made by self-employed workers.

On 8th March, Chancellor of the exchequer Philip Hammond (pictured above) introduced measures that may place yet another financial burden on landlords by raising the main rate of the Class 4 National Insurance contribution (NIC) bracket to 10% from April 2018, with a further increase of 1% in April 2019.

Kate Faulkner, managing director of Property Checklists, has now warned that tenants could bear the brunt of these changes should landlords be deterred from seeking buy-to-let properties.

“From a tenant’s perspective, anything that means a landlord may have to increase their rent is bad news for all,” explained Kate.

“Normally rents rise in line with earnings, unfortunately the prediction moving forward due to government intervention, hiking up taxes and costs in this sector, means that tenants are likely to be the biggest losers as landlords can, if they wish, just shift their investment monies elsewhere.”

How will this impact demand?

There is already evidence to suggest that an increasingly costly sector has quelled demand for buy-to-let finance.

In December, Paragon Mortgages revealed that 46% of intermediaries reported ‘weak’ or ‘very weak’ demand in the wake of changes such as stricter affordability checks and a rise in stamp duty land tax.

This followed news that 440,000 landlords who currently pay the basic rate of tax will be forced into a higher tax bracket from April 2017, prompting concerns that they may simply decide to sell their properties.

However, Martin Stewart, director of advisory firm London Money, rejected claims that an increase to NICs would further impact landlords’ desire to borrow going forward.

“I don’t think this will have a major impact on buy-to-let landlords any more than it will [on] a self-employed milkman.

“There are much bigger losses ahead for the landlords of this country and while any increase in taxation is never appealing in the scheme of things, I think they have got much more to worry about.”

Aerial view of properties
Hundreds of thousands of landlords stand to be affected by recent tax changes

Nevertheless, Martin identified Mr Hammond’s decision to reduce the tax-free dividend allowance by over half as a possible blow to some landlords.

“Of more concern is the fact that dividends for company directors have been attacked for the second successive budget.

“Those landlords that [have] incorporated with a view to taking some income via dividends in the future may well feel hard done by.”

Un-limited company?

Despite Martin’s concerns, Simon Whittaker, finance director at Mortgages for Business, suggested the spring Budget could result in more landlords choosing to incorporate as a limited company.

"The impact of NI changes is complex and depends on whether the individual landlord operated their buy-to-let portfolio as an investment or as a business,” he explained.

“If [it was] as an investment, then the profit is not subject to NI, but if [it was] as a business, then the individual should be paying Class 4 NI.

“If nothing else, the increased contributions could lead to more landlords going down the limited company route.”

Over recent months, impending changes to income tax relief have seen many landlords turn towards limited company buy-to-let finance.

Regardless, Kate insisted that landlords should educate themselves about the potential consequences of the changes, such as the Budget, before they are able to manifest.

“…All landlords would be wise – even if they only have one property – to have their financial investment and tax situation reviewed by an expert rather than ‘wait to see’ what the impact is, only to then found out, after the fact, that the impact is damaging.”

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