Tuesday, October 24, 2017
2017 has certainly been a busy year for UK landlords with new regulations coming into force, an increased focus on fire safety, and lenders tightening the rules for portfolio landlords. But despite what some headlines would have you believe, it’s not all bad news for people with a buy-to-let portfolio. In fact, a number of the challenges could have a positive impact in the long run. We take a closer look at some of the key challenges facing landlords at the moment, and the steps which need to be taken to make the most of them.
Challenge 1 - Landlord Tax
Just like any kind of investor, tax remains a principal stumbling block for UK landlords. Recent analysis has shown that the average yield for landlords has fallen from 4.91% to roughly 4% over the last year, signalling an all-round decline in average landlords’ income (SC1). This drop comes a year after changes to stamp duty, which have significantly increased the cost of property investment, and ground down landlords’ potential for profitable gains. These findings mean that the UK ranks below nations like Greece, Finland, and Italy, in terms of European property investment arenas. With more legislation on the horizon expected to come into effect by 2020, it could soon be near impossible for landlords to offset mortgage interest from their profits.
However, there are also some potential tax plans in the pipeline which could benefit landlords, including invectives for those who agree longer tenancies.
Challenge 2 - Fire safety
This year has seen increased scrutiny on fire safety in rental properties. In July, the Government launched an independent review into building and fire regulations, particularly in high-rise residential accommodation. It’s also been carrying out a series of tests on cladding systems in buildings around the UK to see whether they meet safety standards. Private landlords concerned about cladding have been urged to send samples to the Government's testing facility. A particular type of cladding made from aluminium composite material (ACM) is under scrutiny. The review will examine fire regulations currently in place regarding the design, construction and management of buildings. It’s expected that the final report will be published by spring 2018.
To help landlords understand their responsibilities around fire safety, a new online course has been launched by the Residential Landlords Association (RLA). Fire safety is a legal minefield, so the course will cover the different legislation, including the Regulatory Reform (Fire Safety) order 2005, HMO Manager Regulations, and Smoke and Carbon Monoxide Alarm (England) regulations 2015. It’s designed to help the owners of different types of building understand their responsibilities, and offer practical tips on conducting fire risk assessments to protect both tenants and properties from fire.
Challenge 3 - The Housing and Planning Act
This is another piece of legislation that’s been a big talking point in buy-to-let circles since the summer of 2016. It is intended to make provision on housing, estate agents, planning and compulsory purchases, and brings in new regulations regarding these. There are positives in the bill, such as the fact that rogue letting agents and landlords could incur banning orders, and undergo more government scrutiny. On the other hand, the Secretary of State is now able to impose duties on private landlords to ensure certain safety standards are met, and require landlords to be members of a client money protection scheme. The Housing and Planning Act may not be too much of an obstacle for many landlords, as a lot of estate agents have whole teams dedicated to keeping up with legislation and ensuring all properties and tenancies are complying with the relevant laws. However, it still pays for any landlord to go out of their way to find out all the relevant details of this legislation.
Challenge 4 - Greater Powers for Tenants Regarding RROs
Another recent change to be aware of is the extension of tenant privileges regarding Rent Repayment Orders. These are a means by which tenants or local authorities can seek to have up to a year’s worth of rent, universal credit or housing benefit repaid, more often than not in addition to other fines. Prior to the aforementioned Housing and Planning Act, only local authorities could initiate the process for these orders. Now, tenants can initiate the process if they believe that the landlord is guilty of one of the specified offences in the previous 12 months. Of course, in most cases landlords don’t need to worry, provided they treat tenants with respect and are aware of the offense outlined by the Housing and Planning Act. However, this increases the risk of unwarranted RROs causing hassle and setbacks for landlords.
Challenge 5 - New Energy Efficiency Rules
2017 is the tenth anniversary of the Energy Performance Certificate, which are a legal requirement whenever a property is rented, bought or sold, and are valid for a decade. Come April 2018, there are going to be new rules affecting the private rented sector, bringing in minimum EPC ratings. According to studies carried out by the RLA, roughly a quarter of private landlords have already carried out various energy efficiency improvements, spending just under £7,000 on average. Although the Government has yet to finalise the new regulations, it’s important that landlords avoid leaving the necessary improvements until the last minute. The closer we edge to the deadline in April, the more risk will mount up. Landlords could be left in a situation where there simply aren’t enough contractors available to get up to scratch by the deadline.
Challenge 6 – Buy-to-let lenders tighten portfolio rules
New Prudential Regulation Authority rules which came into force in September have caused a number of buy-to-let lenders to tighten their rules when it comes to portfolio landlords. Under the regulations, all lenders are obliged to ensure borrowers are not over-exposed to risk and will look into the entire buy-to-let portfolio whenever a new borrowing request is made. If landlords are using personal income lenders will also carry out affordability checks similar to those conducted for residential mortgages and will evaluate rental income if it’s being used as part of personal income. Anyone with four or more buy-to-let properties will be affected.
With many landlords having a busy few months ahead of them as they tackle these various challenges, having the right insurance in place can provide peace of mind.
At NIG we have a range of products that can cater for the needs of residential property owners.
For smaller risks, we offer our full-cycle Property Owners eProduct. The product is suitable for single and multi-location portfolios of up to 25 premises and provides cover of up to £10m Building Sum Insured and £500,000 landlord’s contents.
For larger risks, we offer our regionally-traded Essential Property Owners product. This product is designed for professional property owners or managing agents with residential UK portfolios.