Landlords there has been a lot of changes in 2016. This is not legal or financial advice – its a review of what the Government, Its Quangos and the Banks have been up.
The last two years have been eventful ( See also A Landlord Review of 2015. ), many of us have other constants. So we have put together a little Review of 2016.
Get out your notepad and make changes to your business were appropriate.
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3% Extra Stamp Duty
2016 started off with a flurry as Landlords set out to expand their Buy to Let portfolio before 1 April 2016. The date that buying buy to let properties got 3% more expensive.
This was the introduction of higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties.
If you owned an existing residential property, on any additional property purchased an extra 3 percentage points above the current SDLT rates is added.
“The higher rates of SDLT are part of the government’s commitment to supporting home ownership” the Government told us.
This was the rebirth of Margaret Thatchers “home owning democracy”. The new plan is to give First Time Buyers a price advantage over Landlords. More homeowners and less rental homes.
A SDLT Exception!
2016 gave rise to different type of property portfolio expansion that was exempt from the higher rate SDLT.
Instead of buying property they could instead buy the shares of a Limited Company that already owns properties. When you buy shares, you usually pay a tax or duty of 0.5% on the transaction.
This resulted in a new process of complex legal situation, in which a new buyer raises bridging finance on the assets owned by a company. The funds used to repay existing mortgages and “buy out” the shares of the existing owner. Thereafter as the only shareholder of the company owning property moving to a term mortgage. Oh the fun.
It is rare as few landlords hold properties in a Limited Company today. This will be changing moving into 2017?
Other Landlords finding how rare this may be – found another exception.
Buying 6 or more residential properties in one transaction. This exception is one for landlords with a big hunger to expand rather fast. It moves the transaction into a completely different SDLT pricing brackets – one designed for commercial.
( https://www.gov.uk/stamp-duty-land-tax/residential-property-rates )
Has the new SDLT Worked?
The Government wanted First Time Buyers to replace Landlords. In statistics that would mean the same SDLT receipts and same number of sales? Except not to landlords.
That did not work!
Official figures show that £7.7bn has been raised from stamp duty land tax (SDLT) during the first eight months of the 2016-17 financial year.
That is 12% more than during the same period the year before.
This has come despite a 10% drop in the number of homes sold in the UK.
The higher SDLT receipts seem to show Landlords have continued to buy. The reduction in sales suggests First Time Buyers have not stepped into fill the gap.
( http://www.bbc.co.uk/news/business-38391971 )
Mortgage Interest Relief (MIR) Removal
George Osborne unveiled a shock tax change in 2015. It removes a landlords ability to deduct the cost of their mortgage interest from their rental income. When they calculate profit on which to pay tax.
The timetable for this is 6 April 2017 and will be fully in place from 6 April 2020.
In 2016 Landlords tried to fight back – the idea being that higher Tax’s will mean higher rents. A campaign group called “Axe the Tenant Tax” was established.
With Meetings with MPs, Letters and mild Campaigning throughout 2016. The campaign had a devastating blow when they lost in their legal battle in October.
Also unsuccessful in November 2016 was campaigning by Landlord Associations. The effort was to ask Philip Hammond to reverse the changes in the Autumn Statement.
With the changes due to start in a few months, Landlords trying to stop it before it happens. Have resigned to evidencing its impact to get a policy U-Turn in 2017/2018.
A MIR Exception!
Property Investors quickly found a sour solution that Limited Company Buy to Let will retain Mortgage Interest Relief.
This resulted in a big swing to Landlords setting up Limited Companies to buy properties.
Existing Landlords had no luck – as a Limited Company is a “separate legal entity”. To move existing properties into a LTD Company means a Sale & Purchase (not a remortgage). Such a route will result in Capital Gains Tax and SDLT to be paid.
Accountants came out with solutions looking at the “Ramsay v HMRC (2013)” case. In which investors argued they were running a business and was able to move properties without paying CGT after a court battle!
It came with technicalities, If you can prove that you work with your properties on a daily basis (at least part-time). Then you may be allowed to incorporate your property business without having to pay CGT became the idea.
It soon became apparent that a property tax specialist is required. With such technicalities and possibility of fighting a court battle with HMRC to justify it. Its not a none certain solution.
The accountants though are convinced in the Limited Company Strategy as a whole.
You can retain MIR buy buying in a limited company but if you want to draw the monies out of the company there will be tax to pay. Never-mind the incorporation costs, accountancy costs, higher mortgage rates and other issues.
Deciding which route to buy a property – in a Limited Company or in a personal Name in 2016 is no longer simple. Its oh so fun!
( http://www.optimiseaccountants.co.uk/the-truth-about-stamp-duty-and-partnershipsllps/#.WGEj_TW4L6k )
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Squeezing more Money out of an Asset
2016 gave the realisation for Landlords that the Tax Man wants more money from your investments.
To cover this increased expenditure Landlords are looking at other solutions.
The first idea is to Increase Rent. This is not so simple as what we charge is rent is determined by the local market. Can it support a rent rise to cover the costs?
Bespoke Finance has also shown that to cover £59 PCM tax loss a landlord would have to charge £99 PCM extra rent. Except not all landlords are effected to the same extent.
Others have been looking at Serviced Accommodation- in the right areas of the UK. Changing Buy to Let into Short Term Holiday Lets can give good returns on investment. The rise of Airbnb has given property investors other options creating mini hotel chains.
The biggest swing has been Landlords changing single let properties into Houses of Multiple Occupation (HMO). Instead of renting a whole house to a family they rent out rooms to individuals. Removing void periods with tenancy diversification and often given higher rental yields. Some even converting the living rooms into an additional bedroom!
The Good Landlords that historically re-invest a percentage of income in renovating Buy to Let properties – giving better rented homes. Are looking to cut back re-investment in there portfolio. If you can not increase rents and the Tax Man wants more. The way to keep returns is to reduce investment – often a short sighted answer to a taxing question.
Maximum Loan is tied to Maximum Rent
The Prudential Regulation Authority (PRA) has stepped in to decide Banks underwriting criteria for them. At the end of 2016 we have seen many Buy to Let Mortgage lenders start to implement new tighter affordability requirements. Ready for the 1 January 2017 deadline.
The affordability assessment of a buy-to-let loans will require lenders to either use an interest coverage ratio test and/or determine whether personal income is sufficient to meet mortgage repayments.
Most Buy to Let Lenders already had this calculation in place – the maximum rent you can charge decides the maximum loan they can provide.
The PRA set out a minimum requirement for all, Mortgage Lenders wanting to be seen as responsible lenders set out at higher than the minimum requirement.
Although some mortgage lenders already having a Rental Stress Test higher than the PRA minimum at the end of 2016 reduced them.
Overall this is a good thing for novice Landlords, this requirement can help in preventing bad investments where rents charged will not be able to service the mortgage payments.
A PRA Stress Test Exception
The PRA left two main exceptions that leave mortgage lenders with more flexibility.
When lenders come to decide what stress test they use – they have to take into account the Tax Situation of the property investor. The tax situation after the MIR changes for landlords in personal names are not so great. As a separate legal entity the Tax Situation for a LTD Company Landlord is considered better.
With this in mind many mortgage lenders are providing less strict rental stress test rates for Limited Company Purchases.
The prediction in 2017 is we may also see more Five Year Fix Buy to Let Mortgages. As the PRA set out that due to the certainty of mortgage payments on a Five Year Fixed Mortgage. Banks can charge a more favourable stress test rates.
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Lettings Fee Ban
The Autumn Statement in 2016 was a surprise to Landlords and Letting Agents – as the chancellor announced that Letting Agents Fees will be banned.
The hundreds of pounds unscrupulous letting agents charge tenants for referencing is to bring about a total abolition of the fee for all.
Will it just be Letting Agents banned? or can Landlords still charge?
The policy is so far a sentence in a statement. Landlords will have to wait to see what they can or can not charge a customer for Referencing, Check-In, Check-Out, Inspections, Late Fees, Contract Fees and so forth.
“We have seen these fees spiral, often to hundreds of pounds,” Mr Hammond said. “This is wrong. Landlords appoint letting agents and landlords should meet their fees.”
To many Landlords this is fine – some agents do charge outrageous fees and a crazy profit margin on this service.
Is it not Landlords that benefit from enjoying low % fees? in return and wont the cost be passed on to them.
Will letting agents aim to retain profits or will every new enquiry, that previously added to there income now be an cost.
If Landlords are to pay, wont that lead to increased rents. If so wont the successful tenant be paying the accumulated referencing costs of the unsuccessful applicants. Is it not common sense to presume rents wont fall when this cost is “paid off”.
This came as a big surprise to many in the lettings market – its been a campaign for “Generation Rent” for a long time. Thought the housing minister Gavin Barwell said in September that “landlords would pass costs to tenants via rent” if the fees were banned. Labelling this a “bad idea”.
There was no consultation or input from Landlords or Lettings Associations. One day it was a “bad idea” and the next it was government policy.
Leeds Council looses court battle
One thing in 2016 that most landlords will have missed was the case of Leeds City Council v Broadley.
It centred around the question of who is responsible for paying the council tax on a property if the tenant moves out, but a periodic tenancy agreement is still in place – the tenant or the landlord? (i.e. tenant has vacated but not given notice.)
The council’s argument was based on the claim that a single tenancy cannot be both a fixed term and periodic as this would offend the principle of uncertainty.
In other words the Landlord is responsible due to a technicality regardless of what the Tenancy Agreement says.
If Leeds Council had won such an argument – that a six month tenancy was just six month and it can not go periodic thereafter. It would have had huge legal implications in terms of tenancies, deposit protection and the Housing Act itself.
Relax though – the Residential Landlord Association (RLA) funded by landlords like yourself. Argued against this and successfully won the case preventing us landlords of a headache brought to us by a court.
2016 we should realise that the RLA needs your financial support as a member and as a member they provide us with advice such as if this did not go our way.
New Wear and Tear tax changes
In April 2016 came new tax rules that will replace the existing wear and tear allowance available to landlords which currently permits a reduction relating to furnished lettings of 10 per cent of the rent whether or not the landlord was forced to pay to repair any items.
A deduction for the actual cost of each new item will now be issued, subject to certain conditions.
Another one for your Accountant to Advice.
A Ban on Dodgy Landlords
The Housing and Planning Bill 2015-16 will introduce banning orders, rogue landlord database, rent repayment orders and management orders.
Local Authorities will wake up to a Financial Incentive to prosecute landlords. Fines and repayment orders can be retained by the local authority.
The council can apply to the Tribunal to ban you from managing the property and take over management. They can make you repay rents for up to 12 months.
Your details then put on a list, so other local authorities can follow suit.
A good Tax Adviser is required!
2016 gave rise to difficult questions for property investors.
If you can or can not move properties into a Limited Company? and what routes that can be taken to reduce SDLT & CGT?
Would it be better if I just sold my portfolio and started buying properties in a Limited Company?
Im about to buy a house, is it best for me to buy in personal name? or in a Limited Company?
Am I going into a Higher Tax Bracket? after Mortgage Interest Relief is removed. What year will that be?
If I expand my portfolio – then what Tax Bracket will I have?
Has given cause for landlords to look at there own Tax Situation. Often to question if there current accountant is aware of property investors conundrums and give rise to the ultimate question.
Where can I find a good Tax Advisor? and how much more am I going to have to pay for what was simple Tax Advice previously.
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Homeless Reduction Bill
In 2016 a backbench MP (Bob Blackman) launched a Private Members Bill called the Homeless Reduction Bill.
On the outset this was supported by Landlord Associations and opposed by the Government.
Landlord Associations liked it as previously a tenant was not “homeless” until a court had decided a date and bailiffs were knocking on the door to remove tenants from properties.
This results in higher eviction costs for landlords, instead of tenants caught in unaffordable homes being asked to downsize voluntarily. Landlords had to employ solicitors, pay for court judgements and pay for bailiffs.
This results in higher costs and for tenants a County Court Judgement for a monetary amount and an eviction on there record. A process that removes them from the Private Rented Sector for new housing.
The new bill helped prevent all of that. New measures allowing councils to accept eviction notices as proof people are losing their homes.
A good bill!
Unfortunately the NLA then Withdraws Support for Homelessness Reduction Bill. The new final version adds amendments of almost two pages of sub clauses. It removed what the RLA & NLA liked about the bill and returned it to the old ways.
Members Bills do not normally make it to legislation but with the many amendments. The government now supported the bill and it was passed through the house of commons.
At the start of 2016 it was supported by Landlords and Opposed by Government. At the end of 2016 it was supported by Government and opposed by Landlords.
What is odd – that the bill directly contradicts the Government Guidance to Local Authorities on this issue. Such as a statement made by Brandon Lewis (the then housing minister) in a letter dated March 2016.
NLCE Accreditation Launch
North Somerset Council in 2016 wanted to implement selective licensing.
It was axed due to Somerset Property Network campaigning with the help of LandlordReferencing.co.uk
A rare accomplishment as Licensing has shown to be a good income stream for local authorities, whilst passing on social cohesion burdens from them to private business.
Out of this victory National Landlords Code of Excellence (NLCE) was launched. To help move away from mandatory selective licensing to a voluntary code of ethics.
Such schemes help to raise the standards of Private Rentals with self governance – revoking the need of Local Councils setting requirements (typically with high fees).
With a Code of Practice, Required Education and Required Continuous Professional Development the scheme is set to improve rental standards and be an emblem for good landlords.
Will 2017 be its best year?
HMO Proposal to increase scope
The Department for Communities and Local Government has now ended its consultation on HMO and residential licensing reforms in December 2016.
Currently if a HMO licence is required is conditional if the property has three stories or more. This was born out of fire and safety regulations but today with additional HMO requirements it seems odd.
Odd that a five person HMO over three stories required a licence, but a Twenty person HMO over two stories did not.
The proposal is to remove the “three stories” requirement so all properties, regardless of floors, with five or more people from two or more households, are in its scope.
That will mean many properties that did not require a licence may soon need one. That may be difficult for landlords in areas where the council has set limits on the numbers of HMOs.
In addition to this – a proposal to Introduce a minimum room size to 6.52sqm in line with the Housing Act 1985. Making some rooms that were good enough in 2016, may not be rentable at all in 2017/2018.
The consultation has ended – we will have to see what comes out of it.
2016 a ban on Draughty Homes
Starting in April 2016 tenants residing in properties currently rated F or G were able to request energy improvements to a property.
A Landlord will not be able to refuse a tenants ‘reasonable request’ for energy efficiency improvements.
In 2018 properties currently rated F or G will be banned from being rented – until you improve them to a E rating.
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