What a year 2016 has been. Not only have we had the political turmoil of Brexit, and now a major change in direction for the US government, one which will undoubtedly affect the UK, good or bad, we’ve had unprecedented change in UK letting regulation.
We’ve had countless rule changes in residential lettings in England, and a similar process (in some cases more far reaching) in Scotland, Wales and Northern Ireland. In addition, we’ve had some swinging tax changes which have hit buy-to-let landlords hard.
The fact is, it’s far too early to say what effect the two momentous economic and political events may have, and any subsequent political changes in Europe that are still to come. The latter do look likely next year, with continental elections looming. But so far the UK economy appears to be holding up really well, foreign investors are still moving in and many commentators are optimistic about Britain’s future prosperity outside of the EU.
As far as private rented sector (PRS) regulation is concerned, change really got started in October 2015 with the implementation of measures enacted in the Deregulation Act. This brought in considerable change to the residential letting process in England – the first real updates to the Assured Shorthold Tenancy (AST) and Section 21 eviction process since it was introduced in the Housing Act in 1988, with some minor amendments back in 1996.
Following these latest changes, any new Assured Shorthold Tenancy (AST) in England starting on or after the 1st October 2015 requires the landlord to provide the tenant/s (1) with a current copy of the 10 year Energy Performance Certificate (EPC) for the rental property, (2) a current copy of the annual Gas Safety Certificate before the tenant enters the property, and (3) a current copy of the Government guide “How to Rent”, a the checklist for renting in England. This MUST be the latest available version at the time of letting and on a tenancy renewal. Also, as now, (4) the landlord must protect any tenancy deposit taken, plus serve the statutory information (s213 notice) and the scheme’s information leaflet within 30 days of receiving the deposit.
In addition, there have been several detailed rule changes to serving dates for a Section 21 notice, including a new single standardised Section 21 (A6) notice, which includes prescribed information for the tenant, and the requirement to meet all of the above rules. If the property has a mandatory, additional or selective licensing requirement, proof of compliance will also be required. Get it wrong and you could be stuck with a bad tenant for a long time, as you won’t be able to use the highly advantageous Section 21 eviction process until you comply.
One measure that is concerning, but one which will not really affect those landlords letting well maintained properties, is the change introduced by the Deregulation Act 2015. This affects what has been termed “revenge” or “retaliatory” evictions. Much has been made of this idea in the media and by the homelessness charities, claiming that tenants are being evicted using Section 21 for wanting repairs to be done to their rentals.
Now, it will not be possible to carry out an eviction where a tenant has reported a repair and (1) it has not be given an “adequate response” (within 14 days) and (2) the local authority has served an appropriate (improvement) notice on the landlord because of a serious defect (category 1 or 2 hazards). It means that any section 21 notice served will not be effective, and a new notice cannot be served for a period of six months following an improvement notice.
Some of these requirements were there before these latest changes, so most landlords will be familiar with them, but the difference is there’s a lot more to think about and extra diligence is required to not only get it right, but to have documentary evidence that you did. Checklists are now a must when letting residential property in England. All of these documents and checklists can be found here: landlordzone.co.uk/documents
But wait, we haven’t finished here: the tax changes introduced by the previous Chancellor George Osborne in his post-election budget in July 2015, and his subsequent one in spring 2016, constituted something of an unexpected “bombshell” for private residential landlords. Public opinion had been swayed against the private residential landlord with constant media reports of buy-to-let millionaires, and the minority group of “rogue” landlords taking advantage of the ever increasing demand for rental housing and illegal immigrants.
Mr Osborne reacted to this in a politically motivated way by introducing quite swinging and punitive tax changes, (1) to slow down the buy-to-let boom which was worrying the Bank of England, due to its threat to lending banks’ stability, with the sheer amount of loan capital at risk, and (2) to address the question of whether landlords are inflating house prices, which he said were pricing Generation Rent out of home ownership.
The result is a second home Stamp Duty Land Tax (SDLT) premium of 3%, which has knock on effects for anyone buying and selling property; differential rates for Capital Gains Tax (CGT), and CGT payment deadlines penalising property investors. There are changes to wear and tear expenses which landlords can claim, and perhaps must concerning of all, reclassifying mortgage tax relief as a non-claimable expense.
There was big disappointment in the landlord community when the High Court recently rejected a full judicial review of buy-to-let mortgage interest relief changes. Landlords represented by Cherie Blair QC lost a legal fight to overturn legislation designed to increase the tax landlords pay on their buy-to-let earnings. Campaigning landlords Chris Cooper and Steve Bolton brought together a group of likeminded landlords under the group’s fighting name of “Axe the Tenant Tax”, believing that removing business interest relief for just one group, landlords, was an injustice and needed to be challenged. However, the judge thought otherwise, that the claim was not justified and said: “It would be a miserable spectacle to watch a case that is bound to fail.”
There has been a concerted move by a minority of landlords to use companies to shelter their buy-to-let properties from tax, either by transferring existing properties into a company, or dong this with new purchases. Incorporation has its merits for some, but there are many complications. The pros and cons of every investor’s own situation need careful consideration and expert advice, and many experts feel there is little advantage in doing this, plus there’s always the risk that HMRC will be changing the rules again.
And still we have not finished. In February the measures enacted in the Immigration Acts were introduced which brought in the requirement for every residential landlord in England, including lodger landlords, to carry out “Right-to-Rent” checks on all new tenants and their families. Landlords and agents must now check documents face-to-face to satisfy themselves that new tenants have a right to reside in the UK. Failure to act properly could result in fines up to £3,000 per tenant, and this penalty has recently been strengthened in the Housing and Planning Act 2016, by making it a criminal offence to rent to illegals.
The Housing and Planning Act 2016 also contains several measures for tackling rogue landlords, which to be fair most responsible landlords would be in favour of. A database of rogue landlords and agents is to be accompanied by the concept of “banning orders”, and similar in concept to the Proceeds of Crime Act legislation, Rent Repayment Orders will be introduced. A process which landlords can use to recover abandoned premises is to be introduced, but the process is so convoluted that its usefulness is doubtful. It will also be made easier to evict illegal immigrants if it is found they do not have a right to remain in the UK.
What else can hit the private landlord? Well, wait for it, the Bank of England has seen fit to introduce much tougher mortgage criteria for buy-to-let loans and it is probable that landlords with several buy-to-let investments (4 or more) may find themselves paying a higher rate of interest on renewal. In any case, following the Brexit vote, it is predicted that inflation will reach around 4% sometime next year, with the inevitable result that the Bank Rate and mortgage rates will trend upwards after a long period of decline. Furthermore, it is said that Trump’s policy if massive infrastructure investment will boost inflation even more, so get ready for higher interest rates coming.
And yet more…
Another Private Rented Sector related Bill is passing through Parliament in recent months and as we speak, this time to make provision for the “rights of renters” was introduced by Liberal Democrat Peer Baroness Olly Grender on 23 May 2016.
It is a Private Members’ Bill which was started in the House of Lords. The Bill is making progress and had its Second Reading debate on 10 June, where all aspects of the Bill were discussed, and a line by line examination of the Bill took place during committee stage on 18 November 2016. Amendments discussed covered clauses 1, 2 and 3 of the Bill.
- The Renters’ Rights Bill proposes:
- Tenants’ access to the database of rogue landlords and property agents
- Ending of certain lettings fees for tenants
- Mandatory electrical safety checks
- Prevention of rogue landlords from obtaining an HMO licence
- The Act will affect England only
Despite all of this change, buy-to-let investment and the private rented sector (PRS) has continued to grow, but this growth rate is slowing following the above changes. However, the latest available data from the government’s English Housing Survey does show that the PRS is still growing and in any case the PRS is now a major industry in the UK. Private rented households in England have breached the 5 million household barrier for the first time in recent history. In Great Britain as a whole, there are now around 5.6m households in the sector, with an annual growth rate of 8.4%, and representing, 20% of all households, a greater proportion than the social housing sector.
London remains the region where most renting takes place, representing around 20% of the entire nation’s privately rented households, and that with only a 14% share of the overall population. On past trends, approaching half a million new private rentals had been added to the PRS each year in Great Britain in recent years.
Tenant demand continues unabated with a long-term problem of a lack of housing supply, pushing up house prices and rents, and making saving for a deposit for first-time buyers, “Generation Rent” a considerable challenge, if not an impossibility for many. This is not a particularly British problem, it spans the Western World where low interest rates and Quantitative Easing have hiked asset prices to record levels.
Despite various government schemes with help-to-buy, take-up has been sluggish and small-scale, likely to disappoint, and prove insufficient to match the needs for homeownership in a country with a growing population. House building figures remain stubbornly low and well below government targets.
Additional mortgage regulation designed to prevent another boom and bust has been introduced by the Bank of England. It could be argued that the tighter lending criteria, particularly the measures for affordability assessments, are limiting access to finance for both private buyers and buy-to-let landlords, creating a demand bottleneck. This, along with the stamp duty increase is affecting house sales, but at the same time is underpinning people’s dependence on the PRS.
Average rents across the UK, but highly London weighted, have recently been rising at the rate of around 8% annually, with average rents now over £900 per month. At the same time wage inflation (wage rises) have improved, boosting tenant finances, but they still lag far behind rent price inflation.
Given all these changes, apart from a greater focus on tax planning and potentially incorporating investment businesses, landlords and agents find the tenancy management task much more onerous and challenging. We won’t know the full taxation effects for some time as the main tax change – mortgage interest relief – is being phased in over 4 years.
What we do know is that landlords will seek to off-set the higher costs of running their buy-to-let businesses, and the obvious option is by increasing rents to their tenants. We’ve seen this trend over the last six months or so as the Budget changes have impacted, especially on those higher rate tax payers, or those with higher gearing.
When the costs involved in running a business increase, landlords have no choice but to increase rents, which means the tax changes will impact directly on tenants. The market will determine the rent level depending on supply and demand in each location. Tenant demand is driven by market fundamentals, in particular high house prices and difficulty of getting a mortgage. These factors are not going to change for the foreseeable future, which makes the previous Chancellor’s changes look counterproductive.
Taken in the round, and to recap, the changes outlined above combined with the political factors such as Brexit and the US election result have introduced a degree of uncertainty into an important sector of the UK economy which has been growing inexorably for 20 years, a cash-cow in the case of the majority of buy-to-let investors.
Some landlords will choose to sell all, or part of their portfolios depending on individual circumstances, there is no doubt about that. Others will almost certainly step into the void, perhaps picking up some bargains. The Residential Landlords Association (RLA) has recently predicted as high as a 25% sell-off by current landlords, stating: “An RLA survey of more than 1,000 landlords showed that a quarter had either sold one of their properties or had one on the market as a result of the Government’s plans to change Mortgage Interest Relief, to tax them on income rather than profit.
All of this combined with the higher initial investment cost – new investors will need more capital – supply of rental property will no doubt be constrained. However, given the pent-up demand and the lack of any comparable alternative investments giving anything like buy-to-let returns, the PRS in Britain is almost certain to continue to grow, albeit at a slower pace than before. But anything which puts downwards pressure on the supply of rental homes creates demand verses supply imbalance, and his will inevitably hit tenants hard by pushing up rents.
The evidence is already there: the level of buy-to-let borrowing was down 7% between August and September following the introduction of the 3% stamp duty surcharge on second homes, which is continuing to hit landlords hardest, that’s according to the latest seasonally adjusted monthly figures published by the Council of Mortgage Lenders (CML).
The latest CML data shows that the amount of money buy-to-let landlords borrowed fell on an annual basis by 22% year-on-year to around £2.8bn, that the number of loans falling 6% from August to 18,200. This represents a decline of 26% on September 2015.
Paul Smee, director general of the CML says: “Six months on since the stamp duty changes on second properties and buy-to-let continues to operate at lower levels than a year ago. But lending for buy-to-let house purchase and re-mortgaging has settled at its current level over the last four months.”
All eyes must now be on the new Chancellor, Philip Hammond MP, when he presents his Autumn Statement on the 23rd of November, to see if he is willing to “row-back” on some of these punitive “landlord tax” measures introduced by George Osborne.
Tom Entwistle is editor of LandlordZONE® and an experienced residential and commercial landlord.