Landlord tax rises will see rents increase

Landlord and tenants set to suffer under new tax.

Tax rises for landlords being introduced today could see rents rise by 30% and stifle investment in properties to let, making it harder for renters to find suitable homes.

The warnings come from the country’s leading landlord body as the Government begins to restrict mortgage interest relief for landlords and tax their turnover rather than their profit.

Research by the Residential Landlords Association (RLA) has shown that two-thirds of member landlords feel they will need to increase rents to cope with the new tax burden.

The results also show that 58 per cent of members plan on cutting back investment in property.

Independent experts have argued that landlords will need to increase rents between 20 per cent and 30 per cent to cope with the extra cost of the tax hikes.

Ministers have argued that the move levels the playing field between landlords and homeowners, but the respected Institute for Fiscal Studies has said that the tax system: “is not, and was not, even before the recent changes, more generous to people buying to let.”

 RLA Chairman, Alan Ward said: “Today’s tax increases contradict everything the Government has said about needing a larger rented sector to give tenants more choice and more affordable housing.

“It is tenants who will be hit hardest by these punitive tax increases. Aside from likely paying more in rent, in many places they will face a growing shortage of affordable places to rent.

“We call on Ministers to undertake a major review of the impact of this policy and if all the predictions about its impact are right, to abolish the changes in the autumn budget.”

One in four landlords selling up due to MIR changes

 A week ahead of the Autumn Statement a RLA survey revealed that a quarter of all buy-to-let landlords are selling homes as a result of Government tax changes.

The 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.

This means many landlords on the basic rate of income tax will find themselves pushed into a higher rate despite their income not having increased.

It is tenants who are likely to lose out as a result of the changes, either losing their homes as landlords sell up or facing higher rents as landlords try to mitigate the financial impact and supply is reduced.

The RLA are making a final call for Chancellor Philip Hammond to reverse the decision on November 23rd.David Smith, RLA policy director said: “The RLA’s findings are a worrying sign of the potential trouble ahead for tenants as a result of the previous Chancellor’s tax rises.

“Any reduction in supply is going to make it more difficult for them to find a place to live and will inevitably drive rents up.

“Ahead of the Autumn Statement we are calling on the new Chancellor to consider the evidence, reverse policy and support growth in the rented sector.”

RLA research showed 68% of landlords said the changes will reduce their profitability by at least 20%, and 14% said it will reduce profits by more than 60%. A total of 36% said the removal of MIR would result in them making a loss on their investment.

The plans, which were announced by former chancellor George Osborne in 2015 are set to be phased from next year.

Trump, Brexit & the UK’s Property Market

So far, 2016 has been a year of change; Stamp Duty, Brexit, May and Trump, to name but a few. And whether you like it or not, these changes may have an influence on the UK’s property market.

Interestingly enough, the Brexit discussion and Trump’s presidential campaign shared a lot of topics like free trade, immigration, inflation, tax and healthcare.And comparing the two events, the UK’s decision to leave the EU and Trump’s victory during the presidential election in the United States, has already been done on multiple occasions.

We, however, prefer to ask how Trump’s win will influence the UK’s property market?

First and foremost, to be able to find out more about possible consequences, it’s important to view Britain’s housing market as what it is; a small segment of the country’s macro economy.

Having defined the role property plays within the UK, it’s easier to look at Britain’s overall economy to find indicators of future developments. In a what-if scenario describing the relationship between Trump’s America and post-Brexit Britain the possible outcomes received mixed reviews.

Whilst Trump has built his whole campaign on the basics of “America First” combined with a hostile attitude towards free trade deals, he will, nevertheless, need trade partners.

What we do know is that Trump regards the North American Free Trade Agreement as the “worst deal ever”, opening up space for new deals to be made.

How exactly Trump would influence the British market is tricky to call. Broadly speaking, America’s new president is a fan of Britain. He shared his enthusiasm about the referendum results stating it’s “a great victory”, aims to build the finest golf course in the world in Scotland and took Nigel Farage on his campaign tour.

Although British politicians might feel differently about the new President-elect, with both the old and the new Prime Minister describing Trump as “wrong”, Theresa May recently published a statement congratulating him on the win.

Since, at this stage, we know so little about possible effects Trump’s election may have on the UK, City A.M asked some of the biggest investors about their reaction to the recent results.

All seven of them stated a similar point of view: knee jerk reactions won’t get us anywhere.

On top of that, investors seem to have taken some comfort from Donald Trump’s victory speech, giving the situation another positive momentum.

So whilst it currently remains rather difficult to see what influence Donald Trump’s election may have on Britain’s property market, Laith Khalaf of financial services group Hargreaves Lansdown, probably summed up the situation the best by describing the stock market’s reaction to Trump’s election: “Initial stock market reaction to the Trump victory was a short intake of breath, followed by a shrug.”

Popular buy-to-let tax loophole 'won't work', accountants warn

A controversial tax manoeuvre allowing landlords to transfer buy-to-let properties into a limited company without having to re-mortgage, has received a flood of inquiries.

Promoters of the "beneficial interest company trust" are capitalising on a trend among landlords to move existing properties into company structures.

This allows them to avoid the higher buy-to-let tax being introduced next April, which at the moment relates only to properties directly owned by individuals.

Interest in the service has leapt since the failure of an attempted judicial review which sought to overturn the tax.

Around 40 landlords have already used the loophole, promoted by law firm Cotswold Barristers. It says another 50 have inquired since the attempted judicial review, which was led by Cherie Booth QC, failed earlier this month.But experts warn that landlords could fall foul of tax avoidance laws as well as leaving themselves open to allegations of "mortgage fraud".

How does it work?

Many existing landlords are deterred from "incorporating" their properties because of the costs associated with moving them into a company.One of these is the need to remortgage, which incurs administrative costs and may mean a borrower loses an extremely favourable low tracker rate.

Landlords who own their properties themselves will have mortgages in their own name. If they move them to a company, they would have to take out a new mortgage via the company.

This may mean losing a favourable rate and moving onto a more expensive one.

The "beneneficial interest company trust" claims to allow borrowers to move their properties into a company while retaining the legal title - removing the need to remortgage.

Borrowers transfer solely the beneficial interest into the company, and keep the mortgage in their own names.

Meanwhile, income from the properties goes into the company and is taxed at the corporation tax rate, which is currently 20pc and falling, regardless of the tax band of the individual landlord.

The landlord would still potentially have to pay stamp duty and capital gains tax on incorporation, unless they are exempt. (An exemption from having to pay stamp duty exists for partnerships, and capital gains tax does not have to be paid by landlords who can show that they operate as a business.)

When the new tax regime starts to be phased in from next April, the incorporated landlord continues to pay tax on the income at corporation tax rates and is exempt from the new law.

Mark Smith, of Cotswold Barristers, who promotes the service, said: "We are suggesting that this arrangement does not affect the lender’s security because you’re not changing the legal interest.

"If the lender needed to enforce the loan, it would overreach any trust status, and the lender would still have to come after the individual."

He said that because of the tax implications it is only a suitable option for landlords with at least £1m of properties, each with mortgages worth 60 to 65pc of the property.

Cotswold charges fees of up to £14,000 depending on the size of the portfolio.

What are the problems?

Nimesh Shah, of accountant Blick Rothenberg, warned of "huge pitfalls".

He said the main issue from a tax perspective is a section of the Income Tax Act which prevents individuals from transferring an income stream into a company for tax reasons.

Mr Shah said HMRC would be looking for any sign that this was an artificial structure or tax-motivated manoeuvre.

He said: "The test is to do with why you're incorporating. Is there a commercial rationale, or is it a tax reason?

"In a normal incorporation situation everything is going in to the company. Here you're splitting the income and the ownership out, which makes it more of an issue," he said.

Mr Smith said it would not be seen as tax avoidance, because it conferred no extra benefit above those offered by any corporate structure.

On a separate issue, Mr Shah also said that property owners need to be careful with the section of the stamp duty law which apparently allows a partnership to avoid stamp duty on incorporation.

There is no set test, but the Revenue can remove the relief if it believes that the partnership has been established specifically for the purposes of avoiding the stamp duty charge.

Mortgage danger

Lawyers also warned that failing to tell your lender of a change in ownership of a property could leave you open to problems, which in the worst cases could lead to a loan being called in.

Jeremy Raj, of law firm Wedlake Bell, said: "If you're not careful you are leaving yourself open to being accused of committing mortgage fraud. If there's any major change in the ownership of a company then the lender is entitled to know."

Mr Smith said that his lawyers check the terms and conditions of any potential client's loans carefully to make sure they will not be breaking the terms of their mortgage.

The UK's two largest buy-to-let lenders, Lloyds and Nationwide, both declined to outline their position relating to the arrangement.

Are sky-high rents finally running out of steam?

Rental prices have slowed to their lowest annual growth rate this year, according to HomeLet, which provides insurance for landlords.

Tenants signing up to a new rental agreement now pay an average of £910 per month, which is up 3pc on last year.

By contrast, in March, the annual rate of growth of rents was 4.5pc.

On a monthly basis, average rents across the country fell in September by 0.8pc from August, as the market was flooded with newly marketed properties bought before stamp duty was hiked by 3pc for investors.

In the last 12 months, the north-east of England and Scotland are the only places where rents have not increased.

But HomeLet said that the slowing growth in rents suggested that they may be hitting a threshold of affordability.

Landlords will also be hit by new changes to the tax system to be phased in from 2017. This will remove their ability to deduct the cost of their mortgage interest from their rental income, effectively meaning they will be taxed on turnover, not profit.

Buy-to-let tax changes | Mortgage interest relief

• From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due
• So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income
• For higher-rate taxpayers, mortgage costs above 75pc of rental income will make their BTL investments loss-making
• Mortgage interest relief will be restricted to 20pc, meaning that higher and additional-rate taxpayers will be particularly affected

Martin Totty, the chief executive of HomeLet, said that landlords were trying to keep rents within affordable levels.

He said: "Despite factors such as higher stamp duty on purchases for buy-to-let investors, and the tax changes coming in from April 2017, it would appear so far landlords have absorbed any actual or expected decreases in their yields, rather than pass this on through higher rents.”

The average monthly rent in London is £1,555, down 0.4pc in September. The cheapest rents in the country are in the north-east of England, where they average £530 per month.

Don't overlook the importance of a detailed inventory when letting a property

For landlords who have spent significant funds on getting their properties in top condition to attract tenants, the last thing they want is to see all that work undone through damage or neglect by the occupier.But, if they fail to take a proper inventory at the start of the tenancy, this is a situation landlords could find themselves in.

The Inventory is a listing of all the contents of a property and a record of the condition of each item. It’s also referred to as a “schedule of condition”. The form is designed to help monitor the condition of the items before a tenant moves in and just before a tenant leaves, so it can be made clear what damages, if any, need to be paid for.

A lack of an inventory, or one that has not been completed to the correct standard, could mean that, if the tenant does damage the property or its contents, the landlord may not be able to withhold the deposit to cover the costs.

Some landlords who let properties unfurnished mistakenly believe that they do not need to complete an inventory because there is very little that can be stolen, broken or damaged.

However, as proper inventories also include details on the condition of a property, such as cleanliness and decor, even the barest of properties should have one.

They may be able to use their landlord contents insurance to claim for lost, stolen or intentionally damaged items, but many property owners insurance policies won't pay out for accidental damage.

As such, it is perhaps no surprise that many landlords choose to use professional services to ensure that the inventory is carried out correctly.

The inventory acts as a legal contract between the tenant and landlord that shows they agree on exactly what was in a property and in what state it was in at the start of the rental period.

Therefore, it must be signed by both parties at the start of the tenancy and initialled on each page. It is highly recommended that tenant attends the check-in inspection but the tenant should also be allowed a period of time to advise you of anything they disagree with or wish to be amended so you should allow them a reasonable time to do so. 

The Property Ombudsman Code advises a period of five days for the tenant to respond with corrections however be sure that if the tenant does not sign and agree the report you have a clear audit trail that shows you have done everything to allow them the opportunity to comment.

It is also advisable to note the readings of the gas and electricity meters to avoid disputes both with the tenant and energy suppliers.

Stacey Wren of First Assist RLS said

"A true inventory is not simply a list of items in a property - it also includes a description of the condition and cleanliness at the start and finish of the tenancy, enabling one to be compared against the other with clarity and accuracy," says Ian Potter, operations manager at the organisation. It is also vital that an inventory clearly defines any terms used for describing condition and that these are used consistently and using a clear scale.

For more information on Inventories and other First Assist landlord services visit www.firstassist-rls.co.uk or call 0800 0830122

Landlords Home emergency insurance. Is it good value?

All landlords have to make a call on how they will handle the upkeep of their property with boilers topping the list of issues that give the most cause for concern. Well that’s not surprising as it can be a very expensive fix when the break down.

We have taken a good hard look at the boiler insurance market and here is what we have found.

Banks and insurers see household emergency cover as a way of making extra profit from customers. Policies can cost about £200 a year and are supposed to cover emergency problems, such as a boiler breaking down or a pipe bursting.

Experts warn that polices are riddled with exclusions, for example, most providers do not cover lime scale damage and heating controls. Some will not pay out for boiler repairs during the summer or cover boilers more than ten years old. The limits on payouts can vary wildly.

Energy providers are no better. You could find that your old boiler system doesn't meet the standards requested by your energy provider, in which case you'll probably have to pay extra – more than £100 in places – to get your heating system revamped before being offered cover.

So is insurance always the answer?

Not according to consumer group ‘Which’? The consumer group analysed the costs of cover and compared this with the average amount spent calling out engineers when needed.

While boiler breakdown cover, including an engineer's annual check-up of boilers and systems, typically costs between £150 and £200 a year, most households do not need to call out an engineer for repairs each year, according to Which?

Vera Cottrell, financial services expert at ‘Which’ states; ‘Some people may feel reassured by having a home emergency policy or boiler cover but it doesn't make sense financially’.

Over 40% of Which members have at least some type of boiler cover and most say they chose to buy cover for peace of mind or value for money. However, based purely on cost, you'd probably be better off paying for repairs on an ad hoc basis - rather than paying monthly for boiler cover.

Our annual survey of boiler owners shows that the average gas boiler has almost a 50% chance of needing a repair in its first six years - although this drops to less than 40% if you buy a boiler from the one of most reliable boiler brands. 

Which analyzed the results of their boiler reliability survey against the cost of a typical boiler-servicing contract (£183)? They found that 93% of people would be at least £50 better off in any given year if they didn't pay for a boiler-servicing contract, and instead had their boiler annually serviced by an independent repairer and paid for any repairs and faults as they happen. 

You can also cut the cost of expensive repairs by making sure you buy a boiler from a reliable brand.

Also watch out for attractive introductory prices. Many boiler cover companies quote only the cost of the first year of cover, and then as much as triple the amount they charge in the second year. Always ask the provider what the cost of its contract is beyond the first 12 months.

While boiler breakdown cover may provide you with peace of mind, you should also bear in mind that not everything will be covered by a boiler-servicing contract. A typical example is where sludge build-up occurs in your boiler. This is not covered by any of the companies Which looked at and would require a full system flush, which can cost on average more than £15

Check your policy for the following exclusions:

• ·         Boiler age - if you have an older boiler you may find not all providers will accept you as a new customer
• ·         Boiler life - existing customers should also be wary. Some providers won’t renew the cover if your boiler reaches a certain age.
• ·         Call-outs - if your boiler breaks down twice in a year, some policies won’t cover you more than this.