Landlords: Important Changes in Energy Efficiency, Tax and Mortgage Underwriting

In the Buy to Let world the talk at present is around Energy Performance Certificates, (EPCs) with the rules changing on EPC ratings from April 1st. It will then be against the law in England and Wales for landlords to grant a new tenancy to either new or existing tenants if their property doesn’t have an Energy Performance Certificate rating of ‘E’ or above. (In 2023 the government announced it is shelving these plans.)

As a result, lenders such as Coventry have already said that they won’t lend on properties that fall below an ‘E’ rating unless they have a valid exemption.

If a privately rented property falls below the minimum EPC rating, the landlord will need to carry out ‘relevant energy efficiency improvements’ to bring it up to an ‘E’ or above. They may be able to obtain Green Deal finance to do this or the property may qualify for an exemption so it is worth all landlords looking into this.

This is yet another change that Landlords have to get used to as the sheer volume of rules, regulations and tax changes really start to hit home.

Section 24, dubbed “the biggest threat landlords have ever faced”, ushered in a new era of tax changes phased in from 6th April 2017, which will come to a head in 2020. This potentially pushes landlords into a higher tax bracket, paying more tax and potentially losing access to certain benefits.

In summary, this package included the following:

• Landlords of furnished lets could claim a wear and tear allowance of 10% of their rental income. With effect from April 2016, this relief was restricted to expenditure actually incurred.
• Mortgage interest costs could be deducted from rental profits which effectively gives the landlord tax relief at their highest marginal rate of tax. From April 2017, this relief was reduced over 4 years to the basic rate of income tax (which is currently 20%).
• From April 2016 SDLT increased by 3% for landlords (and second home buyers)

On top of this mortgage lenders have had to adapt their rental coverage stress tests and deal with Portfolio landlords, (defined by the Prudential Rental Authority as those with 4 or more mortgaged properties), in a very different way. They have to stress test their whole portfolio, see a business plan, cash flow statement and, most importantly, see that tax is being paid correctly.

As a result, many landlords looking at buying new properties are more inclined to purchase these in Limited Company names now rather than personal names and it is imperative that anyone looking at an investment property gets independent tax advice before they do anything.

However, even with all of this, professional landlords are sensing an opportunity. Prices have eased and as long as they structure and gear their portfolio correctly with the right tax advice, savvy landlords can still do good business.

As for mortgages, well they are at the lowest level Buy to Let mortgages have ever been. Two-year fixes from 1.39% anyone?

Whilst the rates are enticing however, the increasing complexity of the BTL mortgage market means that many brokers are walking away from portfolio landlords, meaning it is more important than ever to look for a broker who understands the current market and the numerous foibles of each individual lender. Managing a portfolio is a serious blend of science and art these days, but for those with the patience and an expert alongside them, landlords can still look to the future.

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