Napoleon is said to have described the English as a nation of shopkeepers. If he were around today, he might describe it as a nation of small-scale landlords. In the near future, however, people might refer to the UK as a nation of corporate landlords as changes to the financial and legal landscape impact both the cost-effectiveness of being a private landlord and the level of personal risk involved.
Investment is about numbers
You buy a home to live in, but you buy an investment property to make you an income. In the most basic of terms, you work out the gross income you can generate from your property, you estimate your expenses, and you decide if the difference between these two figures leaves you with enough profit to be worth the effort involved. If circumstances change, you do your sums again and decide whether or not your investment is still worthwhile. Recent, well-publicised, changes to the tax system have the potential to be seriously detrimental to the net income generated by investment properties held by private landlords, i.e. landlords letting out property outside the framework of a limited company. The announcement of these changes led to a slew of articles both online and in mainstream publications, discussing the possible use of the so-called “landlord loophole”, i.e. the possibility of converting a property portfolio from a private holding to an asset belonging to a limited company. While this might be a good idea in theory, in reality, setting up a limited company can be an expensive and complex undertaking, so much so that small-scale landlords may find it more appropriate simply to sell up and find another investment vehicle.
Risk is also a factor
All landlords have to deal with three main forms of risk:
- the risk of property being damaged
- the risk of being sued for compensation for negligence
- the risk of letting a property to a tenant without the “right to rent”
Even though the risks may be the same, how they affect landlords can be very different. While dealing with a damaged property may be the most obvious risk of being a landlord, it’s arguably the one which should cause the least degree of concern since it can usually be mitigated through a combination of tenant selection, deposits and insurance. The risk of being sued for compensation for negligence may be much smaller and again there are steps landlords can take to mitigate it (the obvious example of this being to take good care of their property), but in a world of “no win no fee” lawyers and adverts making people aware of the possibility of them claiming compensation for an accident which wasn’t their fault, the reality is that even the best landlords can find themselves on the receiving end of a claim from a tenant who has nothing to lose. If a private landlord is found negligent, they are personally liable for the damages, whereas a limited companies can only be sued to the extent of their assets. Likewise, while the “right to rent” scheme applies equally to both private and corporate landlords, the former may find it much harder to navigate the complexities of the scheme in a non-discriminatory manner.
The end for private landlords?
While it’s still relatively early days and the attraction of owning property in the UK should never be underestimated, it is fair to say that the government’s actions have the potential to push private landlords out of the market. Smaller private landlords may well just liquidate their portfolio and move on, while larger ones may become limited companies. What’s more, the government has committed to abolishing letting agent fees for tenants, which presumably means that letting agents will charge landlords instead. While, in theory, this should be a situation which is six to one and half a dozen of the other, private landlords who are already seeing their returns dwindle and their risks increase (due to the right to rent scheme) may decide that enough is enough.