HMRC’s new definition of a buy to let business

Agreed Morag - HMRC cannot have it both ways

Thanks for this post- very comforting to many of our prospective Beneficial Interest Company Trust clients

Reply to the comment left by "Kathleen Gell" at "10/02/2016 - 13:18":

HMRC always want to have it both ways; look at the disgraceful hounding of legitimate users of Gordon Brown's film production reliefs which produced a tax defferal and where HMRC are seeking the disallowance of the initial relief and ignoring the following repayment stream. HMRC is no longer an arm of good government and acts more like Dick Turpin.

Hi Morag.
Could you give me the exact reference for this quote and/or a link? I think this is worth giving to the legal team challenging the Government on Clause 24.

Hi Ros, it's Not Morag, but.....

Interestingly I googled 'the borrower is making an active decision'

It gave opposing results. Not sure if this helps?

The positive was .gov 26 jan 2015

https://www.gov.uk/government/consultations/implementation-of-the-eu-mortgage-credit-directive/implementation-of-the-eu-mortgage-credit-directive

The negative was an eu directive:-
http://www.arthuronline.co.uk/new-eu-mortgage-rules/

New EU mortgage rules March 2016 – Uncle Arthur summarises its effect

May 20th, 2015 | Arthur Online Blog, Property Manager
EU mortgage rules and it's effect on buy to lets

New EU mortgage rules will have an impact on those that become accidental landlords

The new EU mortgage rules set out in the Mortgage Credit Directive aims to create a Union-wide mortgage credit market with a high level of consumer protection. It applies to both secured credit and home loans. This will be in place by March 2016.

So what does this mean for the Mortgage market?

Lenders will be forced to apply affordability checks on all re-mortgage, meaning current mortgage holders may become prisoners to their current lenders. The FCA recognises the issue and introduced transitional arrangements and so whist the borrower does not require more money from the current lender and they have a good payment history they should not be impacted by the affordability rules.

Under the proposals, second charge firms would be required to comply with FCA mortgage rules in areas such as affordable lending, advice, and dealing with payment difficulties. Second charge mortgages are a type of mortgage that can be taken by an existing borrower on top of their main (or first charge) mortgage. They are a secured loan, which means they use the borrower’s home as security. Many people use them as a way to raise money instead of re-mortgaging.

So will all buy-to-let loans be regulated by the new EU mortgage rules?

No. The government considers that, in most cases, buy-to-let landlords make an active decision to become a landlord, an activity for which they will receive an income and for which they will be taxed as a business. As such, the government does not consider that lending to these borrowers should be regulated by the new EU mortgage rules.

Which buy-to-let loans will be regulated?

The government considers that, to meet the requirements of the new EU mortgage rules , it is necessary to put a regulatory framework in place for those cases where borrowers are not making an active decision to acquire a property to become a landlord, and where they do not seem to be acting in a business capacity (“consumer” buy-to-let). Examples might include cases where the property has been inherited, or previously lived in by the borrower, but the borrower is unable to sell it and so lets it instead. The proposed new regulation will only apply to relevant new loans (not existing loans), and not until March 2016.

This might be of interest to some re the EU directive from W Benson & co. The lunes are saying this will be the final nail etc,.......

EU Rules to make it harder to get Buy-to-Let Mortgages
Accidental Landlords will find it harder to get Mortgages thanks to new EU Rules

So called “Accidental” Landlords could be refused mortgages come 2016 due to a European Directive.

It means that home owners who “Let to Buy”, couples renting out a spare property, people relocating for work, or those struggling to sell their property could be refused a mortgage.

However, “Professional” or portfolio landlords wont be affected by the new rules.

The rule change comes from the new European Mortgage Credit Directive. It differentiates between landlords who are “business” borrowers and landlords who are viewed as “consumers”

In short, business borrowers require less protection than consumer borrowers, so the latter will be subject to tougher rules when they take out a buy-to-let mortgage.

The Treasury has confirmed how it will interpret the EU directive – and it will mean a clampdown on borrowing. The Government previously said that buy-to-let loans wouldn’t be regulated in any way so experts have declared the Treasury announcement as a U Turn

Which But-to-Let loans will be regulated?

According to the Council of Mortgage Lenders (CML) the rule change affects “those cases where borrowers are not making an active decision to acquire a property to become a landlord, and where they do not seem to be acting in a business capacity”

Examples might include cases where the property has been inherited, or was previously lived in by the borrower, but the borrower is unable to sell it and so lets it instead. Home owners who rent out their property while they live abroad or move in with a partner will also be affected.

Borrowers that escape the new rules will be those that buy a property with the sole purpose of renting it out.

What does Regulated mean anyway?

Owner-Occupiers need to pass through affordability checks to buy a house. Lenders have been clamping down since the financial crisis in 2008, but the rules got even more stringent when the Mortgage Market Review was introduced in April 2014.

Landlords on the other hand, generally find it easier to get mortgages. There is less focus on their income and spending patterns as it’s generally accepted that the rent, not the borrowers salary, pays the mortgage. Older borrowers, where the loan runs into retirement age, will find it easier to get a buy-to-let mortgage than a residential mortgage.

Buy-to-let mortgages are more likely to be taken out on an interest only basis even when there is no plan in place for the repayment of the capital borrowed. In contrast, interest only home loans have pretty much disappeared from the owner-occupier market.

Is the change good news or bad news?

Most experts say increased regulation of buy-to-let mortgages is bad news. The CML, which represents mortgage lenders, described it as “frustrating” and “disappointing”. It says there is no need for increased consumer protection in this part of the mortgage market and the move is purely about meeting European legal requirements

Some experts feel that the changes will “add another layer of cost and confusion for lenders, brokers and borrowers alike” – so in short the experts are saying that as well as being harder to get, buy-to-let loans will become more expensive too.

The proposed new regulation will only apply to relevant new loans, and will not come into effect until 2016. It does however mean that existing “accidental landlords” may run into problems when they come to re-mortgage after this date – if they can’t get a new mortgage they may either be stuck with a high standard variable rate (SVR) or forced to sell up.

If you are currently an “accidental landlord” it might be worth reviewing your mortgage before the changes are due to take effect in March 2016.

http://www.wbenson.co.uk/eu-rules-to-make-it-harder-to-get-buy-to-let-mortgages/

Reply to the comment left by "Ros ." at "10/02/2016 - 14:17":

Ros,
Here's the link to the website, and they actually provide a link to the HMRC directive.

http://www.mortgagesforbusiness.co.uk/news-insight/2016/february-2016/what-is-a-consumer-buy-to-let-mortgage/

https://www.gov.uk/government/consultations/implementation-of-the-eu-mortgage-credit-directive/implementation-of-the-eu-mortgage-credit-directive

Reply to the comment left by "Annie Stevens" at "10/02/2016 - 22:31":

Thanks, Annie. That's really helpful. I'll pass it on.

The Mortgage Credit Directive Order 2015 is coming in to force on 21st March 2016.

It has some interesting things to say on the definition of a property business (and therefore who falls outside the consumer protection provisions). Basically, if you hold or intend to hold a property for rent to someone outside the family you are a business.

"a borrower is to be regarded as entering into an agreement for the purposes of a business carried on, or intended to be carried on, by the borrower if the agreement is a buy-to-let mortgage contract and—

(a)(i) the borrower previously purchased, or is entering into the contract in order to finance the purchase by the borrower of, the land to which the agreement relates;

(ii)at the time of the purchase the borrower intended that the land would be occupied as a dwelling on the basis of a rental agreement and would not at any time be occupied as a dwelling by the borrower or by a related person, or where the borrower has not yet purchased the land the borrower has such an intention at the time of entering into the contract; and

(iii)where the borrower has purchased the land, since the time of the purchase the land has not at any time been occupied as a dwelling by the borrower or by a related person; or

(b)the borrower is the owner of land, other than the land to which the agreement relates, which is—

(i)occupied as a dwelling on the basis of a rental agreement and is not occupied as a dwelling by the borrower or by a related person; or

(ii)subject to a mortgage under a buy-to-let mortgage contract.

If a BTL landlord is a business when borrowing money (arguably the most onerous contract he will entered into) then surely he must also be a business in all other dealings, including with letting agents, right?

Seems to me that the government's view varies depending on whom they want to protect or hit.