Question
My husband and I are thinking of becoming landlords. A friend has told us that most buy-to-let mortgages are interest-only. I thought that if we bought a property to rent out we could use the rent to pay off the mortgage. This would give us a monthly income and when the mortgage is paid off all the house would be ours. What happens at the end of the interest-only mortgage? Do you still owe all of what you borrowed? How do you then pay off that whole amount?

Answer
This isn’t strictly true; most lenders offer both interest-only and capital and interest repayment terms. Interest-only is often used by full-time landlords because it gives them more monthly cash flow which gives them the leverage to buy more properties. At the end of the mortgage term, the property is usually sold or refinanced to repay the initial advance.

If you want to own the property at the end of the mortgage term, then you should choose the repayment option. However, do take professional advice from a qualified accountant beforehand. Changes to tax and regulation have made it much tougher to succeed when investing in buy-to-let.

Question
I first got into buy-to-let 10 years ago and I’m a little bit worried I might have to sell up because of some of the new regulations. The government cut mortgage tax relief at the beginning of April, but I’m not sure what this means for me.

Answer
It’s hard to answer your question without knowing more about your personal circumstances. I strongly recommend you to take professional advice from either an accountant (who is familiar with the changes to tax relief on buy-to-let mortgage interest) or a specialist tax adviser.

For those who are not aware, income tax relief on buy-to-let mortgage interest and other finance costs is being restricted to the basic rate, i.e. 20% regardless of your actual tax band. Crucially, these costs can no longer be taken into account when calculating taxable profit. This restriction is being phased in over four years from 6 April 2017 and will be fully effective from 6 April 2020.

The new rules mean a greater tax liability, particularly for higher and additional tax rate paying landlords, some of whom could find that they go from profit to loss! If you are a basic rate tax payer do not assume that you won’t be affected. The changes to the way the tax is calculated could mean that you are tipped into the next bracket.

But it’s not all doom and gloom. There are ways to mitigate the situation which is why taking professional advice is imperative. Many landlords have found that operating their portfolios via a limited company is more tax efficient but to incorporate will incur costs, which is why you must take tax advice first.

Question
It seems that the government really has it in for landlords at the moment, but I’ve read that if I set up a limited company I might be okay. Unfortunately, I have no idea what one is! How does a limited company work and what do I need to do? And what benefit do I get for effectively losing all the rights to my rental income? Will I have to pay stamp duty or capital gains tax? Should I inform my mortgage lender?

Answer
As discussed in the answer above, for many landlords, taking out a buy-to-let mortgage via a limited company is now more tax efficient than borrowing personally. Limited companies pay corporation tax, not income tax, and as such are not affected by the forthcoming changes to tax relief on finance costs.

Most landlords looking to borrow via a limited company have chosen to set up a Special Purpose Vehicle – a corporate structure set up solely for the purpose of holding property. There are more buy-to-let mortgage products available to this type of limited company and pricing does tend to be lower than the rates available to standard, trading limited companies. You can get your accountant to set up an SPV for you, or you can do it yourself online at Companies House, it is relatively quick and easy and should only cost around £15.

It is worth noting that you can’t simply transfer ownership of your personally owned rental property to your limited company. By law, the transaction must be treated as a sale at open market value which will mean refinancing and incur all the usual costs of sale including the higher rate of stamp duty.

You don’t lose the rights to the rental income because the limited company is yours. How you choose to extract the income is up to you but it’s usually done by paying yourself a salary or taking dividends.

As stated before, it is imperative to take professional advice from an accountant and/or tax specialist to determine the best route for you. Once you are clear about your strategy, we can help with the finance.

Question
I’ve found a property which I can buy for less than its true value, can I use that discount as my deposit?

Answer
Probably not. Most lenders are not comfortable with purchases of property below the open market value and you may find it difficult to get the finance you need.