Autumn Statement 2016: What landlords need to know let by signpost

Autumn Statement 2016: What landlords need to know

The new Chancellor of the Exchequer, Philip Hammond, delivered his first budget via the Autumn Statement on Wednesday, 23rd November 2016.

This budget was crucial to giving landlords and buy-to-let investors an insight into how the new cabinet will treat the private rented sector (PRS) in the future.

Sadly, it appears that the new cabinet doesn’t appreciate the issues that landlords and letting agents face or the efforts they make daily to deliver excellent homes for private tenants.

However, they have shown that there is a change in attitude towards social housing and that they do understand one of the key areas that needs tackling is the lack of affordable homes – which the PRS can’t afford to deliver to those on benefits and low income.

What can landlords learn from the Autumn Statement?

It’s always worth understanding what the government feels will happen in the future and what they think needs ‘fixing’ in the economy. At the start of the statement, the government states:

“The deficit remains too high and productivity too low. In addition, the government wants to see more people sharing in the UK’s prosperity and ensure that the tax system is one where everyone plays by the same rules.”

And that: “In the near term, the UK’s economic outlook has become more uncertain.”

The important bit for landlords to take from this is the view that the UK’s economic outlook is uncertain.

Uncertainty in the economy can actually be good news for property investors. People don’t tend to buy houses or move when they feel there is an uncertain future. Plus, with many areas’ property prices having recovered well since the recession, forecasts for next year are that price growth will slow and, in some areas, actually see small falls.

That’s good news if you want to expand your portfolio as it means demand for property is likely to weaken. As a result, there may be bargains around next year that would have been difficult to secure over the last few years.

It’s good news from a renting perspective too. People are more likely to stay where they are if renting already. And again, they’re less likely to buy if they’re hearing doom and gloom about the property market.

Other helpful initiatives that will support landlords and letting are:

  1. Raising the personal allowance to £12,500 by 2020 – Plus, from April 2017 the personal allowance will rise from the current £11,000 to £11,500. This means tenants should have a bit more money in their back pockets, so will cope with rent rises.
  2. The National Living Wage (NLW) will rise by 4.2% from £7.20 to £7.50 from April 2017 – this will also help many tenants.
  3. The higher rate tax band will rise to £45,000 next April – Most landlords have a day job as well as one or more properties. This rise will helps those who are earning just over £40,000 and are currently in a higher rate tax band. The threshold is expected to increase to £50,000 by 2020.
  4. Corporation tax to fall to 17% by 2020 – If you run or are planning to set up a portfolio, this cut in corporation tax should help increase profits, but do be cautious. The government may look at changing tax for property companies in the future. In the past they have taken away individuals’ ability to deduct finance costs when running a rental property.

However, it’s important to bear in mind that inflation is likely to start rising faster than income growth next year due to the fall in the pound following the Brexit vote. The government estimates a cost of living rise of 2.3% compared to the expected 0.7% this year.

If your tenants can afford it and your contract allows, it’s worth raising rents now rather than trying to do so next year when cost of living rises start to bite. Remember, you will be affected by inflation too, so it’s important to recoup these cost rises, especially if you’re hoping for your rent to deliver a pension in the future.

Infrastructure investments are good news for landlords

The government also introduced a new National Productivity Investment Fund of £23 billion, which is expected to impact on housing through:

  • A new Housing Infrastructure Fund of £2.3 billion by 2020-21 which will aim at “unlocking new private house building in the areas where housing need is greatest. This will deliver up to 100,000 new homes.”
  • Transport funding to support housing growth.

On the surface, this wouldn’t seem to affect landlords that much. However, it’s planned that, from 2017-18 through to 2021-22, the £23 billion fund will target areas such as affordable homes and infrastructure. More affordable homes are desperately needed, but that could affect individual landlords in particular areas where they’re developed as it may impact on demand. But with there being such a shortage of homes, the new homes built are likely to be absorbed from a demand perspective by the population growth.

Infrastructure investment is always good news for landlords for two reasons. Firstly, it can be an opportunity to buy in areas that currently have poor transport links at the moment, but which will be improved within 5-10 years. Secondly, because many of the jobs created by building the infrastructure are temporary and people need to work away from home, it increases the need for rental accommodation around the major project areas.

For example, there is a huge project which has been accepted by the government along the Cambridge, Milton Keynes and Oxford corridor which could lead to some opportunities for long-term growth.

So it’s definitely worth looking in more detail at what infrastructure projects are going ahead, where and for how long. Meanwhile, keep an eye on any major affordable housing projects which could dampen demand in the short term for your buy-to-lets.

Initiatives which could hurt landlords

There is no doubt that the biggest initiative of this Autumn Statement that will hurt landlords is the failure to reverse the previous chancellor’s decision not to allow finance costs, such as mortgage fees and interest paid, to be deducted from the rent.

And two other initiatives put in place will also cause landlords’ costs to rise:

  1. Insurance Premium Tax will rise from 10% to 12% in June 2017 – this affects your landlord insurance, property insurance, rent guarantees, professional indemnity, public liability, etc
  2. Ban on letting agent fees, which the government state will “improve competition in the private rental market and give renters greater clarity and control over what they will pay.”

The first initiative will obviously hit fairly soon, but the second one may well take over a year to implement due to the requirement for consultation. Unfortunately, as this will reduce agents’ turnover by 10-20%, this means they will need to recoup the money from landlords by increasing fees or cutting costs. This could mean reducing staff numbers, which could affect the level of service you receive.

Is the Autumn Statement good or bad news for landlords?

From a strategic perspective, the statement offers some great opportunities to earn money from property in areas where the government is investing.

However, there is no doubt that a ban on letting fees and increases in the tax on insurance will raise costs even more in 2017. Bearing in mind, that’s on top of costs being increased from new initiatives, such as having to test smoke alarms on the day a tenant moves in, and profits being reduced through tax relief losses, including the wear and tear annual allowance.

The toughest burden on landlords is still yet to come. This is the loss of finance tax relief for those who are on the cusp of being on a higher rate tax payer or who are already. The impact of this could bite very hard and potentially make existing or new investment difficult to stack up from a profit perspective.

What should landlords do?

Sadly, it looks like this government continues to underestimate the value of the work done by landlords and letting agents in the private rented sector.

But whatever your circumstances, this Autumn Statement is the ideal time to take stock of your business and get together with an independent financial advisor. They can help you devise a future strategy for your income and assets, and direct you towards the best way to cope with the new tax changes.

Landlord Insurance Kate Faulkner
Kate Faulkner

Kate Faulkner
Added: 25th Nov 2016