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Fiscal and regulatory changes for landlords in 2020

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By: Richard Rowntree, Managing Director of Mortgages

With more new tax relief rules, updated legislation on energy efficiency standards and a raft of additional fiscal and regulatory policy changes coming into force in 2020, it’s vital landlords kick off the new decade with a full understanding of what’s changing.

Proactive landlords able to stay a step ahead of key industry milestones will find it easier to meet the challenges that lie ahead this year. Here, we detail the most significant changes due to affect landlords in 2020.

Landlord tax relief changes

Landlords have had to contend with a layering of changes in fiscal and regulatory policy targeting the buy-to-let market since 2015.

Landlords used to deduct all finance costs from their rental income and profits were taxed at their marginal rate. However, starting from April 2017 and phased in over a four-year period, tax relief for finance costs are being restricted to a basic rate tax credit.

The phased reduction began with claimable tax relief reduced to 75% and continued through 2019-20. In 2020-21, landlords won’t be able to claim any tax relief on mortgage interest payments. Instead, from April 2020, they will receive a 20% tax credit on interest payments.

In response, landlords are adopting a range of different strategies to mitigate the impact of these changes, ranging from rent increases to portfolio resizing.

Minimum Energy Efficiency Standard

Since April 2018, landlords have been required to achieve a minimum rating of E on the Energy Performance Certificate (EPC) for their rental property for new tenancies or tenancy renewals. From April 2020, this will be extended to cover existing tenancies, meaning all rented properties will need to have an EPC rating of E, even where there has been no change in tenancy.

If your property is let on an assured tenancy, a regulated tenancy or a domestic agricultural tenancy, and is legally required to have an EPC, it is covered by these new regulations. If the property you let has been marketed for sale or let, or modified, in the past 10 years then it will probably be legally required to have an EPC.

Properties with an EPC rating of F or G after 1 April 2020 will be classed as unrentable, so now is the time to make energy efficiency improvements. However, under the regulation’s cost cap, landlords will never be required to spend more than £3,500, including VAT. Where a property cannot be improved sufficiently to achieve an EPC rating of E for £3,500 or less, landlords must take all steps up to £3,500 and register an ‘all improvements made’ exemption.

It’s important landlords don’t rest on their laurels, as the government has set out its long-term vision to improve energy performance standards of privately rented homes in England and Wales, with the aim for “as many of them as possible to be upgraded to EPC Band C by 2030, where practical, cost-effective and affordable”.

It has been suggested that this ambition may lead to new regulations to raise the current standard further to a D rating by 2025 and a C rating by 2030 in England and Wales. EPC D is already required in Scotland by 2025 and the Scottish Government is already consulting on an additional target of C by 2030.

Capital Gains Tax: Private Residence Relief

Private Residence Relief (PRR) provides a useful exemption from Capital Gains Tax (CGT). Currently, landlords can claim PPR for all the time they lived in their property before letting it to tenants, plus an extra 18 months after moving out. From April 2020, this will be reduced to the time they lived in their property, plus nine months, meaning landlords will lose nine months’ worth of CGT relief when they come to sell.

CGT relief of up to £40,000 (£80,000 for a couple) is available for those who let out a property that is, or has been, their home. However, from April 2020, this relief will only apply to landlords who are in shared occupancy with their tenant, as the government aims to “better focus PRR to owner-occupiers”.

The deadline for payment of your CGT bill is also changing in April 2020, from 31 January in the year after the tax year the sale is made, to within 30 days of the completion of the sale. So, if you’re a landlord planning to sell, it might pay to do so before 1 April 2020.

HMO licensing and planning

Landlords looking to buy or convert property with the intention of creating a House in Multiple Occupation (HMO) need to be fully aware of any possible financial implications if Article 4 Directions have been put in place by the Local Authority. Many have already issued city-wide Article 4 Directions, with more expected in 2020, meaning letting shared accommodation to three or more people will need planning permission if there is a material change of use.

Under previous planning rules, landlords can convert a family home into a small HMO with up to six occupants without consent. All HMOs with seven or more occupants need planning permission for change of use. The policy change removes these permitted development rights, meaning all new HMOs in the designated area would require planning permission.

Local authorities continue to review their additional and selective licensing policies as existing 5-year schemes come up for renewal. The Government’s rejection of a proposed new city-wide selective licensing scheme in Liverpool is an interesting decision which may affect the ability of other local authorities to introduce or extend their schemes. Mandatory licensing now applies to all HMOs with 5 or more tenants who share facilities, irrespective of the number of storeys. Properties in this category with licences that commenced prior to the criteria changes on 1st October 2018 will be required to meet higher standards upon licence renewal, to include meeting the latest minimum room sizes for sleeping accommodation and communal areas.

Section 21 abolition

 The implementation of key government proposals – including the removal of the Assured Shorthold Tenancy (AST) and abolition of the Section 21, no-fault eviction process – would mark a landmark moment for the PRS.

If implemented, the proposals mean all new tenancies will either be an assured periodic tenancy – effectively an indeterminate tenancy – or an assured fixed term tenancy, which reverts by default to a periodic tenancy. Tenants will be able to end a tenancy with two months’ notice. Landlords, in contrast, will only be able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act, with a notice period of between two weeks and two months depending on what those grounds are.

Section 8 does already give a wide range of grounds, including a breach of tenancy agreement, such as rent arrears or damage. However, it doesn’t allow for a situation where a landlord is looking to move into their own property or to sell it and the government is proposing an update to accommodate this change.

It is expected the changes to Section 21 will be introduced through a piece of primary legislation later this year – but as of yet the government has not responded to the public consultation or published any legislation. This is certainly one for landlords to keep an eye on.