Crowdfunding could take over as the best way to fund buy to let as new tax rules are set to bite on landlord profits.
Property experts expect hundreds of thousands of landlords to pay more to HM Revenue and Customs (HMRC) from April 2017 as the government phases in a new way to calculate tax on rents.
The National Landlords Association reckons the new rules will mean around 500,000 landlords will move from basic to higher rate taxpayers due the changes.
But the measures could also see crowdfunding take over from solo landlords financing property purchases with mortgages.
The new tax rules require landlords to work out their taxable profits by taking expenses excluding mortgage finance relief from rents – then they deduct 20% of mortgage interest paid as a tax relief.
Tax problem solved
For many taxpayers, says the NLA, this means the extra income could ‘bump’ them into a higher tax bracket.
Crowdfunding resolves the tax problem as landlords pooling funds to buy rental homes outright attracts no income tax.
Landlords become shareholders in a company investing in property and earn their income as dividends rather than rental profit.
Companies borrowing to finance buy to let rentals are also outside the new rules, which only apply to individual landlords.
Although the dividends come from the same rental profits, they are only taxed when paid at more than £5,000 a year.
Jeremy McGivern, of London property agency Mercury Homesearch, said: “People will say instead of putting money in buy-to-let I’ll just do it through crowdfunding and that gets around a lot of tax issues.
Investment barriers lifted
“It’s the law of unintended consequences – there will be ways around changing rules.”
Crowdfunding also lifts the financial barrier to investing in buy to let.
Instead of needing a deposit of £50,000 plus cash to fund buying costs, bills and a refurbishment upfront with a mortgage of £150,000 on a buy to let, investors can stake as little as £50 through a crowdfunding platform.
The advantages of crowdfunding include a passive income, no hassle with tenants, repairs and maintenance and a management team to look after invested cash.
Property crowdfunding also comes with a host of risks – a lack of control over how money is invested and spent on running costs, problems with selling up and quitting a deal early and who pays the debts if the crowdfunder fails.