A Sea Change for Landlords?

The Government is determined to build a housing market fit for the future.  It  aims to make the private rental market fairer and more transparent for tenants.  In doing so, it will reduce the number of private landlords in the UK by making it less lucrative.

Landlords profits being reduced

Landlords across the country are now resigned to the fact that due to more new legislation their profits will be reduced.  A stamp duty surcharge was introduced 2 years ago, and the 10% wear and tear allowance has been discontinued. Landlords can now claim only actual costs spent on repairs, rather than a blanket 10% reduction for wear and tear.

Tax relief on mortgage interest

The latest attempt by the government has been to phase out tax relief on mortgage interest.  Higher taxation is forcing many landlords to rethink their strategy, and in some cases to sell up.  The gradual loss of tax relief from now until 2020 will hit higher rate and additional rate taxpayers.  Indeed the loss in tax relief is also likely to push around 450,000 lower rate tax payers into a high band, according to the National Landlords Association. Until April 2017, Landlords could deduct all their mortgage interest payments before calculating their tax bill, meaning they would be taxed purely on their profits rather than their overall turnover.  With the majority of landlords utilising interest only mortgages, this meant the savings on offer were potentially significant.

Mortgage interest tax relief changes

Mortgage interest tax relief changes will be phased in soon and Landlords 2017-18 tax returns will be the first to fall under new government regulations.  Originally announced in the 2015 Budget, this means the amount of mortgage interest landlords can offset against their tax bill will be reduced. This figure is set to drop each tax year until it is fully replaced by a tax credit for mortgage interest in 2020-21.  Investors could see thousands of pounds of potential profit wiped out. When tax returns are filed for the 2017/18 tax year (due January 2019) they will only be able to claim tax relief on 75% of their mortgage interest.  They will get a tax credit on the rest of their mortgage interest payments.   The following year, the relief will only be available on half of their interest and they will get 20% credit on the rest.

The end of Buy to Let?

Some are calling this latest move from the government the end of Buy to Let for all but the richest.  The number of new Buy to Let borrowers plummeted from 29,100 in March 2016 to around 4,000 the following month when the stamp duty surcharge was introduced.  According to the Council of Mortgage Lenders it has struggled to pick up substantially since. New rules are also on the way to stop landlords and property owners pocketing tax-free cash on holiday let income.  Rent-a-room relief was aimed at helping home owners let their space rooms in a bid to reduce the housing crisis. Instead, many are using this as an opportunity to rent out their homes to tourists while they moved out and claimed up to £7,500 a year in tax free income.   In an attempt to stop home owners from profiting from websites like Air BnB, the Government has stepped in with new legislation.

Shared occupancy clause

It will be introducing a new “shared occupancy clause” for rent a room relief, which will require the individual to be resident in the property and physically present for at least some part of the letting period.  Doing so will return the relief to its original purpose of incentivising the letting of spare rooms. For example a home owner letting their main residence during the Wimbledon tennis tournament to a visiting player whilst they go on holiday for the whole rental period is not eligible for rent a room relief.  This is because there is no shared occupancy so it is taxable rental income and must be declared. However a landlord renting a room to a student for an entire term who goes on holiday for a week during that period is qualified for rent a room relief as occupancy is shared for part of the rental.

Letting fees ban

A final concern for landlords is the new Government bill to ban letting fees across England.  Unexpected letting fees and high deposits can cause a substantial affordability problem for tenants and are often not clearly explained.  This leaves many residents unaware of the true costs of renting a property. A recently introduced bill will bring an end to costly letting fees and save tenants around £240m annually, according to government figures.  The Bill will also give tenants greater assurances that the deposit that they pay at the start of the tenancy cannot exceed 6 weeks’ rent. The Tenant Fees Bill will stop letting agents from exploiting their position as intermediaries between landlords and tenants and prevent unfair practices such as double charging for the same service. It will also help to increase competition between agents and landlords, which could drive lower costs overall and a higher quality of service for tenants.

Summary

The Tenant Fees Bill builds on the government’s work this year to protect tenants and landlords through the introduction of new rogue landlord database, banning orders for rogue landlords and property agents as well as new code of practice to regulate the letting and managing agents sector. For all landlords who already abide by the current legislation and who treat their tenants fairly the changes will unfortunately only be visible in their year end profits. For all landlords, tax and financial planning and the peace of mind that it brings is paramount. Contact us now for professional impartial expert advice.