Many changes in the private rented sector will be implemented over the coming months. Gordon Adamson, director at Northwood in Carlisle, looks at three of them.

1. Taxation

Section 24 (S24) of the Finance (No 2) Act 2015 will start to apply from the 2017-18 tax year and, in graduating stages up to 2020-21, will reduce a landlord’s ability to offset mortgage interest costs against rental profits before calculating the amount of tax payable to HMRC. It essentially means landlords will be taxed on their income, not their actual profit.

This may push some landlords into a higher rate tax bracket and/or may see landlords paying tax on a loss. It will especially impact on sole trader landlords who are highly leveraged with mortgage finance.

Landlords should seek professional tax advice as to how best to structure their property investments to mitigate the impact of S24.

2. The Housing and Planning Act

This is a Bill to make provision about housing, estate agents, rent charges, planning and compulsory purchase and introduces new regulations. There are a number of elements of the increasingly onerous legislation that impact on landlords.

Rogue landlords and letting agents may be subject to banning orders and their details entered into a local authority database.

Landlords can recover abandoned premises without a court order, provided that they serve various warning notices.

Local authorities can access tenancy deposit information to enable them to take enforcement action where a property is unlawfully let as a house in multiple occupation.

Regulations can be imposed on private landlords of residential premises in England to ensure that electrical safety standards are met and property agents can also be required to be members of a client money protection scheme.

3. Implementation of the PRA

The Prudential Regulation Authority’s recommendations for BTL lending came into effect at the beginning of the year.

In a nutshell, lenders will be required to undertake more rigorous due diligence on borrowers, taking into account their other debt and mortgage lending, and there will be stricter criteria for lending, along with a higher “stress test” for calculating how much landlords can borrow.

The new calculation to determine how much you can borrow based on the rental income of your prospective purchase is:

Monthly rent x 12 divided by 5.5 per cent divided by 145 per cent.

So, for example, a monthly rent of £500pcm would allow you to borrow approximately £75,200.

In many cases, this will mean landlords will have to put in significantly larger deposits, and we envisage the average deposit being around 35 to 40 per cent, depending on where you are located in the country and the yields you can achieve.