As we reach the end of 2016, many landlords are breathing a sigh of relief! But what does 2017 have in store for the BTL industry, and are you prepared?
HSE consultation replies for gas safety required back: 27 January
2017 starts off on a positive note for landlords, with the Health and Safety Executive calling for requests to contribute to a consultation on their paper looking at how amendments to gas safety regulations could save the nation’s landlords millions of pounds.
The consultation is hoping to eventually build in a more flexible two month window to the time required for a as safety check - meaning that if the check is carried out just ten months since the previous check (something research shows many conscientious landlords do in order to avoid falling foul of gas safety rules), it will still be valid for the full 12 months. It is estimated that by building in this simple change for both social
and private landlords, a whopping £382 million could be saved over a 25 year
The HSE are calling for landlords to get involved with the consultation, urging them to submit any comments by the 27th January. You can read the full document here.
Tax changes: April
Although the HSE might be trying to save landlords money, unfortunately in April it all takes a bit of a nosedive on that front as we move into Spring, with the tax changes announced in the 2015 Autumn Statement coming into force.
In a nutshell, the changes mean that the amount of income tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax. The changes are likely to flip how many landlords in the UK receive relief for interest and other finance costs. Although the changes are to be gradually introduced over the course of four years, April 2017 sees the first round of amendments, which are likely to take many by surprise.
Currently, landlords can claim tax relief on their mortgage interest payments. In other words, they can offset the cost of the mortgage interest from the rental income when they calculate their profits.
So, if a landlord collects rental income of £10,000 a year, but pays mortgage interest of £9,000, ‘the profit’ is the difference between the two, or £1,000. And landlords pay tax on their profits according to their income tax band.
In this simplified example, a basic-rate taxpayer would pay 20% tax on £1,000, or £200, and keep £800. The tax bill for a 40% taxpayer would be £400, leaving £600, or £450 for a taxpayer at the 45% additional rate, leaving £550.
However, the rules, which are coming into play in April, will change the way that profit is calculated for landlords. Finance costs will no longer be taken into account to work out taxable property profits. Instead, mortgage interest tax relief will gradually be cut back to 20% between 2017 and 2020.
So, a landlord with rental income of £10,000 and who pays mortgage interest of £9,000 will in future have to pay tax on the full amount of £10,000, now considered to be ‘the profit’, less a 20% credit on the mortgage interest of £9,000.
It is really an amendment – for landlords – of the generally accepted accounting principles used for businesses. The government is no longer considering ‘borrowing or finance’ as an ‘expense’ and this has an effect on how it determines ‘profit’.
The tax bill for a higher rate taxpayer would therefore work out at £4,000 (40% of £10,000 profit) minus £1,800 (20% of £9,000 interest), which equals £2,200, up from £400 under the current tax regime. That’s a large increase of £1,800. A landlord who pays 45% tax could expect a tax bill of £2,700, compared with £450.
If you are a higher-rate taxpayer, the new tax will wipe out your returns if your mortgage interest is 75% or more of your rental income. The threshold for additional-rate taxpayers is when mortgage interest reaches 68% of rental income. The tax liability of a basic-rate taxpayer is unchanged. However, the new profit calculation could push a basic-rate taxpayer into a higher tax band.
Passing these extra costs onto tenants in rents is currently a contentious issue but there is evidence to suggest this is what many landlords will do. For example two thirds of 2,883 landlords surveyed by the Residential Landlord’s Association said they would increase their rents to offset the tax changes.
According to the government only one in five landlords are expected to pay more tax when new section 24 rules, under the Finance Act 2015, are implemented, but a number of industry experts dispute this.
You will be affected if:
- You are a resident of the UK, who lets properties in the UK or abroad
- A non-UK resident who lets residential properties in the UK
- An individual who lets properties in a partnership
- A trustee or beneficiary of trusts which are liable for income tax on any profits gained from property
- However, being impacted by the changes doesn’t necessarily mean you are going to have to dig deep and pay more tax. In some cases you may continue to receive relief on interest, and other financial cost in the way you will be used to
Nothing much will change for you if you are:
- A UK resident company
- Non-UK resident company
- A landlord of furnished holiday lets
Although it all sounds very confusing, don’t panic too much – the changes are being phased in gradually, and won’t be fully in place until April 2020.
Come April 2017, you will still be able to deduct some of your finance costs when working out your taxable property profits during the transitional period. These deductions will be gradually withdrawn. They will be replaced with a basic rate tax relief reduction.
The percentage of finance costs deductible from rental income will firstly be reduced by 25%, then 50%, then 75%, then 100% at the end of the rollout.
% of finance costs deductible from rental income
% of basic rate tax reduction
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 yo 2020||25%||75%|
|2020 to 2021||0%||100%|
Agency fees – Date TBC!
Although there is no solid dates set as to when we will hear anything, it is estimated that tenants’ fee will be to 2017 what stamp duty was to 2015… the hot potato that dominates the headlines.
Everyone has an opinion, and most have their own idea on how best to manage this thorny topic, but one thing is for sure, this isn’t going away any time soon, and this news is certainly something that will shape the future of the lettings market for some time yet.
Renters Rights Bill - Date TBC!
The Renters Rights Bill, which was introduced by Liberal Democrat Baroness Grender, a former director of communications for Shelter, has been put forward to improve the quality of the sector for tenants. Grender contends that private tenants are being failed by the private rental market, and believed that tenants have less rights than people who are buying fridges.
If passed, it could mean big changes for the industry, both landlords and agents. The main issues that would arise include:Amendments to the Housing and Planning Act 2016 by opening the register of rogue landlords and letting agents to tenants:
- This would allow tenants and prospective tenants the opportunity to see clearly if they are going to be dealing with a landlord or agent who is deemed to be ‘rogue’. The register has not yet been created, but was originally planned to only be available for local authorities and Government bodies to review. This would ensure that tenants do not have to deal with landlords or agents who have previously provided poor service, which would theoretically improve their overall experience of renting privately.
- Ban rogue landlords from owning HMOs: Further to exposing rogue landlords to prospective tenants, the bill has plans to ban rogue landlords from being able to own HMOs. This would mean that anyone who is featured on the register would not be able to gain an HMO license.
- The banning of lettings agents’ fees: The fees that the bill is hoping to wipe out include: admin fees, inventory check fees; reference check fees; renewal fees; and exit fees. It is believed that the fees are ‘prohibitive’ and a ‘rip-off’ and that they are hard for tenants to afford when they also have to swallow the cost of moving.Why has this bill been proposed, have we not been through enough?
It certainly might feel like this new Bill is just another swipe at landlords and the private rental market, however, it’s not necessarily a bad thing. It is looking to improve the quality of the sector for tenants, not penalise honest, hardworking landlords who are sticking to the rules.
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