New tax relief changes: how will private residential landlords be affected?

New tax relief changes: how will private residential landlords be affected?

Many private residential landlords are going to be adversely affected by George Osborne’s proposed plans to phase in a reduction of the valuable mortgage interest rate relief from the tax year 2017/18.

The Government aims to put more first-time buyers, who don’t qualify for the relief, on a level playing field with buy-to-let landlords.

However, landlords are very concerned about the effect on the viability of their businesses.

Landlords with higher levels of borrowing against their properties are going to be affected the most. The changes will result in a reduction to many landlords’ income.

Please note that this is not a tax or financial advice article.

We strongly advise landlords to seek financial and accountancy advice to find out how they will be affected, and what steps they can take to reduce the effects.

Instead, this article seeks to help landlords by considering the steps you might have to take as a result of the restrictions on tax relief.

And to make you aware of the landlord and tenant law that relates to those steps, and how long those legal steps usually take.

Increasing your rent

If your income is going to reduce, one option will be to increase your rent.

You should make yourself aware of the procedures for increasing rents in assured shorthold tenancies (ASTs), and seek to reach agreement with your tenants about any increases in good time before 2017.

After the initial fixed term of an AST, you’re free to propose a rent increase to your tenant.

If the tenant agrees, the change will take effect and be binding.

If the tenant doesn’t agree, you have two options to get a higher rent for the property:  

  1. Serve a valid Section 21 Notice seeking possession, and bring in a new tenant at the increased rent once you gain possession.

    Of course, that depends on there being tenants out there willing to pay the proposed rent for that property. As always, you should get references and carry out credit checks on new tenants.
  2. Serve a formal one-month notice of proposed rent increase on your tenant on a special form.

    Your tenant can challenge the increase, and ultimately the rent would be decided by a tribunal for rent disputes, who would consider the market rent in the area.

    So you can’t simply set the rent at the level required to make the business viable if this is more than the market rent.

    However, if rent increases are widespread, then eventually the market rent for the area would increase.

In the real world, passing the cost on to your tenants may not solve the problem. Even if your tenant agrees to the increases, they might struggle to pay. 

This could lead to more cases of rent arrears, and increased possession cases going through the courts.

You can take precautions at the same time as agreeing any rent increase, to put you in a good position if you need to obtain a possession order from the court on rent arrears grounds in the future.

For example, you should get any increase agreed in writing and attach the signed document to the tenancy agreement, as it will be a change to the terms of the tenancy.

You should make sure the tenancy agreement is clear on which day of each month the rent is due, and you can send tenants regular statements of the rent. And you should make sure in advance that there’s no dispute over the level of arrears.

You can also carry out (on the proper notice) an inspection of the property, keep a record of that, and carry out any repairs that the tenant has raised, to reduce the risk of the tenant raising any disrepair counterclaims with the court.

Some landlords may have to take more drastic measures if rent increases are not realistic or don’t render their position financially viable.

If that’s the case, you may have no option but to sell your property.

Selling your property

You can sell your property with tenants in situ. And any sale is going to be more attractive if there’s a signed assured shorthold tenancy agreement in place, a rent statement, no outstanding complaints or dilapidations, plus documentation for a purchaser to show that any deposit has been properly protected.

If you want to sell with vacant possession (in other words, keeping a tenant in the property to keep getting the rental income for as long as possible), don’t underestimate how long it can take to lawfully get possession of a property from an assured shorthold tenant.

The whole process, from serving a Section 21 Notice, to obtaining a possession order from the Court, to possibly also obtaining a warrant of possession, can take 4 or 5 months or sometimes longer.

You’re somewhat at the mercy of the busy and under-resourced courts. And if you don’t start the possession process early enough, you risk putting off potential buyers.

We’d advise you to get advice early about preparing and serving a valid section 21 notice. And make sure you’ve taken all the steps to ensure it’s valid, such as protecting any deposit and serving the prescribed deposit information.

For tenancies that started on or after 1st October 2015, the requirements are now more rigorous for service of a valid S21 Notice.

Depending on when the tenancy started, the notice will either be valid for six months or indefinitely.

So you can serve it in good time, but it doesn’t have to be acted on as soon as it expires. For example, if there hasn’t been any interest from a buyer you could delay issuing the possession proceedings.

Of course, the downside to serving the Section 21 notice early is the tenant may leave before you want them to.

But it’s worth considering whether that’s preferable to being stuck with them when an interested buyer is waiting but will not go ahead without vacant possession.

Converting to Houses in Multiple Occupation (HMO)

If you’re planning to convert your properties into HMOs to increase the rental income per property, check whether a license is required from the Local Authority first.

If so, you need to comply with the licensing requirements and other obligations that relate specifically to landlords of HMOs.

Need advice? Get in touch today

Remember, the advice in this blog is just a set of mitigation measures, which will do nothing to stop the tax relief changes from coming into force.

To find out more about how these changes affect you, please call Rachel Garton on 01482 324252.

Or email Rachel here.

You can find out more about how we can help you here.

In the meantime, if you’re interested in trying to prevent the changes coming into force, there are many widely publicised groups actively lobbying against the tax relief restrictions.

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