To win as landlords besieged by tax and red tape, you need to know your stuff

Section 24, tenant fee bans, Brexit… Landlords feel under siege amid an onslaught of tax and red tape. Is it really that bad? And what can you do to survive and thrive amid all this?

Hunkered down at the recent National Landlord Investment Show, in west London, the audience fired off question after question on falling tax relief and rising red tape. Applause erupted when one among them remarked: “There seems to be an attack on landlords. The tone is being set that landlords are greedy, horrible people, rather than people who are trying to provide a home.”

The harder it gets, the greater the opportunity for those who do it right and run it tight. Here’s what you need to know.

Will Section 24 tax changes wipe out your rental profit?

Many small landlords still don’t know what new tax rules on mortgage interest, phased in since April, will cost them. Don’t wait until you file your tax return next year. Work out how the innocuous-sounding “Section 24” rule will hit you — the Residential Landlords Association has a useful tax calculator (tinyurl.com/rla-tax).

From 2020, when the rules take full effect, you will no longer be able to deduct mortgage interest payments as a cost before working out profit. Instead, you will apply a 20% relief after you’ve arrived at your profit, but before you calculate your tax.

Basic-rate (20%) taxpayers face the same levy on their property income as before, but their “profit” will look higher. Lumped on top of other income, it can push them up one or even two tax brackets — which could see them lose child benefit and allowances.

Owners in the higher (40%) and top (45%) tax brackets will pay more. Those with big mortgages in expensive areas, especially London, may shell out more in tax than the let earns.

What you do next depends on your circumstances, so speak to a tax specialist. If Section 24 will wipe out your profits, here are seven strategies to cope:

• Don’t rush into transferring your flat to a company: that could mean paying capital gains tax and stamp duty when you “sell”. You would have the same problem if you wanted to transfer the property back into your own name if, for example, you want to live there again.
• Married couples who own jointly could transfer more ownership to the lower earner via HMRC’s form 17, but this could affect capital gains or inheritance tax down the line. Take expert advice.
• In an area with high demand from tourists, you could switch to a fully furnished holiday let, as these are exempt from the rule. In London, you will need planning permission for this.
• If the rent is below market rate and you have not raised it in years, you could up it now. Sweeten the deal to your tenants with an incentive that you can deduct from your tax bill, such as installing a new bathroom or kitchen, offering free wi-fi and/or a spring clean.
• To offset losses, look for a cheaper agent or manage it yourself. Bear in mind, however, that agent costs are tax deductible, so they may help you
• Pay off some mortgage debt to cut interest.
• Failing all this, sell.

How will the tenant fee ban affect you?

A new bill will ban all fees for tenants in England, except for holding deposits and charges arising from tenant faults, such as property damage or lost keys. The Generation Rent campaign group found the eight biggest lettings agents all charge tenants more than £380 — well above the average £200-£300. Self-managing landlords tend to charge less. But neither you nor your lettings agent will be able to charge tenants for third-party expenses like inventories and reference checks.

The bill will also cap deposits at one month’s rent. Although this will help most tenants, it will make it harder for those who struggle to pass checks, such as pet owners or families who get housing benefit. Many landlords then ask for a higher deposit — and if that’s not allowed, they won’t rent to them.

Will Brexit make it harder to find tenants?

If you let to bankers in central London, Brexit might see you struggle to find tenants, but elsewhere the long-term shortage of rental accommodation means Brexit will have little impact on how easy you’ll find tenants. Local issues will have a bigger impact — in Manchester, for example, a glut of newbuild flats means fewer tenant enquiries.

Uncertainty around Brexit is, however, adding to a general economic slowdown which has seen property prices rise much more slowly than what we’ve been used to. This means you should not depend on a quick return from buying and selling, unless you buy far below market value in the first place.

Overall, property has become much more of a long-term game in which cash flow is king. You really do need to look at your monthly bottom line, but if you are careful, property still outshines investment in shares or cash.

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