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• Author: Ranjeet Johal

Tough times for landlords

Landlords have come under increasing pressure, and this pressure has been ramping up over the last few months with no end in sight. These truly has been a couple of years to forget for landlords and in this article, we consider some of the burdens being placed on landlords and the possible effects of these.

Airbnb

Following pressure from regulators and local authorities, Airbnb has agreed to automatically block its users from renting out their properties for more than 90 days per year. This ban can be circumvented by obtaining a licence from the relevant local council, but this is highly unlikely given the concerns over supply of accommodation.

With falling rental yields in the capital, Airbnb had been a blessing for landlords, who could sometimes achieve 2x the amount of rental income than they would obtain with a long term tenant. This has now effectively been brought to an end.

This ban comes hot on the heels of the decision of HHJ Stuart Brigg in Nemcova v Fairfield Rents Limited [2016] UKUT 303 (LC). The Judge considered the whether a short-term let could constitute a breach of the lease not to use the flat for anything other than a private residence.

The Judge came to the conclusion that the duration of the occupation was relevant. He held that in order for the flat to be properly said to be a private residence, there must be a degree of permanence, going beyond a stay of a few nights or a weekend. A short-term occupation of days and weeks was a breach of the covenant.

Whilst every lease is different and must be considered on its merits, this decision throws another spanner into the works for landlords.

Tax relief on mortgage interest

In the August 2015 budget, the Government announced the plan to remove a landlord’s capacity to deduct the costs of mortgage interest from rental income before calculating their tax bill.

Whilst this is due to be brought in next year, the plan is to phase it in and so the full force of the changes will not be felt until 2020. Next year, landlords will be able to set of 75% of their tax bill, with an addition 25% being reduced each year.

Landlords will now have a 20% tax credit, regardless of what income tax bracket they are in, but tax will be paid on turnover rather than profits. This is likely to hit those in the top tax brackets the hardest.

Many landlords are considering incorporating companies so that their effective tax rate is reduced. In addition, it is predicted that the costs will ultimately be passed on to tenants leading to higher rents.

Affordability criteria for buy-to-let mortgages

On 31 March 2016, the Bank of England outlined new checks that it required lenders to undertaking before granting a buy-to-let mortgage, potentially leading to difficulties for some in obtaining funding when purchasing an investment property.

The new measures included increasing the income coverage ratio and the stress test rates, setting the minimum theoretical mortgage rate at 5.5% and taking into account management charges, lettings fees and the proposed higher rate of tax on rental income when calculating income coverage ratios. The idea is to put buy-to-let mortgages on par with residential mortgages in terms of tougher lending criteria.

The difficulty in obtaining lending will be further exacerbated by new requirements for portfolio lending, whereby a lender will need to analyse a landlord’s entire portfolio as part of the lending process, where a landlord has four or more properties. The analysis will depend on the lender, but is likely to include cash-flow, experience, location of the properties and leverage.

It is hoped that these new rules will slow down buy-to-let lending and lead to more stock on the market available for first time buyers.

Stamp duty

On 31 March 2016, the Government introduced a 3% stamp duty surcharge for anyone buying an additional or investment property. Naturally there was a rush to complete deals prior to this deadline and the number of deals at the start of the year spiked.

The Government had hoped that this measure would slow the relentless rise in house prices and encourage first-time buyers into the market, who it was felt, were being squeezed out by buy-to-let investors. Whilst there has certainly been a slowdown in the market, it cannot be said that properties are becoming more affordable. There has certainly been a reduction in confidence in the housing market.

Lettings fees ban

In last year’s Autumn Statement the Chancellor, Phillip Hammond, once again took aim at the lettings industry with a proposed ban on upfront lettings fees payable by tenants for things such as administration and referencing. This proposal comes in the wake of lettings fees having risen almost 60% in the last 5 years in some cases.

Whilst the idea is to move these costs back to landlords, or have lettings agencies absorb them themselves, rather than having tenants paying out, it is widely thought that landlords will simply increase the rent that they seek.

It is questionable whether this measure will help tenants in the long-term as rising rents will ensure that cash-poor tenants will still be unable to save enough to afford to get a foot on the housing ladder. In addition, there is talk amongst letting agents of charging lettings fees on a monthly, rather than upfront basis.

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