While conditions in the local property market may not be offering the double-digit capital growth of recent years, property in and around Cambridge still represents a solid investment. But it's important to have a good understanding of the various new regulations and legal requirements. Here are 10 of the most important changes that are impacting landlords in today's private rented sector.
1. Mortgage interest tax relief changes Before April this year, landlords could deduct their mortgage interest costs from their income when calculating their tax bill. Now though, you can only offset 75% of your mortgage interest, and this figure is being gradually reduced to zero by 2020. Instead, landlords can claim a tax credit worth 20% of their mortgage interest – a change which will hit high-earning landlords hardest.
2. The end of the wear and tear allowance Until 2016, landlords letting furnished homes could deduct 10% of the annual rent from their profits before they paid tax to account for ‘wear and tear’. This ‘wear and tear’ allowance was permitted regardless of whether they had actually spent any money on furnishings that tax year. According to the new taxation rules, landlords can only deduct the cost of replacing or repairing household items like-for-like.
3. Right to Rent checks Under ‘Right to Rent’ legislation which came in to force in February 2016, landlords have to ensure their tenants have the legal right to live in the UK. This involves checking passport or visa paperwork before the lease is signed. WIth RAH managing your property, we’ll deal with this on your behalf, but the consequences are severe – if you’re found to be letting to a tenant who is living in the UK illegally, you could face a fine of up to £3,000.
4. Energy efficiency regulations From 1 April next year, any properties rented out privately must have a minimum emergency performance rating of E or an Energy Performance Certificate (EPC). The rules will apply to new tenancies from April 2018 and for existing tenancies from April 2020. Fines of up to £4,000 can be imposed for landlords who breach the rules.
5. The Housing White Paper In February, the government released a White Paper on ‘fixing Britain’s broken housing market’. Primarily, the paper focuses on freeing up land for housebuilding, encouraging construction of starter homes and addressing unfair rental practices. With the uncertainty caused by the recent general election, however, it remains to be seen which – if any – policies will be implemented.
6. A property market slowdown Landlords need to be aware of market pressures caused by external events. We found that last year’s Brexit vote had little effect on \cambridge house prices, and any talk of a house price crash has so far been unfounded. That said, transaction levels have been slowing in recent months – if value growth follows suit, property investors may see weaker returns.
7. Section 21 eviction process In 2015, new regulations were brought in surrounding the Section 21 eviction process, requiring landlords to follow the rules around evictions more closely. While these requirements have existed for some time, some self-managing landlords may not be aware of the complexity of the process. As an ARLA qualified agent, RAH is fully up to speed on the Section 21 requirements.
8. Tenancy deposit protection Compulsory tenancy deposit schemes have been around for a decade, but there are signs that the deposit system might be beginning to change. From deposit free renting in the build-to-rent sector to apps offering tenancy insurance, a number of schemes are being touted as a new alternative – so it’s important for landlords to keep abreast of the latest trends and technology.
9. Stricter buy-to-let lending regulations Last year, the Bank of England announced it would introduce tougher new requirements for buy-to-let borrowers. The new rules require landlords to bring in higher levels of rent relative to their mortgage costs. In addition, landlords with four or more properties will face additional stress testing, and be required to provide more information about their income and debts.
10. The continuing impact of stamp duty changes The stamp duty surcharge – taking effect in April 2016 – is arguably the most divisive of the measures introduced to cool the private rental sector. The 3% surcharge means, for example, that a landlord buying a £200,000 home would now pay £7,500 in stamp duty, compared to just £1,500 before the changes. Landlords need to factor in these additional costs before making a new purchase.