Buy-to-let landlords turning to commercial property
Historically, those with buy-to-let mortgages can deduct all finance costs (such as mortgage interest, interest on loans taken out to furnish the property, and fees) in arriving at their taxable rental income.
From April 2017, this no longer applies. They will instead receive a basic rate reduction from their income tax liability for their finance costs, with the relief tapered down to the 20% tax band by 2020. So, this means that landlords who have been able to claim income tax relief worth 40% or 45% are set to find their relief restricted to 20% by 2020.
The Telegraph reports that more than 100,000 landlords bought properties within limited companies last year to avoid the new tax regime. However, many are now expressing concern that the government may seek to make this method of investing in property subject to harsher tax rules. It should be borne in mind that moving property into a limited company can create capital gains tax liabilities as well as stamp duty charges.
Many investors are looking at commercial properties as the yields are often higher, and leases tend to be longer. In addition, commercial tenancies often require the tenant to pay the cost of repairs and insurance rather than the landlord, as is the case with residential property lets.
However, would-be landlords need to be aware that commercial mortgages work in a different way; rates generally tend to be higher than for residential mortgages. Lenders can call in loans at any time, and rates can fluctuate in line with market forces.
It’s important to get good legal advice from a commercial property solicitor, as investors will need to ensure that they understand the terms of the lease and get good title to the property. Investors will find that they will need to learn how rent reviews, service charges, and tenant’s security of tenure work.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.