Three legislation changes all landlords need to know about this year
Thu 18 Jan 2018
2018 will see several critical changes in the buy-to-let market, particularly for those landlords looking to expand their portfolio and maximise yields. So with that in mind, we’ve selected three key legislation changes that, as a landlord, you need to know about.
1. Landlords face fines if EPCs do not meet minimum energy efficiency rating
What is an Energy Performance Certificate (EPC)?
Possessing an EPC was introduced in 2007 as a legal requirement for anyone renting or selling their property. They provide details on a property’s energy ‘costs’ and give an indication of how environmentally friendly the property is.
What is changing in EPC legislations this year?
Whilst landlords were required to provide an in-date EPC when renting out their property, it could still be rented regardless of the energy rating. However as of 1st April 2018, all new assured shorthold or regulated (private landlord) tenancies agreed on commercial and domestic properties will be required to meet a minimum rating of E, on the scale A-G (A being the most environmentally friendly). Furthermore, any existing tenancies that continue after the 1st April 2020 will be required to meet the minimum rating by this date.
What are the penalties if a property does not comply with the minimum efficiency rating?
If this requirement is not met then the property falls into the Minimum Energy Efficiency Standard (MEES) and it cannot legally be rented out. Landlords who fail to comply face severe penalties including fines of up to £4,000.
What should landlords do to prepare for the EPC legislation changes?
To ensure you meet the requirements, you should:
- Carry out a new energy assessment to ensure your EPC rating is correct
- Determine when current tenancies end to work out a timeline for potential planned works to improve the rating if your property does not reach the requirements
We work with trusted organisations that will not only organise and provide you with an Energy Performance Inspection Report, but also offer detailed suggestions and quotations for all work, whether it’s bringing up to scratch or if you would like to offer your tenants a more tenancy efficient home. If you would like further information, please get in touch.
To read more about the EPC regulations and who they apply to, click here.
2. Section 24: Tax relief on mortgage interest payments is being phased out for landlords
What is Section 24?
Prior to April 2017, landlords were able to deduct the full cost of mortgage, loan and overdraft interest payments on their rental properties as part of calculating their tax. However, the introduction of Section 24 of the Finance Act (no. 2) 2015 means this benefit is being phased out over the next few years.
What does Section 24 mean for landlords?
This change will be phased in gradually; last year we saw the relief decrease to 75%, meaning that landlords could claim on the first 75% of their finance costs and the remaining 25% was now taxable at the basic rate. In April this year this will decrease again to 50% and again to 25% in April 2019. Finally, in April 2020, tax relief for landlords will be eliminated entirely, leaving them liable to pay tax on the full amount of income.
What can landlords do to ease the transition?
Whilst the changes cannot be avoided, there are a few things landlords can consider. First and foremost, speak to your financial advisor who will be able to inform you of the options available to continue to maximise yields on your portfolio.
One option they may give you is to suggest re-mortgaging your property as current buy-to-let mortgage rates are significantly lower at present than a few years ago. Another option they could give you is to suggest having your property re-valued. Property prices in London have increased exponentially throughout the last decade, so if your property has appreciated in value then your lender could end up recalculating your loan-to-value (LTV), which could help you achieve a better interest rate.
3. Prudential Regulation Authority (PRA) mortgage finance rules are becoming more stringent for portfolio landlords
What are PRA rules?
PRA rules apply to ‘portfolio’ landlords (landlords who own four or more rental properties). From September 2018, the PRA is stipulating that lenders assess a landlord’s full property portfolio before deciding which mortgage deal to offer.
What do tougher PRA rules mean for landlords?
Lenders will assess all assets individually and determine whether they are ‘financially healthy’ or not. A property is considered healthy if the income it brings from rental payments covers interest costs. This may cause issues for landlords when applying for additional mortgages, if they own properties with a negative cash-flow position.
What should landlords do to prepare for the more rigorous PRA mortgage finance rules?
As previously, the first thing landlords should do is to speak to their financial advisor. They will most likely ask you to ensure you have a clear picture of the position of each of your properties and may suggest producing a property portfolio spreadsheet. These provide lenders one easy place to view the information they will need to evaluate your portfolio.
If you do have negatively performing properties, then your financial advisor will be able to suggest possible options to make your portfolio ‘financially healthy’ again. These could include re-mortgaging the property, re-valuing the property and if necessary on-selling.
So there you have it - three prominent and impactful changes to legislation in the buy-to-let market this year! Come into one of our offices or give us a call if you need further advice or information.