A Landlord Review of 2016

Historical archive — originally published 26 December 2016. This retrospective records what landlords were discussing and expecting at the end of 2016. Laws, tax rules, mortgage criteria and proposals described below may have changed. It is not current legal, tax or financial advice; check current rules and seek qualified advice before acting.

Landlords, there have been a lot of changes in 2016. This is not legal or financial advice: it is a review of what the government, its quangos and the banks have been up to. After an eventful couple of years, we put together this review of 2016 and the questions landlords faced going into 2017.

What was the headline landlord news of 2016?

Contemporaneous reactions differed. Kate Faulkner pointed to the proposed letting-fee ban and the lack of discussion with the industry about its impact (26 December 2016 post). LandlordXX questioned whether long-term investment in the private rented sector remained viable amid tax and regulatory risk (26 December 2016 post). Adam Hosker chose the new PRA buy-to-let affordability changes: the rent a landlord could charge would constrain borrowing (26 December 2016 post).

3% extra stamp duty

The year began with landlords seeking to expand their buy-to-let portfolios before 1 April 2016. That was when higher rates of Stamp Duty Land Tax (SDLT) for additional residential properties added three percentage points to the applicable bands in England and Northern Ireland. The government presented the measure as part of its commitment to supporting home ownership. We saw it as a bid to give first-time buyers an advantage over landlords, recalling the idea of a “home-owning democracy”.

An SDLT exception?

Some investors explored buying shares in a limited company that already owned property, rather than buying the property itself. Share transactions ordinarily attracted their own duty (typically 0.5%), rather than the additional-property SDLT charge. The proposed financing could be complicated: a buyer might use bridging finance secured on the company's assets to repay existing mortgages and buy out its existing shareholder, then seek a term mortgage. Few landlords then held property in limited companies, though we wondered if that would change in 2017.

Another route discussed in 2016 was buying six or more residential properties in one transaction, which could bring non-residential SDLT treatment. This was hardly an option for a landlord without a substantial appetite and means to expand. These were observations about transactions discussed at the time, not a recommendation or a statement of today's tax treatment.

Had the new SDLT worked?

If first-time buyers replaced landlord purchases, one might have expected similar sales volumes and SDLT receipts. The official November 2016 receipts bulletin reported £7.7 billion of SDLT in the first eight months of the 2016–17 financial year, 12% more than in the corresponding period a year before, despite a reported 10% fall in UK home sales. At the time, we interpreted the higher receipts as suggesting landlords continued to buy and the fall in transactions as suggesting first-time buyers had not filled the gap. That was our reading of contemporary figures, not proof of the cause of either change.

Mortgage interest relief changes

George Osborne had announced in 2015 a restriction on individual residential landlords' deduction of mortgage interest from rental income when calculating taxable profits. The announced transition would begin on 6 April 2017 and be fully in place from 6 April 2020. Landlords feared higher tax bills might mean higher rents; the “Axe the Tenant Tax” campaign sought a reversal. Its legal challenge failed in October 2016, and landlord associations' appeals to Philip Hammond ahead of the November Autumn Statement were also unsuccessful. At year-end, campaigners looked instead to evidence of the policy's effects in 2017 and 2018. See the government's announcement at the time.

A limited-company route?

Investors quickly noticed that the change to individual landlords' finance-cost relief did not apply to limited companies in the same way. This helped fuel interest in limited-company buy-to-let purchases. But a company is a separate legal entity: moving an existing personally owned property to it was generally a sale and purchase, not simply a remortgage, with potential capital gains tax and SDLT consequences.

Some accountants discussed the Ramsay v HMRC (2013) case and whether a landlord carrying on a genuine property business could qualify for incorporation relief. The facts, activity involved and possible dispute with HMRC made this a specialist question, not a certain workaround. Nor did buying through a company settle every tax question: extracting money could itself have tax costs, alongside incorporation and accountancy costs and potentially higher mortgage rates. Deciding whether to buy personally or through a company was no longer simple.

Squeezing more money out of an asset

Facing a higher expected tax bill, landlords considered increasing rent. But the local market, not the landlord's costs alone, determined what a tenant would pay. In one Bespoke Finance illustration at the time, covering a £59-per-month tax loss required £99 more rent per month; individual landlords' outcomes would differ.

Others considered serviced accommodation or short-term holiday lets in suitable areas, with Airbnb offering another way to use a property. Some converted single-family lets into houses in multiple occupation (HMOs), letting individual rooms to diversify tenancies and potentially increase yields; some even converted living rooms into bedrooms. We also worried that landlords who usually reinvested in renovations might reduce that spending to preserve returns—an arguably short-sighted response.

Maximum loan tied to maximum rent

At the end of 2016, lenders were preparing for Prudential Regulation Authority (PRA) buy-to-let underwriting expectations due from 1 January 2017. Affordability would be assessed using an interest coverage ratio and/or whether personal income was sufficient to meet mortgage payments. Many lenders already stress-tested rental income: the rent a property could command affected the size of loan available. The PRA set a minimum standard, though individual lenders could be stricter, and some adjusted their tests around that time. We thought a sensible stress test could help inexperienced landlords avoid borrowing against rent that could not service the debt.

PRA stress-test flexibility

The PRA framework left room for differences in a borrower's tax position. At the time, some lenders applied a less restrictive rental stress test to limited-company purchases than to personal-name purchases. We also expected more five-year fixed-rate buy-to-let borrowing in 2017 because the certainty of payments over that period could allow a more favourable stress test. These were observations and predictions made in 2016, not current lender criteria.

Letting-fee ban proposal

Philip Hammond's 2016 Autumn Statement announced a proposed ban on letting-agent fees charged to tenants. Some agents were charging hundreds of pounds for referencing, and the Chancellor said landlords appointed letting agents and should meet their fees. Yet the announcement left landlords asking which charges—for referencing, check-in and check-out, inspections, late payments or contracts—would eventually be prohibited and whether landlords as well as agents would be covered.

While some landlords accepted that certain agents charged excessive fees, others asked whether agents' costs would be passed to landlords and then built into rents, leaving successful tenants to cover the cost of unsuccessful applications. We noted the apparent contrast with housing minister Gavin Barwell's September 2016 concern that landlords would pass costs to tenants through rent. Industry representatives felt they had not been consulted before the announcement. At the time this was a proposal, not an enacted ban; this section should not be used to determine today's permitted fees.

Leeds council lost a court battle

The 2016 Leeds City Council v Broadley case concerned council-tax liability when a tenant had moved out but a periodic tenancy agreement remained in place. Leeds argued, in effect, that a single tenancy could not be both fixed-term and periodic, which could leave a landlord liable despite the agreement's wording. Had that argument prevailed, we feared wider consequences for tenancies and deposit protection. The Residential Landlords Association (RLA) supported the landlord's successful challenge. We saw the case as an example of why landlords valued specialist association support and advice. The outcome and its implications should be checked against later law and individual circumstances.

Wear-and-tear tax changes

From April 2016 the old 10% wear-and-tear allowance for furnished lettings was replaced by a system of deductions for the actual cost of replacement items, subject to conditions. Under the previous allowance a deduction could arise even where the landlord had not paid to replace an item. We urged landlords to discuss the change with their accountant rather than assume the old treatment still applied.

Measures against rogue landlords

The Housing and Planning Bill 2015–16 proposed banning orders, a database of rogue landlords, rent repayment orders and management orders. We noted that enforcement could have financial implications for local authorities as well as landlords: fines and repayments might be retained locally. Councils could seek tribunal orders affecting management of a property and repayment of rent, potentially for up to 12 months, and information about sanctioned landlords could be shared. These were the measures under discussion in 2016; current enforcement rules and procedures must be checked separately.

Why a good tax adviser mattered

For property investors, 2016 raised difficult questions: could existing properties be moved into a company, what SDLT or capital gains tax might arise, and would it be better to sell an existing portfolio and make new purchases through a company? Should the next home be bought personally or in a limited company? When would restricted mortgage-interest relief change an investor's tax band, and how would portfolio growth affect it? Those questions made many landlords reassess whether their existing accountant understood property investment—and what more specialist advice might cost.

Homelessness Reduction Bill

Bob Blackman's private member's bill, discussed in 2016 as the Homelessness Reduction Bill, initially attracted support from landlord associations while the government opposed it. Associations wanted councils to act before an eviction reached court and bailiffs, rather than treating a tenant as homeless only at the end of the process. Earlier recognition of an eviction notice might have spared landlords legal and bailiff costs and tenants court judgments and eviction records.

Later amendments led the National Landlords Association (NLA) to withdraw support: in its view they removed the feature it and the RLA had welcomed. As government support changed, the bill advanced through the Commons. We found it striking that the positions seemed reversed by year-end and questioned how the revised bill sat alongside government guidance and a March 2016 letter from then housing minister Brandon Lewis. This recounts the bill's position at the time, not what the law ultimately became.

National Landlords Code of Excellence accreditation

North Somerset Council had considered selective licensing in 2016, but withdrew the plan after campaigning by Somerset Property Network with support from LandlordReferencing.co.uk. Supporters of that campaign saw licensing fees and administrative burdens as a concern. Out of the campaign came the National Landlords Code of Excellence (NLCE), intended as a voluntary alternative: a code of practice, education and continuing professional development aimed at raising standards in private rentals. We wondered whether 2017 would be its best year. The existence and scope of any current accreditation should be verified independently.

Proposal to expand HMO licensing

The Department for Communities and Local Government closed a consultation on HMO and residential licensing reforms in December 2016. Under the threshold discussed then, mandatory HMO licensing depended in part on a property having three or more storeys. We found it odd that a five-person HMO over three storeys might need a licence while a larger HMO over two did not. The proposal would remove the three-storey condition for properties occupied by five or more people in two or more households. It also proposed a minimum room size of 6.52 square metres, potentially affecting rooms that could be let under the rules at the time. Landlords awaited the consultation's outcome, particularly in areas with local limits on HMOs. These are 2016 proposals, not a guide to today's national or local HMO licensing requirements.

Energy efficiency and draughty homes

From April 2016, tenants in properties rated F or G could request reasonable energy-efficiency improvements, according to the rules discussed at the time. A further measure was planned for 2018 to prevent letting properties rated F or G until they reached an E rating. Landlords needed to plan for improvement costs. The dates and rules here are historical; check the current energy-efficiency standards and exemptions before letting a property.