As the rules around buy-to-let property become increasingly complex, more landlords are creating limited companies to manage their portfolios. But that’s not the only change causing upheaval in the private rental market. So, if you’re a landlord today, what do you need to know?
In recent years, a number of regulatory changes have been introduced that have affected landlord’s bottom lines – from how much tax you pay to what your legal obligations are.
Which? looks at the changes in the market and explains everything landlords need to be aware of in the coming year.
1. More landlords are incorporating
In the first half of this year, 18% of private rentals in England were owned by limited companies, rather than individuals – up 4% from the year before, and 8% from 2016, data from Hamptons International shows.
In areas such as Yorkshire and the Humber, companies own 25% of rentals, while in London and the North West, it’s closer to 20%.
What’s behind the increase? Hamptons points to the changes announced in the 2015 Spring Budget, which decreased the amount of tax relief available for mortgage interest.
But while incorporating can be tax-efficient, it can be more expensive in other ways, so you should thoroughly investigate the pros and cons.
- Find out more: will setting up a company cut your buy-to-let tax bill?
2. Mortgage interest tax reliefs cut further
The changes announced in 2015 introduced a gradual decrease of the amount of mortgage interest tax relief landlords were able to claim.
In 2017-18, you could deduct just 75% of your mortgage interest. This went down to 50% in 2018-19 and will hit 25% in 2019-20, before being eliminated altogether.
At the same time, a 20% tax credit is being phased in. For basic-rate taxpayers, the impact on your tax bill will be minimal, but additional and higher-rate payers are likely to feel the pinch.
3. More properties will require an HMO licence
The owners of an additional 177,000 properties will need to obtain licences this year as the criteria for Houses in Multiple Occupation (HMOs) broadens.
Currently, you’re required to seek an HMO licence if your property is:
- rented to five or more people from more than one household
- at least three storeys high
- the tenants used shared facilities.
But from 1 October, any property occupied by five or more people from two or more households will be considered an HMO, regardless of its height or the available facilities.
If your property is considered an HMO, you’ll need to meet additional requirements, such as being a fit and proper person to hold a licence, meeting additional fire, gas and safety obligations, and ensuring the property is suitable for the number of occupants – otherwise you could face a steep penalty.
From October, your property will also need to meet minimum room sizes. For example, bedrooms used by an adult must be at least 6.51 square metres. You can find out more in our story on HMO licensing.
In both Scotland and Wales, the regulations are a little different. An HMO is any property rented by at least three unrelated people who share bathroom, toilet or kitchen facilities. Your responsibilities and obligations in Wales and Scotland may also vary, so check the regulations where your property is located.
4. Many councils introduce new licensing
Even if your property doesn’t meet the requirements of an HMO, you may require a licence from the local authority where your property is located.
Over 70 councils have already introduced licensing schemes for private landlords, with Sheffield City Council approving one just this week. Many more are currently debating the implementation of licences, including Nottingham and Blackpool.
Requirements vary from area to area, but will generally include proving you are a ‘fit and proper person’, meeting tenant safety regulations and, in some cases, signing up to a charter.
Wherever you own property, it’s worth checking up on the local requirements, as failing to obtain a license could land you with a fine.
All private landlords in Scotland must be registered with their local authority and added to the Scottish Landlords Register. In Wales, meanwhile, landlords must be registered with Rent Smart Wales. And, if they are involved in setting up and managing their rental properties, they must obtain a licence or must use a licensed agent.
- Find out more: becoming a landlord
5. Letting fees ban under debate
In November last year, the government announced a ban on residential letting fees in England, which would prevent tenants being charged to process their applications.
The Tenant Fees Bill has gone through the committee stage, and will now head back to Parliament, though it appears to have cross-party support, so could become law by late 2018 or early 2019.
Tenants will still be required to pay rent, security deposits, holding deposits, default charges and capped fees to vary or terminate their lease. But no other fees will be allowed, meaning the common charges for reference checks or application processing will be outlawed.
In response, letting agents may pass these costs on to landlords, meaning your management agency’s bill may be set to increase.
A similar ban is also currently on the table in the Welsh Parliament. Scotland, by contrast, has had a ban in place since 2012.
6. Three-year leases proposed
Earlier this month, the government announced new plans to introduce compulsory three-year contracts for most residential lets in England.
Under the proposal, landlords would need to offer tenants a three-year lease, rather than the 12-months that is currently common. A break clause within the lease would allow tenants to end it earlier if they choose to.
While tenants would be given greater protections, the National Landlords Association has raised concerns about decreased flexibility.
The scheme is currently being consulted upon, so it’s not clear when, or if, the new rules would be introduced.
7. Rogue landlord database now live
Landlords in England subject to banning orders must be reported to a new database that was launched in April this year.
Local authorities can also make an entry if a landlord or agent has been convicted of a banning order offence in the past, or received civil penalties for two or more banning order offences in a 12-month period – although this power is discretionary.
As a general rule, the database can only be accessed by local authorities, and that must be in relation to their duties under the Housing Act 2004, a criminal investigation relating to a banning order, investigations relating to landlord or tenant law and to promote compliance with housing or landlord law.
But in London, the general public can access the Rogue Landlord and Agent Checker, which shows information about private landlords and letting agents who have faced prosecution or fines from London councils.
8. Base rate rises on the horizon
A hotly anticipated hike to the Bank of England base rate failed to materialise in May, with attention now turning to the meeting on 2 August.
While the timing is uncertain, the Bank of England has strongly signalled that the base rate is likely to rise several times over the next two to three years, with predictions that it will hit 2%.
If you’re on a variable-rate mortgage, any increase to the base rate is likely to affect the amount of interest you pay. For landlords with interest-only mortgages, this could put a strain on your finances.
So consider whether now is the right time to remortgage to a fixed-rate deal.