Has it too far? tipped The BTL balance:

Major changes in legislation affecting privately rented housing have recently come into force, with further moves on the horizon. We question whether it is still worth it for landlords

Words by Andreea Dulgheru

Tax and regulation have become major topics of discussion in the BTL market. From amendments to mortgage interest relief to the proposed ban on section 21 no-fault evictions and extending the Decent Homes Standard to the private rented sector, changes have left landlords, brokers and lenders wondering: what impact will this have on the industry?

On a cold Friday morning, we gathered 11 BTL experts—Juliet Baboolal, partner at Seddons; Jeni Browne, sales director at Mortgages for Business; Ed Zneimer, associate at Seddons; Mike Cook, chief mortgage officer at MFS; Lucy Barrett, managing director at Aria Finance; Andrew Ferguson, managing director for BTL at West One; Andy Virgo, sales director at CapSol Finance; Kim McGinley, managing director at VIBE Specialist Finance; Chris Morris, director at Goldbridge Partnership; Nick Simmons, managing director at The Finance Company; and Emily Hollands, head of specialist finance at OSB Group—to find out the answer to this burning question.

Andreea Dulgheru: We’ve seen quite a few tax and regulatory changes recently; some have been implemented, and others are still at the proposal stage. Of all these, which one do you think has had the biggest impact on the market—or has the potential to make the largest waves?

Jeni Browne: From speaking to our clients, the one that has caused the most upset is the abolition of section 21, because they rely on that more heavily than using the section 8 core eviction process—they find it to be more effective and less costly. The removal of this makes them feel incredibly vulnerable in terms of how they will be able to get their properties back in the event they need to remove tenants.

Lucy Barrett: Yes, we’ve seen that a lot, as well. I think customers feel the raft of changes to the BTL market as yet another thing thrown at them. They feel a bit victimised and it hampers them from being able to run their business as they want to. Landlords feel this will remove their flexibility and ability to do something they want to with their business. In reality, they never would have put the tenant in jeopardy anyway, as they want to treat them fairly. Section 21 is just allowing them that control of their business.

Andy Virgo: If you look at the rule, it’s good for tenants to have that surety that if they’re a good tenant, then they would remain in situ. If a landlord has a rogue idea to move a property on and evict a tenant, it gives them some rights, which is great for them. I think the problem could arise if HMO operators have some rogue tenants. Let’s say you’ve got an eight-bed HMO and seven great tenants, but one who’s not behaving the way they should be, upsetting everyone. If a landlord can’t move that rogue tenant out due to the section 21 abolition, they could be losing seven good ones.

AD: With the section 21 ban proposal, the changes they’ve made to section 8 also come into play, which are supposed to help with this issue. Does it truly help landlords, or is it just a poor attempt at keeping the balance?

Juliet Baboolal: I think it needs to be tried and tested, and that’s the problem. When you serve a section 8 notice, there’s no guarantee that when you get to court things will work in your favour. That tenant, for example, can come up with a bit of payment, which then throws the entire case out. Whereas with a section 21, it’s what we call a no-fault notice— basically, the judge’s hands are tied. If the case went to court, you would be guaranteed possession of your property, but that security has been removed with the new proposal. The improved section 8 has not been tried and tested, and landlords feel a bit miffed because they’re exposed. I’m not quite sure the new grounds replicate or give us the comfort that a section 21 does—including from lenders’ perspective where they want vacant properties if they repossess. Section 21 gave us that security because, even if we didn’t get possession immediately, we would get it eventually whereas, with section 8, it’s very much dependent on the judge that you get on the day. If a county court judge says they’re not giving possession orders that day, what you get instead is a new hearing date, which just delays the process.

AD: Would you say that the delays in the legal process with section 8 is the biggest problem landlords have at the moment?

Juliet B: Yes, and the lack of security with the section 8 process. If you’ve got a crafty tenant who knows the system, they can play it, which is a problem. On top of that, with section 8, you’re entitled to claim arrears, but a lot of landlords don’t want that—they just want the tenant out. That should be something that both the tenant and landlord are in agreement on at beginning of the tenancy. So it just seems one-sided in terms of the way the legislation is going.

Michael Cook: One of the last surveys that MFS did revealed that about 40% of landlords had at least one tenant they wanted out, but felt they couldn’t or didn’t have the means to do this. With the section 21 ban proposal, I think the intention is good; people want security. And, if a landlord does want to exit the sector, they can still do that—the assured shorthold tenancy has an end and, let’s face it, you can’t exactly sell a property within a month these days, anyway. It takes six months, realistically, to go through conveyancing and everything else, so you’ve got plenty of time to give adequate notice if you want to sell a property. However, if you do too much interfering, it just has a negative effect, and landlords might leave the sector.

AD: So rather than banning section 21 evictions, what would be the alternative solution that would benefit both landlords and tenants?

AV: Probation. Give a tenant a probationary period for their tenancy of six months or however long you want it to be to prove themselves to be a good tenant. And at least the landlord then has a degree of flexibility to review.

LB: It could be quite subjective, though, couldn’t it? If you look at it in employment terms, does the employee believe they weren’t good if they don’t pass their probation, even if the employer does? And who determines that? So, actually, that probably gives tenants fewer rights; if a landlord says they don’t like how a tenant kept the kitchen, does that make them a bad tenant? Who decides this?

Jeni B: I personally like it. I’m currently going through a process of trying to evict my own tenant who hasn’t paid rent, so I served both section 8 and section 21 notices. We had our court hearing through for the section 8 date for 7th March but, unfortunately, the tenant’s then gone into something called ‘breathing space’ via the Debt Respite Scheme, so now I can’t touch them for 60 days. And, even when they come out of the breathing space, I then have to wait two weeks before I can re-serve the section 8 notice. That will then go to court, so I’ll have to wait for my new court date—which could take between six weeks and three months. If the judge rules in my favour, I must give the tenant two weeks’ notice, then I have to wait up to three months to get the bailiff. The whole thing just goes on and on. The reality is, if you’ve got a non-paying tenant, it takes a year to get them out if they don’t want to leave. A year of no rent.

LB: That’s terrible, especially with mortgage costs where they are right now. When you’re paying 5% or 6%, that suddenly looks even less appealing.

Andrew Ferguson: This is a great example of the hassle that smaller landlords are dealing with and the depth of understanding required with all the rules, regulations and issues in the market. This is why we are seeing smaller landlords exit the market and there’s a move towards more professionalisation. Section 21 is obviously all about protecting tenants and giving them rights, but it just feels that the balance is tipped too far. The government needs to recognise the importance of the PRS.

Kim McGinley: From what I’ve read, the government is hoping that the ombudsman they’re setting up will mitigate some of the delays in the court proceedings. It feels like a nice thing to have, but is it going to do much?

Juliet B: I don’t think the ombudsman has been set up to really help the situation— it’s leaned towards the tenants’ side. Looking at the white paper, it’s there to rectify problems that the tenant might have with the landlord. In my opinion, we need bailiff reform—apart from going to court and getting a possession order, we need bailiffs to have the authority to look at your case. Each one is different and not all tenants are bad. You might even have rogue landlords, and that’d be who they want to target. However, the government has thrown all the landlords into one bin and told them they’d get rigorous, draconian treatment.

Jeni B: When we’re talking to our clients, the consensus is that having a housing court set up to deal solely with tenantlandlord disputes would expedite the process. It would mean the people that are running the hearings are specialists in that part of law and will understand it fully and be equipped to deal with it, which should then make for good, fair outcomes, and a quicker process.

LB: The reality is, the government doesn’t want small landlords in the market, and it’s doing everything it can to push them out of it. If the government had its way, it would all be corporate PRS landlords; it is making it difficult for smaller players who have a full-time job and can only commit a certain amount of time to it.

MC: I just don’t know where it stops for landlords. That sector will just get smaller, if we’re not careful.

AD: Going back to your statement, Jeni, that it takes almost a year for a landlord to get a property back. Obviously, if the tenant is not paying rent, then you have a year with no profits. Is there any way that landlords can mitigate this?

Jeni B: In my situation—as my estate agent frequently reminds me—you should take insurance. I think my big learning out of all of this is that insurance is really important.

LB: It’s expensive though, isn’t it?

AF: It probably shifts you into unprofitability, actually.

Jeni B: The house that I own is never going to be a good investment from a yield perspective, because of where it is [Sevenoaks, Kent]. This wasn’t a business decision—I used to live in that house and didn’t want to sell it. So, it doesn’t wash its own face anyway, let alone with an insurance policy. But, I think if you deliberately went into investing as a landlord, this is an idea for people to consider.

Ed Zneimer: But, as everyone said, the legislation is clearly aimed at forcing out the entrepreneurial, small BTL landlord.

Jeni B: Yes, and I think what’s so disappointing is that landlords are really good people. Although there will always be the odd exception, by large, they take real pride in providing good homes, looking after their tenants, and providing a great service. I really don’t understand why people want to get rid of the ‘dinner party’ landlords. What’s wrong with wanting to have an income in retirement?

Juliet B: Or, in your case, that house has sentimental value, which is why you didn’t want to sell it. That was your choice, and you shouldn’t have to sell it because of some rules that have just been written.

MC: And if you do sell, you’ll get whacked by the new capital gains tax.

Jeni B: I did think of selling the house and, when I did the capital gains tax calculation, I thought I actually can’t afford to pay it. It’s awful because you get stuck. We have clients who are stuck with properties they no longer want because they can’t afford to sell them [due to the capital gains tax]. It’s crazy. People are almost forced into these situations.

AD: That brings me to my next topic of discussion, which is the most recent capital gains tax changes that were announced in the Autumn Statement. Do you think we will see a lot more landlords try to get rid of their properties that are no longer profitable before the changes come into force in April this year?

LB: At the moment, it is quite hard to unpick why people are selling, because it’s due to a whole raft of things. While it may be down to the new capital gains tax, if people are coming off really cheap fixed rates, the portfolios just don’t stack up anymore. And if the market is going to be a bit flat for a while in terms of sales values, landlords might think it’s now time to leave. It’s almost like death by a thousand cuts.

AV: Lucy’s absolutely right. There are so many things coming in, and the culmination of all of those are going to force landlords to think whether it’s worth it. It’s death by a thousand cuts for sure. But in some respects, the positive slant on this is that it’s actually encouraging smaller landlords to stay in the market and find a way to make the property work for them.

Chris Morris: I think that the capital gains tax rate changes won’t affect anyone’s decision of whether to sell a property or not. It’s more the fundamentals of capital gains tax and the overall bill that make it difficult for landlords. I heard that about two years ago, there was talk inside the Treasury about abolishing capital gains tax entirely and, instead, charging gains to income tax. The most concerning thing for me is that in the past four budgets, nothing’s really been done about capital gains tax— the government halved the allowance, but that doesn’t mean much—and nothing’s been said about inheritance tax. It makes me think that, at some point, they’ll do something big—and that’s where we will have landlords exiting the market quickly.

Jeni B: I think the other thing worth talking about is the fact that limited companies don’t pay capital gains tax. What we’re seeing is lots of people looking at incorporation. When section 24 [of the Finance Act 2015] was announced, a lot of people considered this option, but decided to wait. Now that they’re paying the full-blown tax increases and have got higher interest rates, more are looking into incorporation. Obviously, there’s a benefit here—if you push the properties via the correct pathway into the company, then you’re not going to be paying capital gains tax when you do dispose of them in future.

CM: Believe it or not, it’s actually worse off from a capital gains tax perspective. The only benefit of a company, from a tax perspective, is if you’re not going to spend all the money you want out of the company—so you essentially moneybox it to keep control over the profits that they’ll be generating. If you’ve got a company that’s got property in it, the company pays tax at 19%. If you sell it, the company still pays tax at 19% on the overall gain, but then that money sits in the company. If you, as the individual, want to get that money out, all you can do is liquidate the company. It’s an investment company, so it doesn’t qualify for business asset disposal relief, which means you pay 20% capital gains tax on liquidating to get your shares out. So, in total, you pay 39%, so you’d have been better off paying the 28% gain you’d have been liable to if you were selling it personally. I’m still a big fan of incorporating BTL portfolios into limited companies if the circumstances are right. But I think there have been a lot of negative publications that panicked everybody into wanting to incorporate. People were coming to me with two or three properties, saying they wanted to stick this in a company, and I’d explain that by the time they factor in the benefit of their mortgage interest relief, they’re looking at a 15-year repayment period for them to get the benefit back on the cost that it’s going to get in the company.

AV: Andrew and I have been talking to brokers for the past few years, highlighting the fact that people need to be aligning themselves with tax advisers to make sure they get the right advice for their particular case, because it sounds like there are so many different scenarios. It’s getting more complicated and tax advice is becoming more necessary. We are seeing the majority of enquiries coming in from limited companies these days. But are landlords simply following the route of everyone else?

CM: The ‘man in the pub’ is my enemy. I can’t tell you how many times I’ve heard someone say they were told to stick their BTL properties in a company because they spoke to a fella down the pub the other night. I tell them all the reasons why they shouldn’t do it and, a lot of the time, they still don’t believe me because their mate down the pub’s done it. That’s what you’re up against. It just comes down to looking at individual circumstances. We’re always clear with the client and personally don’t work with people who want to try it even if we said no—we tell them to find someone else to do it.

AV: Now we’ve gone from rogue landlords to rogue tax advisers.

Juliet B: We often see these cases when an individual wants to transfer a portfolio into a company—they’re getting a loan, and then the lender asks for the tax advice they were given. There are times when the advice is rogue and wrong. Many go on these consumer forums and read what others are saying and doing, and they just follow carte blanche, or they have people who would put their name out there and claim this is the advice. Then, in three years’ time when it comes to enforcement and HMRC has brought the lender into the whole proceedings, that particular tax adviser has disappeared. So, it’s important to have the right one.

CM: Absolutely. I also think there should be more responsibility on tax advisers because, even when you do someone’s tax return, it’s still selfassessment—if it’s done badly, they will go after the individual. There are a lot of people who are simply filing. This is why we’re traditionally more expensive than someone who might do a tax return for £100, because they’re operating from their house etc and don’t take that responsibility. Part of the reason we charge the fee we do is because we are doing the extra work— we are taking the responsibility.

Juliet B: I think you get what you pay for and, when you try to have these shortcuts in the beginning and you go to a back-street accountant, it will ultimately come back to bite you.

AD: With landlords following the herd and opting for limited companies regardless of whether it’s the right choice for them and taking rogue advice, do you find it harder to advise clients?

AV: The key element is not giving advice on something you don’t know anything about. The most important things you can do are recognising your weaknesses and making sure you are introducing the right people to the right advisers at the right stages of the deal.

EZ: The reality is that some of the advice needs to be more nuanced than that, and you need a specialist.

CM: People never seem to appreciate the difference between an accountant and a tax adviser. You can pass the chartered accountant qualification without doing the tax element. I think one of the barriers is landlords not appreciating how specialist some of this stuff is. And I do get it—if you’re just a regular BTL investor, an accountant should be able to look after you. But when you’re involved in multi-property portfolios and talking about incorporations, restructuring, potential sales, moving things around and the more complex side of things, there is a need to have a specialist person—and it’s the same with solicitors.

Juliet B: We often get asked the question: what causes a delay in the lending transaction? It’s usually when the borrower has chosen the wrong solicitor because they want to do it cheaply, but that person doesn’t have the experience. It then makes the lender’s solicitor’s job more in-depth and difficult. You’ve got to do your homework in terms of choosing all your advisers, especially with tax. Some of these don’t just have cost implications, but criminal penalties attached to them, and then that stops your whole business.

AD: Moving on to another proposed regulatory change, we’ve seen the Renters’ Reform Bill circulating recently. One of the things included in that is the plan to allow rent increases once per year, which could hurt landlords. Could this proposal affect landlords’ ability to get a BTL mortgage?

Emily Hollands: I don’t think it’s relevant what rent a landlord charges the customer for the BTL mortgage. The valuation will always provide the rental figure based on OMV, and that’s what most lenders would use to base their lending on. It will affect landlords themselves, though. With the cost of living crisis and the pricing of materials to improve properties, there is an option for them to raise the rent, and they should be able to do that. But if it goes to once a year, then that’s going to make it very difficult. They’re going to be in a position where they’re making less money on those BTL properties.

KM: I disagree to a certain extent. Not all lenders will just accept the market rent from valuation. There are actually quite a few lenders, still, that would take the lower of the market rent (confirmed by the valuer) or the passing rent (what the property is currently achieving); landlords might not always get the most competitive option though. From a broker’s perspective, that’s another educational piece for us to understand at the outset, so we’re quoting the right lender that will take the passing rent, rather that the valuer quotes.

LB: In terms of rent increases, we’ve talked a lot about what isn’t fair on the landlord, but I think there have to be some rent protections. You set a tenancy and, like any business, if you charge a price for goods and services, you fix it for whatever period—whether that’s a one-off payment or for 12 months. If it’s a fixed fee, it’s simply that, and I think it’s the same with rent. You sign a tenancy agreement at a set price and, when that tenancy comes up for renewal, obviously, that’s the point when a decision can be made and capped. It would be a bit unfair for a landlord to call up their tenant and up the rent every month.

Jeni B: This is another rule that [doesn’t affect good landlords]. Most don’t raise the rent every month, or every six months for that matter—they are only doing annual increases.

LB: I must be the only landlord in the world whose rents aren’t going through the roof, because I keep reading about the price of rent going up.

MC: It depends on stability and the mortgage costs across a landlord’s portfolio, but if you’ve got a good tenant…

LB: I’ve got good ones and five-year fixes on my mortgages. This comes back to morality—I could whack the rents up but, actually, my costs haven’t gone up. They will at some point in the future, so maybe there is an argument there that you’re starting to offset the future costs but, ultimately, if you’ve got a good tenant, you might put the rent up, [but only] a little bit. I think a lot of responsible people take the same view.

CM: Obviously, the risk of putting the rent up is ending up with a non-paying tenant. If you go down that route, you might not get them out, or they choose to stay and then call you up every month with something that needs fixing. You end up spending more trying to appease them with all the fixes, because they’re upset the rent’s gone up, whereas before they just let it go, because they felt the rent was good value. When you’re looking at renting—and I always see it with clients—their most profitable years are the ones when they’ve had the same tenant long term, they don’t have a lot of repairs, and they’re happy. The ones where you’ve had a tenant out halfway through the year, you end up getting six to eight weeks with no rental income for the gap and thousands of pounds worth of repairs, because you might have to paint a few walls or change a carpet or bed. Then, when you look at the profit and loss on that property for the year, it’s actually made a loss. Surely, it’s better not to increase the rent by £100 a month, as it will cost you more in the end.

LB: It comes back down to the difference between doing it part-time or not. If I did it for my full-time job, maybe I would consider [increasing the rent] a bit more. If this was my only source of income, I’d have to be a bit more business-minded about it. If you’re doing it on the side of your main job and it’s a future savings/ pension type thing, or you had a good opportunity to buy a property, you’re probably a bit more empathetic and not as focused on the money-making aspect.

AF: I think that’s a good point about the different mindset of an amateur landlord, who is more likely to show empathy and be less fussy about an extra £100 on the rent. A business wants to maximise income so, potentially, one of the downsides of the professionalisation is rents creeping up slightly.

Juliet B: Also, as an amateur landlord, you have that personal relationship with your tenant. Whereas, if you’re a corporate landlord, you’re removed from the situation, so it’s easier to raise your rents.

AD: Going back to the Renters Reform Bill, the white paper also proposes the implementation of the Decent Homes Standard to the private rented sector. How do you think this will impact this space?

Jeni B: I don’t personally see it as an issue, as I think most properties already fit inside what is regarded as acceptable. The thing that it’s trying to tackle is ensuring that properties are free from any serious health and safety hazards—but what landlord is consciously letting a property out, thinking it might catch fire and kill their tenants at any moment? Landlords aren’t really like that. The general view that we’re hearing from our clients is that this is one piece of legislation they don’t mind. If anything, it’ll drive out the rogue landlords who have substandard properties that are dangerous. It’s helping to professionalise the market, so it’s a good thing, and this is supported among the landlord population.

Juliet B: There’s also a compulsory portal that all landlords will be required to sign up to, which is for compliance, so there’s an additional administrative element to it. I agree with you, Jeni—90% of the landlords are doing the right thing. They’ve got the homes in the right status anyway, so I don’t think it’s a bad thing.

MC: But will it ever reach those landlords, the ones that probably collect cash in hand every week?

Jeni B: They stay below the radar, don’t they?

MC: If it’s in a bad area of a big city, they’re off the radar anyway; they might not even be mortgaged. Christ, I rented a few when I was a student, and they were horrendous, yet the landlord would be round every week to collect cash in hand. You can pretty much guarantee they are well off anybody’s radar, not paying tax, you name it. They’re the ones that this regulation probably won’t reach—but it needs to.

Jeni B: I think the portal is an interesting one, isn’t it? Because we know it’s going to have details about the landlord. The impression that I got—and I could be wrong—is that it’s going to be a bit like a Trustpilot for landlords. So the question our clients are really concerned about is: where’s the arbitration on this?

LB: The problem with reviews is if anyone can submit them—whether they’re a valid customer or not. It would be a real problem, I think, if people could make unvetted comments.

Jeni B: Back to the ombudsman, if a tenant leaves a very negative review of a landlord on the portal, maybe the landlord would then have the opportunity take it to the ombudsman and there would be some sort of arbitration… I don’t know, but this is what they are quite worried about.

Juliet B: There will be a discussion. But I do think landlords now need to have a proper paper trail in terms of what they’ve done. Gone are the days when you could just say you’ve done everything you could to fix an issue—you must evidence it in writing so you’re not penalised. It puts an additional onus on landlords.

AD: Nick, from your conversations with landlords, do they share the same views and worries about this property portal?

Nick Simmons: No, not at all. I’ve had no clients who have raised concerns with regard to the Decent

Homes Standard. So, mirroring what Jeni said, I think it’s a good thing.

AV: We, as lenders, want it [the portal].

Jeni B: Would you decline an application if someone had a bad profile?

AD: I was going to ask that, actually. I don’t know if the portal will only be available for landlords and local councils to make sure everyone’s accountable. But if it was accessible to everyone , would you use that as part of your due diligence?

AV: It’s not something that’s come up on the radar yet. But yes, you do landlord Google searches for reputation and, if something comes up, it needs investigating. That’s the beauty of lenders that have a degree of manual underwriting about their process and can then speak to the broker and investigate this. However, some of the larger lenders that have a tick-box or fully automated processes might struggle with something like that.

Juliet B: Additionally, if a matter got to litigation, it would be remiss of you to have information at your fingertips and to not review it.

MC: I think it would pop up on certain AML/KYC searches, LexisNexis, and other systems that look for negative things online. And you do get certain things that pop up about court cases or challenges, or your previous employment—information that isn’t always relevant, but you do want to see if it has a bigger impact. So I imagine it’s just an extension of that.

AD: Emily, what do you think? Would you be keen to have access to this property portal to vet landlord applicants?

EH: I think everybody would want us to say no but, if there’s data available, we’re going to want to have access to it. Having said that, even at the moment with the EPC ratings, we are asking that of the valuers. If it’s something they have access to, we wouldn’t necessarily go down the route of scrutinising every single property on that basis. It’s still ambiguous and up in the air, and I feel it’s less likely to come in.

AD: This brings me to my next question— do you think any of the current proposed regulations will actually be implemented?

Jeni B: I think section 21 abolition will definitely come in this year. I also believe the Decent Homes Standard bill will go through, but the minimum EPC changes will be postponed as they’re reassessing the way that EPCs are done at the moment, aren’t they? I think this will be pushed, but it will still happen.

AD: In your opinion, what should be implemented in terms of tax and regulation?

AV: Can they just reverse it? [ laughter ]

LB: [ laughter ] I think there’s enough.

AV: Yes, nothing for now. Everyone needs time to settle and understand the landscape as it is today so that we can all do things correctly, reach a norm again, and then review it.

CM: I agree—you need to have time to be able to understand it and the implications, and then pass this knowledge on to the client so they can make decisions.