Game changing real estate regulations in April
This month, many new regulations are coming into force that will affect the property market. Marcus Whewell, The Guild's CEO, highlights key laws and discusses what impact these could have on the UK's housing.
My last blog highlighted some of the likely impacts of the imminent Stamp Duty changes on the Buy to Let market in England; but what other legislative changes are in the offing?
There are other items of note: one relates to the Buy To Let sector of the market, the second affects how companies can help address money laundering.
As well as the extra 3% tax on the purchase of so-called second homes (and so-called ‘Granny annexes’), The Government (or rather HMRC) is tightening up the rules surrounding the treatment of expenses for landlords. The alteration will remove the ability of landlords to deduct ‘wear and tear’ from rental receipts before income tax is applicable. Many landlords have complained that this could dramatically reduce the yields from such properties, and maybe even tip the scales in favour of exiting the sector. However, I believe the likely effect will be less dramatic, for several reasons.
Firstly, in a free market, if this change does represent a new, significant cost of supply, then rents should simply adjust to cover this extra risk for the landlord. This is not necessarily desirable, as it would increase the cost of housing at a time when household budgets are already under strain - but in the absence of rent controls, this is the logical outcome. Incidentally, this change also provides an easy argument for the landlord and agents to review rents (upwards) without seeming to be excessively greedy!
Secondly, the forecast rise in house prices (roughly averaging 5% p.a. for the next three years) means that the capital gains in many regions should be more than enough to outweigh the reduction in allowances.
Thirdly, larger landlords are already starting to incorporate their companies to try to retain the allowances, and so the effect may fall disproportionately on the smaller providers.
The Government seems keen to dissuade sole individuals from investing in properties for rent, but currently private lettings play an important role in facilitating residential housing supply. With the disappointing performance of ‘Right to Buy’ in terms of its overall impact on the general housing market, the protracted difficulties in persuading the construction sector to invest in significant new schemes, and the increasingly ‘complex’ positon of housing associations, this may prove to be a significant political gamble.
The second piece of legislation (which comes into effect on 6 April 2016) relates to companies needing to declare and register ‘Persons of Significant Control’ (or PSCs). The Government has declared the reduction and prevention of Money Laundering to be a high priority, and registering and declaring PSCs is an important step towards this goal.
In short, this new rule ensures that individuals can and will be made more clearly accountable for the behaviour of their organisations, and that companies cannot hide behind lists of shareholders, subsidiary boards and various holding companies.
The costs of registration for businesses are quite low, and so objections are focussing on potential concerns over the security and portability - sharing of the data rather than a significant additional financial burden. However, in the light of the furore over Mossack Fonseca’s recent revelations, surely this is the right thing to do.
There are some other imminent changes that could indirectly affect the property market. Council Tax bills will rise by an average of £58 for Band D (average) properties, as more than a hundred councils around the country are increasing rates by up to 4% - the largest council tax increase for eight years.
On the other hand, if you rent your home from a housing association or the council, starting from this month, your rent will decrease by 1% each year for the next four years. The government hopes that this will help reduce the amount of housing benefit it pays and is planning to reduce the household benefit cap this Autumn from £26,000 to £20,000 - or £23,000 in London. From 1 May 2016, the family premium of £17.45 for housing benefit claimants with one or more dependent children will also be abolished.
We also see the launch of a new tenancy protection scheme called TDS Custodial, soon to be followed by Mydeposits. Until now, the only such scheme was operated by The Deposit Protection Service.
These amendments are not expected to greatly influence the market, which is probably welcome, given the growing uncertainty likely to result from the Euro Referendum and the general economic slowdown. When you are walking on a tightrope, small and controlled movements are generally the order of the day!