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Buy-to-let: does the income case still stack up?

Mortgage payment holidays will soon to come to an end, but landlords face a growing risk of reduced rental income
Buy-to-let: does the income case still stack up?

The temporary rise in the stamp duty threshold might have seemed like a gift to some, but life is getting tougher for buy-to-let investors. A looming rise in unemployment stands to hinder tenants’ ability to pay their rent, while potential reforms to capital gains tax could increase administration and costs for landlords when they sell properties.

The economic fallout from Covid-19 has already placed some renters under financial strain but the proportion of tenants either unable to pay rent or seeking a reduction is expected to rise over the coming months, as the government’s furlough scheme starts to unwind. 

The government’s official guidance has been that landlords and tenants should work together and exhaust all possible options before starting eviction proceedings. But landlords are feeling the pressure. Mortgage payment holidays come to an end on 30 September, while some decided against taking a deferment for fear that it would hinder their ability to borrow in future. The courts were due to reopen for repossession hearings on 23 August after a five-month ban on evictions, but the government unveiled a last-minute extension to 20 September for England and Wales.* 

“Where landlords can genuinely see that tenants are struggling they are happy to work with them, insofar that they are able,” says Samuel Lane, partner at Irwin Mitchell. Court proceedings should always be a last resort and landlords should consider looking at options such as surrender agreements, where a struggling tenant is released from the tenancy and any arrears written-off, he says. But he adds: “I am expecting a lot of claims early next year when recession grips and people are suffering."

That is a thought echoed by David Lawrenson, a buy-to-let landlord of more than 20 years and owner of property consultancy LettingFocus.com, who says he has not yet experienced any voids in rental income. “As we move into the end of the furlough scheme, then that’s likely to be where people see increased [requests] for incrementally lower rent or giving holidays on the rent until the situation improves,” says Mr Lawrenson. 

In a worst-case scenario, those landlords that do find themselves turning to court proceedings will face a lengthy wait in regaining possession of their property. The most common way for a landlord to do this would be to issue notice under section 21 of the Housing Act 1988, for “no-fault” eviction. Landlords can also seek automatic repossession – under section eight – if a tenant is eight weeks or more in arrears. In both cases, however, that notice period has been extended to six-months in England*, from two months pre-coronavirus, until at least 31 March next year. If a tenant fails to vacate, then a landlord can apply to court for a possession notice, which can take effect up to 42 days later for tenants in the most difficult circumstances. 

But the courts will be dealing with a backlog of claims pending prior to coronavirus and those from landlords that serviced notice while the eviction ban was in place. What’s more, those landlords that have already made an application for possession, will need to notify the court in writing that they wish to reactivate a stayed eviction case. 

“You also have to find out whether the tenant has been financially affected or otherwise by coronavirus,” says Mr Lane. The ramifications of the latter change are not yet clear, he says. “What we imagine it could be for is so they can consider whether to make a 42-day possession order.”

There are already signs of pressure on rent levels due to a growing number of properties that were let on a short-term basis to tourists being marketed for residential occupation. The average rent in inner London declined by 8.4 per cent in July, according to data from Hamptons International, as the number of properties on the market rose 42 per cent on the same time last year. Together with falls in the South East and East of England, that dragged down rent levels by an annual 0.1 per cent across Great Britain. 

Potential reform to the capital gains taxation (CGT) regime is also cause for concern within the buy-to-let market, after chancellor Rishi Sunak requested the Office for Tax Simplification carry out a review of the system in July. Currently, CGT on sales of second homes is charged at 18 per cent for basic income tax rate payers and 28 per cent for higher rate payers. 

The consultation has sparked disquiet within the industry that gains on sales could be taxed at the owner's income tax rate, says Heather Powell, partner at tax and accountancy specialist Blick Rothenberg. 

Any changes in November’s budget would need to be enacted on the day they are announced, she says, so as not to spark a sudden exodus. “You could just see lots of people that had one or two resi properties, particularly the way the market is running away with itself, saying ‘I’m out of here’,” she says.  

However, companies do not pay CGT and therefore buy-to-let properties owned by a limited company would not be affected by any changes here, says Ms Powell.  

Government reform has also provided a boost to the buy-to-let market, with second homes included in the temporary rise in the stamp duty threshold. Mr Sunak’s announcement has led to an uptick in buy-to-let mortgage applications, says Steve Olejnik, managing director at broker Mortgages for Business.  

However, he adds: “The lenders are asking more questions about how landlords coped in the pandemic, have they had any voids? Have they had any payment holidays?” There are certain lenders that in some cases would refuse to grant a remortgage or mortgage on a new property until payments have been brought up to date, Mr Olejnik says. 

Stamp duty provides some up-front saving for those increasing their portfolio, says Mr Lawrenson. “It's in the price though,” he adds. Some landlords could end up paying more for a property than if they “just hung back a bit” until after 31 March when property prices could come down further, Mr Lawrenson says.