Yahoo Finance What landlords can do to beat the government's buy-to-let crackdown
The buy-to-let sector had just begun to rebuild itself after years of punishing tax and regulatory crackdowns. But a wave of rental reforms threatens to trigger another investor exodus.
Landlords bought more homes in the first three months of this year than they sold – for the first time since the 3 percentage point stamp duty surcharge was introduced on additional properties in April 2016, according to Hamptons estate agency.
But the revival will be short lived. Smaller landlords are preparing to sell because plans published by housing secretary Michael Gove last week will overhaul the private rental sector.
The reforms will bolster tenant rights but this will leave landlords exposed to additional costs and months of arrears. It comes as rate rises on buy-to-let mortgages are already eating into investors’ profit.
But how much difference will the new rules make to buy-to-let business models in practice and are there ways in which landlords can shield their investment from the crackdown?
Don’t sell up just yet
The reforms have so far only been published as part of the Fairer Private Rented Sector White Paper, so they have a long way to go before being made permanent.
David Smith, of JMW Solicitors, said the reforms would “likely be watered down” before becoming enshrined in law.
New tenancies will be the first to be protected from “no-fault” Section 21 eviction under the new rules and the Government has committed to giving landlords six months notice before they take effect. Existing tenancies will transition to the new rules at least 12 months later.
Mr Smith said: “It means the first wave of rules won’t apply until late 2023 or early 2024 at best. So landlords really shouldn’t be rushing into selling up, they have plenty of time and if you have a decent tenant then certainly don’t be evicting them now.”
There could also be valuable tax benefits to a delayed exit from the market. Ministers are reportedly toying with granting a capital gains tax break on second home sales, particularly targeting accidental landlords in a bid to free up the supply of homes.
Evicting tenants
Landlords will still be able to evict tenants who have breached their rental contract, such as repeatedly failing to pay rent or anti-social behaviour, once Section 21 is abolished.
Investors will instead need to use Section 8 of the 1988 Housing Act to gain possession of a property, which will require them to go through a potentially arduous and costly court process.
The Government's White Paper promised to rectify “unacceptable delays” in the court process, although details were scarce.
Eviction will be mandatory where a tenant has been in at least two months’ arrears three times within the previous three years. The extreme ends of the private rental market will also continue to fall outside of the Housing Act.
Tenants who pay more than £100,000 a year in rent, and who entered into the tenant after April 1990, are exempt from the legislation, as are those who pay £1,000 or less in Greater London and £250 outside of the capital.
Communicate to avoid eviction
Robert Jones, of buy-to-let adviser Property Investments UK, said conversations with tenants about the reality of reasonable rent rises, before a contract is signed, would become increasingly important.
Mr Jones said: “The best way to navigate the new rules is to do everything in your power to avoid a tenant falling into arrears in the first place.
“Obviously in some cases arrears are unavoidable, but if tenants are taking on a property which could already be a bit of a stretch for them then it’s vital landlords have a dialogue before anything is signed about the likelihood of regular rent reviews. Make sure tenants are aware the rent might not always stay the same as on day one.
“A good letting agent will also be worth their weight in gold to communicate with tenants and ensure referencing and credit checks are done properly.”
Renting to tenants on benefits
The new rules will ban private landlords from discriminating against tenants receiving benefits. Some investors have historically avoided renting to this demographic because of an increased risk of arrears, or because their mortgage lender prohibits it.
But the new ban is expected to have little effect on landlords’ business model. Tenants reliant on benefits are unlikely to pass credit checks and private market rents dwarf frozen local housing allowance rates.
