2022 was a mixed year for landlords. On one hand mortgage rates rose. On the other house prices continued to rise and demand for rental property soared. However, with prices likely to fall and major tax changes and new pro-tenant legislation on the horizon, what will 2023 bring for landlords?
This is a market that even the most experienced landlords are struggling to keep pace with. Given the constant and complex changes across the rental market, we would like to look at some of the key factors 2023 will bring for landlords.
1. The Renters’ Reform Bill
Tenants will receive new rights to challenge landlords on rent hikes and substandard homes thanks to the new Renters Reform Bill, legislation the government believes will “redress the balance between landlords and the 4.4million tenants living within it.”
The Bill is primarily aimed at clamping down on those landlords renting homes that are unfit for habitation due to damp, a lack of safety or a lack of heating. However, all landlords will have to meet the demands of the Bill. If they are found to be providing sub-standard property, a Private Renters’ Ombudsman will be able to demand landlords repay a portion of the rent as reparation.
Perhaps the most significant change is the Bill will outlaw ‘no fault’ Section 21 evictions. This will mean landlords will no longer be able to terminate tenancies without giving any reason leaving them reliant on Section 8 notices if they want to evict a tenant.
While a Section 8 can enable a landlord to tackle rent arrears, tenants who have damaged their property or tenants repeatedly involved in anti-social behaviour, they can be challenged. This can end with a long wait for a court hearing during which time the tenant/s will remain in situ.
2. The upcoming EPC changes
The Energy Performance Certificate (EPC) gives properties an energy rating of between A and G with A the most energy efficient and G the least.
At present, all rental properties in England and Wales need to have an EPC of at least E if they are to be let (unless exempt). However, as the Government seeks to reach net zero by 2050, this will be increased to a C for all new tenancies by the 1st January 2026 and for all other tenancies by 1st January 2029.
Although this legislation is still going through Parliament, it will almost certainly be passed given the Government’s very public environmental ambitions. Funding may be made available, but landlords still need to take action – and, if necessary, cover the costs – during 2023 if they are to meet the likely deadlines.
It is also important to note that whichever way the EPC vote goes, from the 1st April 2023 it will become unlawful for a landlord to continue to let a property rated F or G. This is unless they have made all possible cost-effective energy efficiency improvements prescribed by The Minimum Energy Efficiency Standards (MEES) as set out in The Energy Efficiency (Private Rented property) (England and Wales) Regulations 2015.
3. Higher tax bills when property is sold
Landlords will be hit by a capital gains tax (CGT) liabilities from April 2023 if they sell rental or investment property.
CGT is charged on any profit made when an individual sells an asset that has increased in value. It is definitely applicable to any buy-to-let investment, particularly given the recent performance of the housing market.
In his 2022 Autumn Statement, the Chancellor Jeremy Hunt announced the annual exemption for CGT will be cut from £12,300 to £6,000 in April 2023. It will then be halved again to £3,000 in April 2024.
In addition, any profits above these thresholds will be taxed at a rate of between 18% and 28% depending on the seller’s tax band.
4. A rise in buy-to-let mortgage rates
Mortgage rates look set to increase during 2023 following the increases caused by the fallout from the disastrous mini-budget in September.
While residential mortgage rates have started to fall back to below 5%, BTL rates remain higher at 6% or over.
More worryingly, mortgage rates are tied to the Bank of England base rate. These are expected to climb above the current 3.5%. This could force buy-to-let mortgage rates to rise even further meaning that landlords who secured their deals when rates were much lower will face higher monthly payments, lower profits and even the need to remortgage.
5. More rental bad debt
According to Which? Magazine, tenants are more likely to miss a rental payment than home owners are to miss a mortgage payment.
As the cost of living crisis continues to bite, tenants may struggle to meet their rental responsibilities. When you couple this with increasing mortgage rates and the greater protection the new Renters Reform Bill will give tenants, the threat of even more rent arrears to chase shouldn’t be ignored.
6. New tax rules for holiday lets
From the 1st April 2023 new tax rules will be imposed on landlords of holiday lets.
Today anyone with a second home in England or Wales can apply for a council tax discount and access small business rates relief if they say their intention is to let the property as a holiday home.
This will change on the 1st April. After this date landlords will need to be able to prove their property has been rented out for at least 70 days a year and available to let for at least 140 days to qualify for rates relief and reduced council tax. This change has been implemented to show genuine holiday rents.
While this probably doesn’t make hugely encouraging reading for many landlords, there are two reasons why investment property still has a very healthy future.
Firstly, rental demand will more than likely grow even stronger. The cost of living crisis is making it even harder for first time buyers to get onto the property ladder. There is also a likelihood some home owners may need to sell then rent because of heightened financial pressures.
Both will increase demand for rental properties which will of course benefit landlords.
Secondly, higher mortgage rates and falling prices could combine to provide landlords with potential bargains.
If you can buy at the bottom of the market and have the resources to make these properties work for you until the market swings, you could see your property significantly grow in value.