Are you up to date with industry regulations and legislations?
Seasoned landlord and NLA representative, Richard Blanco, recently gave a useful regulatory round-up of new legislation, including tax and mortgage changes - here's what we took away from it!
Tax has been one of the major worries of landlords over the past year. To recap, landlords no longer have automatic entitlement to a 10% tax break for wear and tear of their properties, and the additional 3% Stamp Duty surcharge also came into effect on the 1st April. We still have a big change to come too. The withdrawal of higher rate tax relief on finance costs will start to be phased in from 6th April next year, and will be phased in over 4 years. The majority of landlords however, (51%) will remain basic tax rate payers.
NLA research suggests that 1 in 4 landlords think they will be pushed up into a higher tax band because of this change, and interestingly, of those with 20 or more properties, 53% think they’ll be pushed up in a higher band. NLA research highlights a lack of awareness and understanding however; 51% of landlords think that they won’t experience any change from these tax changes, but of those, only 56% say they fully understand the tax changes.
It’s imperative you sit down with your accountant and really digest the new tax changes. Richard mentioned that he'd already worked out what his tax bill will be on the 31st January 2021, so he can adjust his business model accordingly - and we recommend you do too!
How are landlords reacting?
Despite all these tax changes, there has been a strong rebound in optimism in landlord sentiment. It had reached an all-time low of 39%, but there has been a big jump in this latest quarter, and now 54% of landlords are optimistic about their lettings business going forward. Clearly landlords are beginning to take the changes in their stride. It’s also important to note that those without mortgages won’t be affected by the tax changes at all.
Interestingly, 1 in 4 landlords are now thinking of moving to a limited company. Simon Allen from Searchlight Finance talks of some of the pros and cons of incorporating in the NLA & Portico panel debate, so we'd advise having a read of that.
Richard made the point that commercial mortgages start from 3.29% whereas many buy-to-let mortgages are around 2% at the moment.
He went on to say that you need to think long and hard about mortgage implications, because your mortgage is likely to go up by a lot if you incorporate. He gave the example of someone he knew whose payments would go up by £40,000 if they moved to commercial mortgages, but their tax bill would go up by £15,000, so they were better off paying a higher tax bill and keeping their properties in their name.
Do you work with LHA tenants?
The number of landlords working with Local Housing Allowance tenants at the moment is at a historic low of 16%, and as low as 7% in London. More notably, 70% of landlords who have tenants in the LHA market have arrears.
This is a huge problem for local authorities that desperately need us to provide properties for their vulnerable tenants - many of whom who are on benefits.
Bank of England buy-to-let regulation
The Bank of England’s latest buy-to-let regulation is also sure to cause a stir in the industry. From January 2017, the Bank’s Prudential Regulation Authority (PRA) is introducing a compulsory stress test of 5.5%.
Some lenders have been using rates of 4.99% or an SVR of 5.19%. Now they will have to use 5.5% as a minimum. In response to government changes to landlord tax relief, a number of lenders are also increasing their buy to let rental cover requirements to 145%.
This will of course really affect the maximum loan to value in London. Richard gave his latest purchase as an example: he bought his property for £620,000 and managed to get a 73% loan.
If we considered this with the new criteria, the mortgage of 5.5% would be £2,131 a month x 145% which would equal £3,090. The maximum loan to value therefore would be 58% rather than 73%, so you can see how this will affect a lot of London landlords.
New criteria is also being introduced for portfolio landlords. If you have four or more mortgages, you will now be classed as a portfolio landlord and lenders will have to apply different underwriting criteria to you.
Richard explained that he was hoping that would just be in terms of assets and liability statements, but others are speculating it will be more than that. Some lenders may even decide not to go down that route and simply not lend to portfolio landlords.
To finish off, Richard quickly talked us through the regulatory headlines:
- The Housing and Planning Act is coming into force bit by bit - so landlords who do behave badly will be banned and prevented from letting properties
- The Deposit Protection information is also going to be used by local authorities for the prevention of crime
- There are going to be civil penalties for infringements on things like property condition etc. Client Money Protection is going to be brought in for agents, and it’s quite likely landlords will have to do regular electrical safety checks
- It’s really key we have that right to serve a Section 21 notice if we want the property back or if things aren’t working out with the tenant. In order to have this right, you must make sure you give the tenant the Energy Performance Certificate, the Deposit Protection Certificate, the Gas Safety Inspection Certificate, and also the government’s How to Rent booklet, as if you don’t you’ll lose the right to serve a section 21 notice. Currently, only about 40% of landlords are giving tenants the how to rent booklet - Richard recommends emailing everything over at the beginning of a tenancy
- North of the border in Scotland, we’re going to see the end of No Fault Eviction - so make sure you’re well-informed of those changes if you have properties in Scotland
- The Welfare Benefit Cap is coming down from £25,000 - £23,000 in London. Quite a lot of tenants working less than 16 hours a week are going to be affected by that if they’re on benefits, which is something to be aware of
- The Minimum Energy Efficiency Standard means that landlords won’t be able to begin new tenancies in properties that are rated F and G from April 2018. So have a look at those EPCs, check your rating, and see if there’s anything you can do to get it up before April 2018. The government has said that they will offer some support, but we are going to have to pay the first £5,000 of any alterations that need to be made. Currently the NLA is trying to get that requirement lowered or removed
- There are now 19 boroughs either consulting on or with discretionary licensing schemes in place, and 7 boroughs with Article 4 Directions that make it difficult to let to sharers. This is spreading across London, so think carefully before you make your next property purchase!
- Consultation on HMOS means we may need mandatory HMO licenses for properties of two storeys rather than 3, with 5 people living in two or more households. So that may well change next year.
If you’re unsure on any new legislation, or if you have any questions about your letting property, give us a call today on 0207 099 4000. Click here for an Instant Property Valuation.