The foundations for the modern UK Buy to Let (BTL) market were put down in the 1988 Housing Act which put in place full deregulation of rents and tenancies. Ever since the introduction of the BTL mortgage in the mid-1990s, there has been a boom in the BTL market. There are currently two million landlords owning 5.3 million properties (19% of all housing stock) with a total value of £1.4 trillion (Cluttons). However, recent regulation changes are likely to have a massive impact on the BTL market.
Section 24 of the Finance Act (No. 2) Act 2015 heralded a massive change to how profits from rental properties would be calculated. Section 24 removed the ability for BTL landlords to offset their mortgage interest payments against the rental income from their properties. This will result in landlords paying much higher rates of tax. The changes will lead to over half of UK Landlords being pushed into a higher tax bracket and some even making an annual loss.
The changes will be phased in over a 4 year period as follows:
75% for the tax year ended 5th April 2018
50% for the tax year ended 5th April 2019
25% for the tax year ended 5th April 2020
0% from tax year commencing 6th April 2020
However, to make matters even more confusing, from April 2020 landlords will be given a 20% tax credit against their mortgage interest payments.
These changes are effectively a “Turnover Tax” and will lead to lower net profit margins for landlords. It is anticipated that many landlords will decide to sell and leave the market entirely, potentially leading to a shortage of rental properties.
Wear and Tear Allowance Removal:
The wear and tear allowance was abolished in April 2016. Previously this allowed landlords to deduct 10% of their rental income to cover the costs of replacing any furniture and repairing any general wear and tear during the year. This has been replaced by Furniture Relief which allows landlords to deduct the actual cost of furniture purchased during the year. For more information follow this link: https://www.gov.uk/government/publications/reform-of-the-wear-and-tear-allowance/reform-of-the-wear-and-tear-allowance
Extra Stamp Duty:
The previous Chancellor, George Osbourne, announced in his 2015 Autumn Statement an increase of 3% to Stamp Duty Land Tax (SDLT) when purchasing a second property (https://www.gov.uk/stamp-duty-land-tax/residential-property-rates). The plan was to curb second home ownership in order to help first-time buyers. There was a massive spike in BTL purchases just before its introduction in April 2016. This increase in Stamp Duty has put many BTL investors off from purchasing more properties.
From the 1st October 2017 the Prudential Regulation Authority, part of the Bank of England, started to enforce tougher new lending criteria on BTL lending (https://www.landlords.org.uk/news-campaigns/news/landlords-urged-re-mortgage-tougher-lending-criteria-begin-bite)
If a landlord owns four or more properties a lender will be required to look at the entire portfolio. These affordability assessments will include borrowers' tax liabilities, personal income and possible future increases in interest rates. Landlords might be required to provide proof of rent payments and potentially a business plan to support a new application. Lenders may refuse to lend to a landlord if every property is not viable. All it will take is for one property in the portfolio not to be performing as expected, even if the other properties are, and the lender may refuse to lend to the landlord.
In addition, tougher “stress tests” have also been implemented. Lenders must assess whether the landlord can afford repayments if interest rates were to rise to 5.5%. This is despite the Bank Rate continuing to stay at record lows.
It is estimated that there are now over 160 separate pieces of regulation covering residential property lettings.
- Right to Rent checks – Landlords need to ensure that their tenants have the right to live in the UK. If they fail to do so the landlord could be fined £3,000 (https://www.gov.uk/check-tenant-right-to-rent-documents)
- Deregulation Act 2015 – made it much more difficult for a landlord to evict a tenant, even in the case of non-payment of rent (https://www.gov.uk/government/publications/retaliatory-eviction-and-the-deregulation-act-2015-guidance-note)
- Licensing – plans are being made to license every landlord in the UK
The increase in regulation not only takes up more of a landlord’s time but also adds to the ever-increasing cost of running a BTL business.
From the 1st April 2018 (sadly this is not an April Fools joke!) all properties available on the market for let must have a minimum rating of “E” on their Energy Performance Certificate (EPC). There are some exceptions but the majority of properties will be affected. Landlords who fall foul of this can be fined £4,000. The costs of meeting this minimum standard could be substantial, especially in older properties that may have been let for several years. From 2020 all let properties must meet the minimum rating of E, even if they are not on the market. For more information see: https://www.gov.uk/government/publications/the-private-rented-property-minimum-standard-landlord-guidance-documents
Following the above issues facing landlords, many are considering selling their properties. However, there are many factors a landlord must consider if they decide to sell their investment.
- Selling a property is notoriously stressful and time-consuming. It can take months for a property to sell and dealing with estate agents and lawyers is becoming increasingly stressful.
- Capital Gains Tax. The sale of an investment property might lead to a large CGT bill.
- Fees. Estate agent and legal fees mean selling a property can be expensive. Furthermore, there may be early repayment charges on any mortgage taken against the property.
If you are a landlord and facing any of the issues above, please get in touch to see how the Somerset Estates REIT may be able to help you, or if you just simply fancy a rant about these changes and a sympathetic ear!