Property letting and changes for landlords
A number of legislative changes are taking place which affect residential landlords. This article looks at the key areas for property investors to be aware of.
As part of the Government’s wider commitment to try to rebalance the housing market and improve standards in the private rented sector, it has introduced a number of changes for residential landlords. We explore some of them below.
Mortgage Interest Relief In the 2015 Summer Budget, George Osborne announced plans to restrict mortgage interest relief for buy-to-let landlords. In the past, landlords could claim tax relief on the monthly interest repayments at their rate of income tax, so top-earning landlords could claim up to 45p relief in every £1.
In future this relief will be limited to basic (20 per cent) tax, making buy-to-let investments less tax efficient for those who pay high or top rate tax. The new rules will be phased in over a four year period from April 2017.
Wear and Tear Allowance Currently, landlords of residential furnished properties can deduct 10 per cent of their rental income from their profit to account for wear and tear, irrespective of their actual expenditure.
From April 2016, landlords will only be able to deduct costs that they actually incur in replacing furnishings.
Rent-a-room relief At the moment, anyone who rents out a room to a lodger where the rent exceeds £4,250 a year must pay income tax on the excess amount.
From April 2016, this tax-free allowance will increase to £7,500 per annum; which, for many home-owners, may remove any tax liability on this income.
Responsibility for Water Debt – new online Landlord Portal According to Water UK, customers failing to pay their water bills has become such an issue that it "currently adds £15 per year on to everyone’s water bill. By far the biggest source of bad debt comes from tenants of rented properties who leave before settling their water bill”. Consumers are not currently obliged to notify a water company when moving into or out of a property, making it difficult for water companies to pursue payments.
In a bid to address this, a new website, the Landlord and Tenant Address Portal (Landlord TAP), now allows landlords and managing agents of properties in England and Wales to register details of those responsible for the payment of water and/or sewerage charges for let properties. They can also make changes to tenant details and confirm when a property has become empty. The information is automatically passed to the relevant water company.
Landlord TAP is voluntary in England but has been mandatory in Wales since 1 January 2015. It is not clear whether it will become a mandatory requirement in England, but where it is used it should make it easier for water companies to locate tenants who fail to pay their bills, and in turn to reduce overall levels of bad debt.
Public safety – smoke and carbon monoxide detectors In a move to protect tenants, the Government has enacted the Smoke and Carbon Monoxide Alarm Regulations (2015) which makes landlords responsible for ensuring that smoke and carbon monoxide detectors are installed in their properties.
The regulations came into effect on 1 October 2015 and require landlords to install smoke alarms on every floor of their property, and test them at the start of every tenancy. Landlords will also have to install carbon monoxide alarms in high risk rooms. Those who fail to install the alarms could face a fixed penalty of up to £5,000 and local authorities have powers to ensure the work is carried out if landlords default.
During the tenancy it will be a tenant’s responsibility to ensure the alarms work and to change batteries. However, should the alarms become faulty, landlords will be responsible for replacing them.
Conclusion The changes mentioned above demonstrate just some of the Government’s steps to improve standards in the private rented sector. However, it is yet to be seen whether the restriction of mortgage interest relief and the changes to wear and tear allowance will have a knock on effect on the supply of rental homes, as owning buy-to-lets becomes a less tax efficient investments for some landlords.