Buy To Let Mortgage

HMO – What you need to know

As you may or may not have heard, the Government is changing the Regulations that apply to Houses in Multiple Occupation (HMOs), these changes will give you a new reason to contact your existing HMO customers and target new ones. So, what is changing and what do you need to know?

The licencing rules are changing:

Currently only HMOs that meet the following criteria require a license:

  • A ‘large’ HMO rented to 5 or more people who form more than 1 household
  • At least 3 storeys high

The new rules extend the scope to:

  • Any HMO rented to 5 or more people who form more than 1 household
  • Any number of storeys
  • Purpose built flats where there are up to two flats in a block.

There is also an extension to the ‘mandatory licence conditions’ for HMOs

  • This will include conditions relating to:
  • minimum sleeping accommodation standards
  • maximum occupancy of such rooms
  • and the disposal of domestic waste in HMOs

All these changes will come in to effect on 01 October 2018.

to letHow landlord tax is changing

When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.

It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.

But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.

At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.

NOW

Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

2020

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.

You will have to pay £5,000 tax in this scenario, so you make no profit at all.

 

Tim at Park Gate found us an excellent Buy to Let Mortgage. Very competitive interest and almost zero other fees. Excellent, friendly & clearly explained service throughout and we recommend them. 

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