A typical ‘ordinary’ mortgage will include clauses which prohibit you from letting out the property, or require you to get the lender’s permission before doing so. If you let the property without informing the lender, then you are in breach of the terms of the mortgage.
In these circumstances, the lender could take action against you. For example, the lender might demand immediate repayment of the mortgage. If you cannot repay the mortgage, the lender will normally be entitled to take possession of the property and sell it.
So investigate available ‘buy to let’ mortgages, designed specifically for buy to let investments. But be prepared to comply with some rigorous conditions, imposed because of the credit crunch. For example, that you can only apply for a 75% mortgage if you are over 25, your annual income (apart from your rental income) is at least £35,000 and this is not your first mortgage. As with any mortgage you should shop around and, if in doubt, take advice from a trusted adviser.
Legally, there are a number of obligations in relation to:
Separately, you may want to make alterations for commercial reasons: for example, modifying the property to meet your target tenants’ requirements, or upgrading the property to increase the likely rental you will be able to charge.
You are legally required to have all gas appliances, whether fixed or mobile, and ventilation (such as flues) checked every 12 months to make sure they are safe. If you employ a managing agent to manage your property for you and they have said they will organise this, make sure they do, because you are still legally responsible for making sure these checks are carried out.
The work must be carried out by a Gas Safe registered engineer. You can check they are registered by going to the Gas Safe Register website or calling the Gas Safe Register on 0800 408 5500 and they should be able to show you a current id card, which includes information on the work they are authorised to undertake. The engineer should give you a landlord’s annual safety certificate, and you need to give a copy to the tenant within 28 days after the check is carried out, and to any new tenants before they move in.
You should also ensure that tenants have all the information they need: for example, instruction manuals for appliances.
You should also be aware that there are restrictions on the use of gas appliances, such as heaters, in any room used as a bedroom. If there are gas appliances in any bedroom, you should consider replacing them, or take advice to check that they are allowed.
You also have to provide a free copy of an Energy Performance Certificate on the property to every new tenant and prospective tenants when they first view the property. You will need to commission an inspection of the property by a registered energy assessor, who checks the age, layout, construction, insulation, heating, lighting and other energy-related facilities of the property. You can find an assessor at the Landmark website which contains the official registry.
The Certificate gives your property an energy efficiency rating (based on how much the property costs to run) and an environmental impact rating (based on the amount of carbon dioxide the property releases into the atmosphere). The ratings run from A to G in each case. It may include recommendations for improving the property, eg by insulating it, but you do not have to implement them. However, don’t forget that your tenant will see the Certificate, and may ask you to act. If you do, there may be financial help available for certain improvements – for example, you may be able to offset up to £1,500 per dwelling against your income tax under the Landlord’s Energy Saving Allowance scheme if you spent it on certain types of insulation. Check the web to see if you qualify.
A Certificate usually costs somewhere between £35 and £100, dependent on the size, value and location of your property and, of course, the supplier, so shop around. It is valid for ten years, no matter how many different tenants you have in that period.
If you own multiple, similar properties, there are special rules that allow you to commission just one Certificate that covers them all. You will need advice on the options available.
You are responsible for the safety of electrical equipment, though the regulations do not specify precisely what you need to do.
Broadly speaking, you are required to take reasonable steps to ensure safety. This might include:
You should keep a record of all your safety measures.
You are legally required to ensure that certain items of furniture are fire resistant. The regulations apply to upholstered furniture (such as sofas and beds), children’s or nursery furniture, and garden furniture for indoor use. Antique furniture is not covered by the regulations.
Typically, new furniture that is fire resistant will carry a display label stating that it meets the 1988 safety regulations, and a permanent label giving details. (Beds and bed bases may instead say that they meet the British Standard BS7177.)
More broadly, you must take steps to ensure that any furniture, furnishings or equipment you supply are safe. You must also provide information on any risks which are not obvious.
You can ask a prospective tenant to provide references from their previous landlord, a reference from their employer, and a bank reference. You should also run a credit check on them.
If you are letting to a company, you should check the company’s details with Companies House. You should also run a credit check on the company.
Unfortunately, these checks will not guarantee that you get a good tenant. You will also need to keep an eye on the tenant, and be ready to take action if the tenant fails to make payments or causes any other problems. Making sure you have the right, written agreement will help if there are any problems (see 7).
In most cases, the most appropriate form of agreement is an assured shorthold tenancy. The key advantage of this form of agreement is that it allows you to regain possession of the property at the end of the term. Shorthold tenancies run for a fixed period of between six months and three years. An agreement can also contain a break clause allowing the landlord or the tenant (or either of them) to terminate the agreement early.
An assured shorthold tenancy agreement is not appropriate in some circumstances: for example, a holiday letting, a long term letting (over three years), a high rental letting (over £100,000 per annum), a business letting, or if the landlord will lives in the same building. Your lawyer can advise you.
If you are letting to several tenants, you should also ensure that the tenancy agreement makes them jointly and severally liable for the rent and for any damage they may cause. That means that if any of them leave and/or cannot be traced, you can take action against those left, or that you can find, for the whole amount.
Whatever the circumstances, a written agreement is essential. Without a written agreement, you may have great difficulty evicting the tenants or enforcing your rights if the tenants fail to fulfil their obligations.
If you let premises using an assured shorthold tenancy you are legally required to protect any deposit using a tenancy deposit scheme. You are also required to provide the tenant with information relating to the deposit within 14 days.
The government has authorised three schemes:
If landlords fail to comply, they lose their right to recover possession of the property simply by giving notice to the tenant – which is usually the reason they granted an assured shorthold tenancy – and are liable to pay a fine of three times the amount of the deposit.
If you do not comply, all is not lost. There have been court decisions that say you can make a late payment into a scheme and avoid the penalty if there is a dispute with a tenant, provided you do so before the matter gets to court. However, take specialist legal advice if there is a dispute and you have not complied, to make sure your position is safeguarded.
Letting residential premises typically involves a whole range of activities and responsibilities:
Many landlords choose to manage as much as possible of this themselves. However, the practicalities of dealing with tenants can be quite onerous, particularly if you do not live locally.
A managing agent will typically charge 10-15% of the rental to manage the premises. It is important to ensure that you have a clear written agreement stating what the agent’s responsibilities are. Some agents charge a percentage for basic specified duties, but add on extra charges for, eg having to make more than three site visits in a 12 month period. Be sure you are clear what your total liabilities could be in a worst case scenario, eg if a problem at the property requires many site visits. You should also satisfy yourself that the agent will carry out their responsibilities properly.
Reputable agents will generally be members of one of the trade bodies: the Association of Residential Letting Agents (ARLA), the National Approved Lettings Scheme (NALS) or the National Association of Estate Agents (NAEA).
You are legally obliged to maintain the property, and to ensure that it is of an acceptable standard for human habitation. This will include maintaining the structure and exterior of the building, water, electricity and gas installations, and plumbing fittings (such as baths and toilets).
You are also legally required to take reasonable steps to ensure that the premises are safe. This will include ensuring that gas appliances, electrical appliances and furniture are safe, and if necessary repairing or replacing them (see 3, 4 and 5).
Finally, you must ensure that you carry out any repair obligations agreed in the tenancy agreement.
You are legally required to take reasonable steps to ensure that the premises are safe. If you fail to do this, you could be liable for any injury or damage to property they suffer.
You should also ensure that it is easy for tenants to contact you (or your agent) if there is a problem, and that you respond promptly.
Finally, you may want to take out appropriate insurance. Landlord’s insurance can include cover for landlord’s liability and for legal expenses.
If the property is a flat, there may be restrictions and obligations in your lease, the constitution of the management company or association and/or any internal rules and bye-laws. For example, there may be rules about pets, making a noise after certain hours, and siting of satellite dishes. Ensure that your lease to your tenants obliges them to comply with these rules too.
Otherwise, you are not normally responsible for your tenant’s activities unless you have authorised them.
There may be an exception if you are letting out more than one property (for example, several flats in the same building), and one tenant is disturbing others. If you fail to take action against the disruptive tenant, the other tenants might claim that you are failing to fulfil your responsibilities under your agreements with them.
You should insure the building and contents. If you have existing insurance, check whether it will still be valid if you rent out the property: most domestic insurance policies will not be valid. You may need to get business or specialised landlord’s insurance instead.
If you are letting a flat, the management company or association will usually have taken out landlord’s insurance. If it is standard, it should include building and contents insurance. (It will not include insurance of any contents owned by the tenant.) The cover may include compensation for loss of rent as well as damage: for example, if you have to offer a tenant a reduction in rent while damage is repaired.
You should also consider cover for landlords’ liability and for legal expenses if a tenant is injured or suffers damage to their property. This cover is often included in packaged landlord’s insurance policies.
You (or an agent acting on your behalf) have a right to reasonable access to make repairs. Normally, you should arrange to visit at a convenient time and should give at least 24 hours’ notice. However, you can enter without notice to make emergency repairs (eg in case of flooding).
You should ensure that the lease agreement also gives you a reasonable right of access to inspect the state of the property, and to provide any agreed services (eg cleaning). You may also want to include additional rights (for example, allowing you to show prospective new tenants around the property before the existing tenant’s lease expires). However, these rights must not be unfair: if necessary, you should take advice on what is acceptable.
Apart from these rights, you are not generally allowed to enter the property without the tenant’s permission or a court order.
Immediately contact the tenant and find out why the payment has not been made. Assuming that the tenant cannot or will not pay, you have several options:
You should take advice on the best approach in your circumstances. In any case, try to keep a good relationship with the tenant. An angry tenant could make your life difficult, causing damage to your property and refusing to leave until you have gone through lengthy court procedures (often lasting several months). Under no circumstances should you try to harass the tenant into leaving (see 16).
No. Harassing or unlawfully evicting the tenant is a criminal offence – even if the tenant is in breach of the tenancy agreement. You could face fines or even imprisonment. The tenant might also be able to claim damages from you, adding insult to injury.
If you need to take action against a tenant, ensure that you follow the correct procedures. You will need a court order before a tenant can be forced to leave. Take advice.
You should inspect the property regularly as part of your maintenance and repair obligations. It’s also worth inspecting the property to see how the tenants are treating it: you may be able to detect early warning signs of possible problems.
You should ensure that your agreement with the tenant includes the necessary rights of entry to inspect the property.
Any deposit has to be held in a tenancy deposit scheme (see 8) which will set out how the deposit is treated when the tenancy comes to an end. If there is a dispute, optional alternative dispute resolution (ADR) procedures are available, at no charge to either you or the tenant, under all three tenancy deposit schemes.
You pay tax on the profits you make from residential lettings. The profit is based on the rental income, less ‘allowable’ expenses.
Most of the costs associated with letting the property are allowable, for example:
If you let the property furnished, you can also claim either a renewal allowance for the replacement costs of items such as furniture and cutlery, or an allowance towards their wear and tear.
There are special tax rules for a ‘holiday letting’: broadly, where furnished premises are let for short-term holidays rather than for people to live in. (There are detailed rules on what qualifies as a holiday letting.) You cannot claim a wear and tear allowance for items such as furniture, but you can claim a capital allowance (or a renewal allowance).
There are also special rules if you rent out a room within your own home for someone to live in. Under the Rent a Room scheme, you can get tax-free rental income of up to £4,250 (for the tax year 2012-13). However, you cannot claim any expenses under this scheme, and the allowance is halved to £2,125 if anyone else (eg your spouse) also receives income from renting out a room in your home.
As tax can be complex, you should take appropriate advice.
In most cases, you are liable for Capital Gains Tax (CGT) if you sell a property that is not your main home. The taxable gain is based on the difference between the price you sell the house for and your original purchase cost. However, you will be able to deduct some of the costs (eg estate agents and solicitors’ fees). For gains on or before 22 June 2010, the tax is charged at a flat rate of 18%. Thereafter, the rates are 18% and 28%, depending on the total amount of your taxable income. You have a tax-free allowance (£10,600 in the tax year 2012-13) that you can set off against the gain.
You may be able to defer payment of CGT if you use the sales proceeds to buy another property, or invest in another business.
CGT can be complex and you should seek appropriate advice.
The income is taxed in the same way as for any other rental property (see 19).
When you sell the property, there are generous allowances which make the Capital Gains Tax (CGT) position more complicated. Suppose, for example, that you own a property for 10 years, living in it for the first two years and then letting it out for eight before selling it for a capital gain of £300,000. For these purposes you are treated as making an equal gain each year, so your gain in this example will be £30,000 per year. Your position is:
The amount of tax payable is then calculated (at the 18% and 28% rates, depending on your total taxable income) after allowing for your CGT tax-free allowance in the year you sell the property (£10,600 in the tax year 2012-13).