Photo: James Stringer
Bank of England Governor Mark Carney has promised action on the buy-to-let industry in the UK, as landlords consider incorporation as a way to combat recent changes to the sector.
Buy-to-let has become a major part of the UK housing market, with the privated rented sector meeting demand from tenants unable to afford to buy a home. But the Bank of England and Financial Policy Committee have both warned in the last year that they are concerned about the market’s potential risks.
The FPC warned at the end of summer that the market posed a threat due to being “disproportionately vulnerable” to very large drops in house prices.
Since then, the Bank of England has said that it is keeping a close eye on it.
Now, though, Carney has confirmed that action will be taken.
“We do have to be careful around that [buy-to-let] sector. And I think collectively there are a number of things happening and we are watching it, we are watching it closely and we will take action,” he told the Financial Times in an interview, citing concerns that a large number of landlords could sell up at once, if prices were to crash again.
The Governor also tried to play down expectations of an interest rate in the near future, emphasising a “low for long” stance.
The comments from Carney arrive at a time when sentiment is decreasing in the buy-to-let sector, following measures from Chancellor George Osborne to cut mortgage tax relief and also raise stamp duty by 3 per cent for second home purchases from April 2016. Some experts predict a short-term surge in buy-to-let lending and sales, as lenders try to buy properties before the deadline, which could also push up house prices.
Richard Lambert, CEO at the National Landlords Association (NLA), comments: “The Bank of England should be concerned about the future of the buy-to-let market because this government is pushing many landlords to the conclusion that they have almost no other option than to sell up.
“There are still big questions as to what the Governor has in mind to ‘tackle’ buy-to-let, especially given the role George Osborne has played in significantly cooling the market in recent months.
“Mr Carney has an important and very difficult job to do, but repeatedly and publicly labelling a sector which plays such an important role in supporting economic recovery as dangerous is hardly helpful.”
One agent reports that landlords are now seeking to find away around the new costs by putting their property portfolio into a limited company.
Transferring an existing property portfolio into a limited company structure could potentially attract Capital Gains Tax (CGT) based on the market value of the property,” advises Benham & Reeves Residential Lettings, although such a move may be deferred on incorporation, allowing the landlord to roll the gain into the cost of the shares.
The transfer could also see the landlord facing a hefty Stamp Duty Land Tax (SDLT) bill as each property is effectively considered to be “sold” at market value to the company even if there may be no consideration.
If purchasing property through a company for the first time, overseas companies or similar vehicles must pay 15 per cent SDLT if the purchase price exceeds £1,000,000 and from April 2016, £500,000 if the property is not for rental investment.
“Before the changes to mortgage relief, the jury was out on whether or not it was better to incorporate. Under the new rules, the case for incorporation grows stronger,” comments Anita Mehra, MD of Benham & Reeves Residential Lettings. “It’s not appropriate for all of our clients but we’re actively encouraging all investors to at least explore the option to see if it works in their favour financially.”