www.which.co.uk – By Stephen Maunder
Energy, taxation and lending reforms could hit profits
Whether you’re a first-time landlord or a seasoned investor, you may have struggled to keep up with the raft of reforms in the buy-to-let sector last year. But don’t worry, we’re here to help. Which? explains the 12 key things you’ll need to be aware of in 2018 as the government continues to shake up the property investment landscape.
1. Ombudsman scheme to be launched Landlords will soon need to register with a redress scheme to solve tenancy disputes. In October, communities secretary Sajid Javid announced plans to make all landlords join an ombudsman scheme that will offer legally binding resolutions to disputes between landlords and tenants. At this stage, it’s unclear whether the government will extend the scope of an existing body or launch a new one – so keep an eye out.
2. Energy efficiency changes Energy Performance Certificates measure how energy-efficient your home is. From April, rental properties will need to achieve a minimum rating of E. Initially, this will apply to new tenancies and renewals, before being extended to all existing tenancies by 2020. Landlords could face cumulative fines of up to £5,000 for breaches such as providing false information, failing to adhere to compliance notices or renting properties that don’t meet the new regulations.
3. Letting fees ban In November, the government introduced a draft bill to parliament to ban letting agents from charging fees in England. The proposed ban was originally announced in November 2016. At this stage, it looks likely to come into force at some point in 2018. The draft bill proposes banning letting agents from charging tenants a fee to rent a property, capping holding deposits at no more than one week’s rent and capping security deposits at six weeks’ rent.
4. Landlord licensing While a UK-wide licensing system has been debated, it’s currently up to councils whether landlords are obliged to sign a code of practice. Some permits only apply to landlords letting HMOs (larger buildings rented to five or more people), while others are compulsory for all landlords in an area. Around 300 councils either have some form of scheme or are consulting on the introduction of one, so check your local council’s website to see if you’ll be affected. Some of the largest fines in 2017 were brought against landlords in Wales (£4,000) and Dagenham (£2,000).
In a separate announcement last week, the government put forward proposals to inspect rental properties every three years and introduce accreditation and refresher courses for landlords.
5. Rogue landlord database A new database of rogue landlords and letting agents will be launched in England in the spring, provided it is approved by parliament early this year. From April, the database will name and shame landlords who have been banned from letting properties. It’s not yet clear if this database will be available to the public.
6. Right to Rent Right to Rent legislation came into force in February 2016, and requires that landlords check whether their tenants have the right to live in the UK. A total of 106 landlords were charged for breaching Right to Rent rules in 2016 – with fines totaling around £30,000. If you use a managing agent, they should conduct these checks on your behalf.
7. Affordability changes for portfolio landlords At the end of September, tougher lending restrictions for portfolio landlords came into force. Landlords with four or more properties now need to show full financial information for each property in their portfolio when applying for new finance, rather than simply providing their top-line profits. As well as increasing the amount of time it takes to borrow additional funds, these changes could see landlords with heavily mortgaged portfolios getting turned down for new loans.
8. Cuts in mortgage interest tax relief The gradual tapering of how much mortgage interest landlords can deduct when calculating their tax bill will continue in 2018. Currently, landlords can only offset 75% of their mortgage interest, and this will drop to 50% from April. This level will continue to reduce until it hits zero in 2020, when it will be replaced by a tax credit worth 20% of mortgage interest.
9. Mortgages could get more expensive In the last week or two, lenders have been cutting rates on buy-to-let mortgages – but this season of goodwill is set to be short-lived. This is because two major sources of funding for buy-to-let lending are set to close soon. The Funding for Lending Scheme (launched in 2012 to encourage banks to lend) ends this month, while the Term Funding Scheme (which lends to banks at the base rate) closes in February. The imminent closure of these schemes – coupled with a possible further base rate increase – could push up buy-to-let mortgage rates from long-term lows.
10. Yields dropping on investment properties According to data from Your Move, the average rental yield in England and Wales in October was 4.4%, down from 4.8% a year earlier. With capital growth also taking a hit in some parts of the country, landlords could face smaller profits in 2018.
11. Stamp duty surcharge remains More than 18 months on from the controversial introduction of a 3% stamp duty hike for landlords, the tax remains a hot topic in the buy-to-let sector. The 3% surcharge means that landlords buying a home for £200,000 need to pay £7,500 in stamp duty – compared to £1,500 before the changes. While this is nothing new, it’s vital to factor this into your calculations, especially when you consider how other regulations could put a squeeze on your profits.
12. Leasehold scandal set to continue If you’re investing in a new-build home, you’ll now need to pay greater attention to its tenure. The growing scandal of new-build houses being sold as leaseholds with punitive ground rent clauses developed throughout 2017, and the government is now taking action. In December, plans were announced to ban new-build leasehold houses and make it easier for current leaseholders to buy their freeholds. While this might seem to be an issue for owner-occupiers, landlords who have purchased leasehold properties to let out are also likely to have been affected.