Undoubtedly, 2017 was another tough year for landlords. With so many legislative changes in the last 18 months (wear and tear allowance, Right to Rent checks, Section 24, roll-out of Universal Credit, landlord licensing, etc.) it is more important than ever for landlords to fully understand their obligations in order to protect their investment and tenants, and ensure they are adhering to new and existing laws.
There was a record number of government consultations relating to the private rented sector last year so, as we embark on a New Year, this is good time to reflect on some of the key changes introduced last year, how they affect landlords this year and offer some expert advice.
One thing I am confident about, is that for those who focus on the long-term gains by educating themselves and working closely with their letting agents, landlording will still be a good business and a better investment than many of the alternatives. If sums are donecorrectly and compliance is taken seriously, property can still be financially rewarding in 2018.
TOP TIP for 2018: Put a price on your time – If you are struggling to keep on top of changing legislation and your obligations as a landlord, seek professional help. The cost of having your asset taken care of will be far less than a fine for non-compliance.
Mortgage Interest Tax Relief (Section 24)
Until 2017, landlords could deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. April 2017 marked the beginning of this interest relief being slashed gradually from 100% to zero by April 2020. Instead, landlords will claim a tax credit worth 20% of their mortgage interest – a change which will hit high-earning landlords hardest.
So, for the 2017-18 tax year, landlords can still claim 75% of the finance costs at the higher rate, with the remaining 25% being deducted at the basic rate. From 2018-19 this will fall to 50%, in 2019-20 25% will be deducted, with the other 75% receiving basic-rate tax reductions. Finally, in 2020-21 tax year that all financing costs can only attract the basic-rate tax reduction.
As a result of this, some landlords have considered selling up altogether, some have looked at setting up a limited company in which they can transfer their property portfolio so they can restructure, and others are looking at ways to realign their portfolio to have fewer mortgaged properties.
TIP: - Get your accounts in order: Landlords with mortgages need to understand what impact the changes to mortgage interest tax relief will have on their profits, so being organised and understanding what is coming in against what expenses you have is essential. I would recommend obtaining expert advice from a tax specialist who understands property.
Introduction of ‘no-deposit insurance’
Compulsory tenancy deposit schemes have been around for a decade, but there are signs that the deposit system might be beginning to change. Over the last 12 months, no-deposit insurance products have become more prominent in the market, offering tenants the opportunity to rent a property without having to put down a hefty deposit. With the no-deposit insurance products, a tenant typically pays the equivalent of a weeks’ rent upfront, rather than the 6-8 weeks’ rent in advance required for traditional deposits, and an insurer sits behind the product to reimburse landlords’ claims at the end of the tenancy. Tenants remain liable for the damages and the insurer chases recovery from them.
TIP: - Understand your options:Although there is some skepticism in the market, it is important for landlords to keep abreast of the latest trends and technology. In my opinion, there is no substitute for a landlord knowing they have the physical deposit in their account (if they are using an insurance backed deposit scheme) or with a third party (if held in a custodial scheme.) Landlords will have to consent if they want to go down the no deposit insurance route, which many seasoned landlords will not do.We are yet to see how deposit disputes will play out at the end of tenancies with these no-deposit schemes.
Second Phase of PRA Changes
From 30th September 2017, the Prudential Regulation Authority (PRA), part of the Bank of England, enforced tougher standards for landlords with four or more mortgaged properties, meaning they now have to meet new requirements.
Following the introduction of stricter affordability tests imposed by lenders at the start of the year, this latest set of requirements from the PRA targets loans to portfolio landlords to prevent higher risk buy-to-let lending.
Lenders will now review a landlord’s entire property portfolio when making a decision on their single property application, which will hit hard on multi-property landlords, especially if one or two of the properties are not turning as much of a profit.
TIP: - Create a business plan: Following the introduction of stricter affordability tests imposed by lenders this year, landlords need to have all financial records relating to their portfolio documented in a business plan for any new mortgage application.
Roll-out and changes to Universal Credit
In the Autumn Budget, the Government finally had a realization that there is a range of fundamental issues which need to be urgently addressed and bowed to the volume of criticism levelled at its scheme by announcing changes. Of most importance to landlords was news that new housing benefit claimants could continue to receive it for an extra two weeks, while waiting for their universal credit payments to start, designed to help reduce rent arrears at the point of transfer to Universal Credit.
One of the greatest issues with Universal Credit is the increasing complexity of it and this alone can be off-putting for landlords considering taking on tenants in receipt of UC. Although changes made should improve the service, until the system has proved itself “fit for purpose”, landlords will remain cautious about renting to those in receipt of Universal Credit for fear of unsustainable levels of rent arrears.
TIP: If your tenant is in arrears, request direct payment: As with the old Local Housing Allowance system, where a tenant is in two months or more of rent arrears, there is the potential for landlords to request direct payment.
2018 – there’s more to come
Minimum Energy Efficiency Standards (MEES)
From 1st April 2018, there will be a requirement for any property rented out in the private rented sector to have a minimum energy performance rating of E on an Energy Performance Certificate (EPC). From this point on, it will be unlawful to let or lease a residential or commercial property with a poor energy rating, unless there is an applicable exemption.
The change was announced by the Department for Energy and Climate Change in a bid to cut energy bills and carbon emissions, and will come into force for new lets and renewals of tenancies with effect from 1st April 2018 and for all existing tenancies on 1st April 2020. It is arguably one of the most significant pieces of legislation to affect our existing building stock in a generation.
TIP:- Check your property has a valid EPC:Landlords should first review their property to check it has a valid and up-to-date EPC. If the property has an EPC rating of “F” or “G” (or is at risk of becoming so), steps should be taken to improve the energy efficiency of the property so that it meets minimum requirements. Landlords should take advantage of void periods and lease breaks to make improvements, or ensure these are included as part of on-going maintenance and planned renovations.Obviously, there could be an increased cost to upgrade to a rating of E on an EPC.
Draft Tenants Fees Bill
As part of the Autumn Statement 2016, the government announced plans to ban letting agents charging fees to tenants in England. Currently, tenants usually foot the bill for tenancy agreements, referencing and credit checks, but these costs will now have to be covered by agents or passed on to landlords.
The government’s commitment to banning letting fees was then further reiterated in the Draft Tenants Fees Bill released in November 2017. The Bill revealed the full details of its plans to make the charging of fees to tenants an offence, and to make it compulsory for agents to be a member of a client money protection scheme.
Under the proposed legislation tenants can be asked to pay only their rent and a deposit; this will also limit holding deposits to no more than one week’s rent, and security deposits at no more than the equivalent of six weeks’ rent. Landlords dealing directly with tenants will also be caught by this new bill.
TIP:- Shop around for good service: When the ban comes into force, which is likely to be next year, agents will be forced to become more competitive and provide better service for landlords. Landlords should be empowered to shop around for the agent that provides the quality of service that they are seeking, at a price that they are willing to pay.I personally would’ve preferred there to be a cap on fees to tenants rather than them being scrapped altogether.
Other possible changes
The government is considering whether to change the law so all letting and managing agents must be qualified and regulated to practice as well as making all landlords become members of a redress scheme to help protect tenants from unfair practices. There have also been suggestions that incentives for landlords who offer longer tenancies may be introduced sometime next year.
Paul Shamplina, is founder of Landlord Action.