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2020 is the start of a shiny new decade. The buy to let sector is continually evolving and landlords need to keep their eye on the ball if they want to stay ahead of the game. To make your life easier, we have a quick roundup of the main things that landlords need to be keeping an eye on in 2020. Grab a coffee (or herbal tea if you are detoxing!) and sit down for a wild (not!) ride.
MEES Regulations
Phase 1 of the Minimum Energy Efficiency Standards (MEES) came into force in April 2018. From 1 April 2020, ALL residential rental properties with existing tenants in place must have a minimum Energy Performance Rating (EPC) of E or above.
If a property is rated F or below, the landlord must make it more energy-efficient, using their own funds (if they want to rent it out). There is currently a cap of £3,500 (VAT inclusive) in place. If the cost of improving the property to band E and above is greater than £3,500, landlords can register an exemption on the basis they have done all they can within the funding cap. You can register a MEES exemption here.
Note: an exemption is only valid for five years. You will need to re-register your property every five years if it still has an EPC rating of E or below. If you purchase a new property that has been registered as exempt, it will need to be re-registered under your name, as exemptions are given to the landlord, not the property.
Private Residence Relief
A previously handy private residence relief (PRR) loophole is being closed from April 2020. Landlords can currently claim up to £40,000 in capital gains tax relief (or £80,000 for a couple) when they sell a rental property they once lived in, even if it’s been rented out for many years.
In April 2020, the government is pulling the plug on this loophole. After April you will only be eligible for private residence tax relief if you move back into the property before you sell it.
The final period exemption is also being slashed from 18 months to 9 months.
These changes are important for landlords who rent out their former homes. So, if you have a property you once lived in and it is currently let, keep in mind that your tax bill could be far higher than you expect if or when you sell. If you’ve forecasted capital gains tax in your property business exit plan, you’ll need to re-visit your calculations.
Mortgage Interest Tax Relief
Mortgage interest tax relief has been gradually phased out since 2017. The changes have been controversial to say the least and many experts believe this is why landlords are leaving the Private Rental Sector.
Unless you are new to buy to let, you are probably aware of the phasing out of mortgage interest tax relief and that from 2020/21 tax year landlords can only claim the basic rate of income tax, currently 20%, on their mortgage interest.
If you have a buy to let mortgage you should calculate how this will affect your rental yields. Right now, interest rates are low, but there is no guarantee they will stay this way . If rising interest rates will have an adverse effect on the profitability of your portfolio, have an exit plan in place, or start re-assessing your financing options.
Section 21
In April 2019, the government announced it was consulting on the abolition of Section 21. This consultation was launched in July and closed in October.
The government proposal is to remove Assured Shorthold Tenancies (AST’s) from the Housing Act 1988 for social and private landlords. With AST’s removed landlords will be able to form fixed term tenancies or contractual period assured tenancies where a fixed tenancy isn’t formally ended but is rolled over. This would prevent landlords using Section 21, known as the “no-fault” eviction process. Instead, if a landlord wanted to evict a tenant, he/she would need to serve a Section 8 notice.
The changes would not be retrospective applying only to new tenancies, but if an existing tenancy agreement came to an end, the new one would have to be a fixed-term tenancy.
Naturally, landlord groups expressed concern at the proposal, especially as the current Section 8 process is not fit for purpose. Critics say removing Section 21 means more landlords will leave the sector, which will further reduce the supply of private rental homes. The government responded by stating it would strengthen the Section 8 process by:
- Improving ground 13, so if tenants repeatedly refuse access to the property for repairs and maintenance, a landlord can evict them.
- Amending ground 8 – so landlords can evict a tenant if they are two months in arrears and one month remains unpaid when the hearing takes place.
Landlords will also be able to serve a Section 8 notice if they want to evict a tenant in order to sell or move back into the property.
The government says the changes might remove the need for landlords to take tenants to court unless the tenant challenges the eviction.
Although the consultation has now ended, we won’t know the outcome for a while, but if the planned changes do go ahead, it’s likely they will be implemented at the end of 2020.
Electrical Checks
The government announced plans in 2018 to make it compulsory for landlords to carry out safety checks on electrical systems in rental properties. This would be a mandatory process every five years as it currently is for HMO’s. So far, the proposal has not been implemented but there is a chance it could be revived in 2020. If it is implemented, landlords will be given notice of the changes, which should give them plenty of time to put systems in place, like finding a suitably qualified electrician.
Mortgage Interest Rates
While mortgage and loan interest tax relief are being phased out interest rates are very low right now, so the cost of borrowing is correspondingly low. If your buy to let mortgage deal is due to expire this year, spend some time searching for a good replacement arrangement. Don’t just pop along to your nearest high street lender – specialist brokers are more likely to find you a competitive contract. Don’t rest on your laurels though, the interest rates may not stay low for long.
House Prices
The housing market stalled towards the end of 2019, but while London prices contracted, prices in the West Midlands and North West increased by 3.4% and 3.5% respectively.
Experts don’t expect house prices to rise significantly in 2020, but they say some UK cities could see healthy growth over the next five years. This is especially so in the north, with cities like Leeds and Sheffield more likely to outperform London and the South East.
If you have plans to expand your portfolio in 2020, pay close attention to house price trends and research your target market before you buy. Landlords with portfolios in the north of England have recently enjoyed much better capital returns than London landlords, and this is unlikely to change any time soon. With the average house price only £125k in the North East, it’s one to watch if portfolio growth is one of your 2020 goals.
