Unfortunately, Section 24 is going to make a lot of buy-to-let landlords a lot poorer but it isn't going to affect everyone equally. Today, Amy and Richard look at what kind of investor is most likely to suffer and at why incorporating a limited company is not necessarily the best way to mitigate the problem.
Property Expert Series: Richard Ignatowicz From Mortgage Savers
- Part 1: Introducing Richard Ignatowicz From Mortgage Savers
- Part 2: An Introduction To Specialist Mortgages for Property Investors
- Part 3: What Is Section 24 And What Does It Mean For Buy-To-Let?
- Part 4: Do Landlords Need To Set Up A Buy To Let Limited Company?
- Part 5: What Is A Special Purpose Vehicle (SPV)?
- Part 6: How Should Landlords Go About Finding The Best Buy To Let Mortgage?
- Part 7: What Kind Of Property Deals Should Investors Be Looking At?
- Part 8: What Does The Mortgage Market Look Like In 2017?
Amy: Richard, can you tell me a little about Section 24 and the changes that we're seeing with tax? How is this going to affect the market? I know everybody's talking about it at the moment.
Why You Should Worry If Your Rental Yield Is Below 4%
Richard: You are right. It looks like Section 24 will have a major impact, predominantly on investors in the south of England.
Investors in the north, who are traditionally getting a decent cash flow, will have to pay tax, so, it will have an impact on them but not as much as it will with southern investors.
If you are earning around about 4% rental yield or lower, the full implications of this tax mean there will be a negative cash flow.
Unfortunately, this will cause a lot of landlords financial distress.
So, we're anticipating that a lot of them will probably be retiring early or selling up.
What that may or may not do to the marketplace, we don't know yet. But, it could certainly mean new opportunities for new investors, or even existing investors, who might find themselves able to pick up some bargains. But we will see.
The Problem With Incorporating A Buy-To-Let Business
Amy: You're one of the first people I've spoken to, Richard, who has come away with a really positive slant on that.
I think you've hit the nail on the head there, that in times of change there are always opportunities too, and we have to look at how we can work with these changes.
So, are there any tips you have for investors who may be worried about changes in the tax situation?
Richard: Certainly, number one is cash flow, cash flow, cash flow. That's imperative.
You've got to make sure that you've got a decent buffer. Also, talk to a decent, knowledgeable tax advisor or accountant who understands property, because, the biggest problem at the moment - that investors are coming back to me on - is accountants saying 'you need to incorporate because that way you'll pay less tax'.
This can be bad advice because a lot of accountants are not aware that there is a disparity between interest rates.
So, for example, with a limited company, you may find that you can be paying 4% interest rates on a mortgage, whereas, for a personal buy-to-let mortgage, you may only be paying about 2%.
So you got to talk to your accountant and say 'look there's a 100% disparity in interest rates here. Is it still worth me doing a limited company incorporation because I'm going to be paying 100% more interest to maybe save 20% in tax?'
That's where you need specific advice with knowledgeable accountants who realise that there is this interest rate disparity.
Amy: And everybody's situation is different, as well, and everybody's being affected differently by these changes too.
So, it's really important, as you say to go and get advice for yourself and your own circumstances.
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