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Fears are growing that more tenants will find themselves in arrears or will be forced to look for cheaper properties, thanks to the government’s changes in the tax on buy-to-lets. One of the UK’s largest online letting agents, Upad, has said that this situation could rise significantly in the next year, if landlords increase rents from April 2017 to offset their increased tax bill. From the next tax year, the rules allowing buy-to-let landlords offsetting mortgage interest against tax will be phased out, before being withdrawn altogether by April 2020. The tax changes are going to force many landlords into higher tax brackets, while others will only receive 50% of the tax relief they get now. The choices are stark – see your profit margin fall, see a profit turn into a loss, or pass on the higher costs to tenants.

Upad fears many tenants will struggle to meet these increased prices, with recent data showing nearly one in 10 UK tenants fell behind with their payments in August 2016. With the average tenant already spending half of their pay on rent, they will find it hard to fork out even more for their home. In London, the problem is even worse, with rents eating up to two-thirds of a tenant’s salary.

Upad CEO and founder, James Davis, points out that rent arrears are becoming the fastest-growing problem for landlords and tenants. He pointed out that if wages do not increase more than inflation, landlords will find it difficult to secure rises and the entire lettings financial model could be at risk.

One option would be for tenants to move to properties with lower rents, which would either mean moving to a smaller home or a cheaper, less desirable area. Another fear is that many landlords will simply sell up or not invest in more buy-to-lets, so there will be fewer rental properties available altogether. This could hit the vulnerable members of the community very hard, with people on housing benefit, in low-paid jobs, or living on pensions finding it hard to cope with any rent rises. The alternatives would be to be forced out onto the streets or to move to unregulated homes, with all the risks that that involves.

The proposed tax change is already having an effect, with research by the Residential Landlords Association showing 25% of landlords have either sold homes or intend to do so, because of the tenant tax. Another option for buy-to-let investors with several properties is to set up a limited company to manage the portfolio, as this would be exempt from the new rulings. However, this comes with its own costs and complications, as proper accounts need to be kept at Companies House, and other taxes will apply instead.

Many organisations and landlords are hoping the government will have a change of heart in the Autumn Statement. Otherwise, it could be a bleak few years for both landlords and tenants, which would worsen an already dire housing situation in the UK.