How Will Major Changes To Lettings Regulations In 2020 Impact Landlords?
Tue 25 Feb 2020
Jeremy Leaf, Principal
We have been talking to our landlords about how best to deal with new lettings and management rules coming into force this year, such as:-
1.Minimum Energy Efficiency Standards (MEES) - from 1st April, a minimum energy performance certificate (EPC) rating of E or above will be required for all privately-rented residential properties after being required for newly-let properties since April 2018. Otherwise they will be unlettable and subject to potentially huge fines! Landlords will be expected to pay up to £3,500 towards energy efficiency improvements to bring properties up to standard, but if higher, can apply for an exemption.
In addition, all rental flats in listed buildings may require a valid Energy Performance Certificate, even if it simply proves the property is exempt. If not, landlords could be fined up to £2,000 for a first compliance notice and up to £5,000 if the property continues to be rented for over three months. Owners of flats in listed buildings who do not issue their new tenants with an EPC are also being warned they may be unable to serve a section 21 possession notice.
2. Capital Gains Tax (CGT) – from 6th April 2020, those selling residential property will only have 30 days to file a CGT return and make an advance payment towards their tax bill where CGT is due so liability is likely to increase significantly for landlords. This marks a significant change from current arrangements which allows CGT payment on the disposal of a property up to 22 months after the sale as part of self-assessment returns. Under the new rule, sellers will be required to complete an online form where they identify a gain but still need to include this information on their following year’s self-assessment return.
From the same date, lettings relief will be restricted to property owners who have shared occupancy of a property with their tenant at some point during their ownership. Until then, taxpayers who let a property that is either currently or formerly their main residence can claim lettings relief of up to £40,000 when they sell that home with up to double available to a married or civil partnered couple.
Private landlords will lose the nine months of CGT relief they now enjoy if selling after April 2020 but can claim Private Residence Relief for the time they lived in their property before letting it to tenants plus an extra 18 months after moving out. This final exemption period will be reduced to the time landlords lived in the property plus nine months after moving out.
3. Mortgage Interest Tax Relief – from April, landlords will only receive a credit on mortgage interest payments at the 20% basic rate after being phased in over four years from 2017/18. This is particularly tough on higher rate tax payers who will have to declare rental income previously used for interest payments.
In response, many landlords are setting up limited companies but costs involved may prove prohibitive and rules could be further extended to discourage the move.
4. Tenant Fees Act – from June, this Act will apply to all tenancies but letting agents have been banned from charging fees other than rents, deposits and charges for defaulting on contracts to new tenants since June 2019. That means any tenancy clauses containing checkout fees are unenforceable and agents charging them could be breaking the law. Deposits are presently limited to a maximum of five week’s rent if the annual rent is below £50,000 for any new or replacement tenancy. If the annual rent is higher, the maximum is six weeks with holding deposits limited to one week. However, agents will NOT have to refund the difference unless the tenancy renews. Tenants who remain on contractual periodic tenancies will continue with the same insured/custodial deposit which will need to be adjusted by or after June 1st 2020.
Landlords or agents can be fined up to £5,000 for a first offence and £30,000 for subsequent breaches.
Tenants should be able to obtain return of any banned fee which has been taken incorrectly via the County Court.
NB Jeremy Leaf & Co have not increased their percentage costs to landlords despite the tenant fee ban and many other agents doing so!
5. Extension of the Homes (Fitness for Human Habitation) Act - from 20th March, the obligation on landlords or agents acting on their behalf, in England to carry out improvement works to tenanted properties to ensure they are ‘fit for human habitation’ or risk being sued, is being extended to include existing statutory periodic tenancies. Up to that date, the Act only applied to tenants who signed contracts on or after 20th March 2019. As a guide, privately rented properties should be free at least of the 29 types of hazards in unsafe homes as set out in the Housing, Health and Safety Rating System (HHSRS) with which lettings agents and landlords should already be familiar.
6. Anti Money Laundering (AML) – since 10th January, letting agents must register with HMRC for AML supervision and have been legally required to carry out ‘enhanced’ due diligence on landlords, tenants, permitted occupiers and guarantors under the 5th Money Laundering Directive if the rent is at least equivalent to a monthly level of 10,000 euros.
Enhanced due diligence includes obtaining additional information about the customer and beneficial owner, the nature of the business relationship, source of funds and reasons for the transaction.
Landlords and agents should also consider:-
a) obtaining the title register document to confirm ownership;
b) conducting a simple risk assessment on all and
c) carrying out appropriate due diligence depending on the risk assessed.
The new regulations were published in early January without notes on compliance, so enforcement may prove difficult – at least initially.
7. Mandatory Five Yearly Electrical Tests – from July, electrical wiring and fixed electrical installation testing for all new private residential rental tenancies in England will probably be a legal obligation and will have to be renewed at least every five years to bring them into line with gas safety regulations. Any issues highlighted in the report, which has to be carried out by a qualified person and supplied to new tenants before taking up occupation, must be remedied within 28 days or sooner depending on the recommendations.
Existing tenancies will be included from 1st April 2021, subject to Parliamentary approval. If the landlord does not comply, a local authority can issue a fine of up to £30,000.
Safety is always paramount but especially in rental properties so now would be a good time for landlords to check electrical installations and carry out necessary work;
8. Tenant Evictions – the government seem intent on ending ‘no fault’ section 21 evictions. When the new Renters Reform Bill becomes law – probably later in 2021 - landlords will have to rely instead on an enhanced ‘section 8’ possession through the courts but need good reason, such as the need to move back into the property but this won’t necessarily make it easier to remove difficult tenants. As a result, landlords are likely to become even more risk averse in future and only accept tenants with the best possible references where possible.
9. Air Pollution – the government announced last November that from later in 2020 vendors and landlords will have to disclose the level of air pollution to buyers and tenants as part of ‘material information’ if above the present legal limit of 40 micrograms of nitrogen dioxide per cubic metre (mcg/m3) . The requirement will be enforced by National Trading Standards Officers and certainly have an impact on values and marketing. Therefore, landlords should find out current pollution levels for their property and take appropriate action sooner rather than later!
10. Pets the government announced at the end of last year that tenancy contracts will be overhauled to make it easier for tenants to have well-behaved pets. Apparently, only around 7% of available properties are currently advertised as ‘suitable for pets’. A total ban on renters with pets will only be allowed for perhaps smaller properties or flats where ownership may be impractical.
Recent tax and regulatory changes have prompted some ‘accidental’ landlords to leave the sector which has resulted in a shortage of stock and upward pressure on rents. But buy-to-let investors have been returning to the market recently not least because yields are becoming more attractive compared with other investments and the apparent inexhaustible supply of new tenants!