One of the potential problems that is no doubt growing in
the background of the mortgage market is the increasing liability to tax for
Buy to let Mortgages. With a relatively low level of perceived taxation a few
years ago, many would-be landlords will have entered a market without a lot of
research possibly owning one or two properties that they have let out. Beyond this
position there are those investors who have
developed a small portfolio of properties, moderately highly geared with
mortgages and growing their book by re-mortgaging on property price rises.
The growing focus of HMRC and the government on this sector
means that now a BTL property creates four opportunities for HMRC to collect
tax. Quite apart from stamp duty, capital gains and inheritance there is of course
income tax. The budget changes that were proposed in 2015 and will take effect
from 2017 and beyond mean that those landlords paying higher rates of tax will
only be able to offset mortgage interest
payments at the lower rate of tax. Depending on the level of gearing this could
mean that some landlords may need to drop off some of their properties in order
to reduce their loan to value on
mortgage and thus their gearing.
There is a potential here, with an influx of properties onto the market to dampen house price sales
and to reduce ( or possibly even halt) house price growth. Whilst it would
be all too easy to see the spectre of
reducing house prices and a possible return to the days of handing keys back to
the lender, such a view is perhaps a little far fetched. What is not in doubt however, is that
landlords at all levels, particularly those subject to personal taxation rather
than corporate are going to have to take actions that they had not planned for
in order to deal with the new rules.
So what does this mean for mortgage advisers?
If losses occur or if tax liabilities suddenly spring out of
the proverbial woodwork, they could be
held to blame. After all a mortgage intermediary recommends or sells a
BTL even if it is not generally regulated. (Consumer BTLs and regulated BTLs
will be dealt with separately in this article.) That recommendation or advice or
sale is expected to take into account affordability and plausibility of the
deal for even where the products are not regulated it could be argued with
relative ease that these things should have been considered. After all, most PI
insurers require non advised sales to be undertaken in a similar manner to regulated sales and it
could be argued in a court that given
that there are also regulated BTLs in the market place in the form of CBTLs it
would be reasonable for a client to
assume the same duty of care when making a sale.
So what can brokers do to protect themselves?
In relation to cases already completed, not a lot other than
to put aside a reserve against potential complaints from BTL clients in the
future.
For future cases however, now is the time to act.
There is a potential exposure to intermediary firms where a
recommendation in made to take a buy to let mortgage (there is equally an
exposure where a recommendation is not made and where a client agrees to take a
BTL). The exposure relates to the potential tax liability that a client is likely to incur either
immediately or at some time in the near future. Mortgage intermediaries are not
tax advisers and are not in a position to advise on matters of tax liability .
However, they do have an obligation to point out potential exposures such as
tax liability when considering the merits of
a mortgage transaction. To this effect, firms need to ensure that there
is a dialogue about potential tax liability covering the following points:-
·
That changes are taking place in the way that
HMRC looks at rental income from BTLs.;
·
That the firm is not a tax adviser and is not
therefore qualified to give advice on this matter;
·
That the client should seek advice from an
accountant or other tax adviser before proceeding with any BTL transaction;
·
That your firm will ask the client to sign a
document confirming that advice has been taken in relation to current and
future tax liability and that they are proceeding on the basis of that third
party advice and acknowledging that the mortgage firm has not offered advice on
matters of taxation.
These aspects should be
written into the firms BTL Mortgage procedures and staff should be appropriately trained.
Firms should also consider implementing a suitable
declaration regarding BTL transactions that is signed by all applicants.
What about consumer Buy To Lets?
Even within the mortgage sector, it seems difficult enough
to determine exactly what does or does not constitute a consumer buy to let and
so it seems highly likely that HMRC will take a simple view of the matter when
it comes to tax liability. If there is rental income, then there is tax due,
irrespective of the circumstances behind the case. This being the case, it is
even more important to ensure that anyone in a position to take on a consumer
BTL, or indeed a regulated BTL for a family member, is aware of their exposure
to tax liability before they agree to take on such a mortgage. Once again, an
explanation of the limitations of the recommending firm in relation to tax
matters and a clear explanation of the likely risks and liabilities are crucial
as well as some form of documentation where the client has acknowledged the issues
and has confirmed that they have taken appropriate tax advice. Consumer and
regulated BTLs fall within the remit of the Financial Ombudsman Service and
are, by definition, easier to raise complaints about as they don’t necessarily incur
costs to pursue.
