AN INVESTOR’S GUIDE TO BECOMING A LANDLORD
- Landlord Responsibilities
- Calculating Tax
- Stamp Duty Land Tax
- Choose your tenants
- Weighing up your options
When times of economic uncertainty bite, many investors review their portfolios to find alternative sources of income. With interest rates still fairly low, letting residential property can offer a viable long-term alternative.
But as with most investments, you’ll need to become an expert in a new field and adapt to ongoing changes in regulation. The laws governing the private-rented sector can be overwhelming, but with the correct advice, property investors can set off on the right track.
Long-term flexibility and security
According to the Office of National Statistics (ONS), rents have risen by 14.5% since 2011. For many people looking to grow their capital, becoming a landlord is an attractive option. Investing in the right property may out-perform other savings and the rent provides a steady income stream.
Most investors have a solid business-like approach to money, which is why letting residential property often suits their way of thinking. But it’s a long-term commitment and you’ll need to understand your responsibilities as a landlord.
Choosing the right property
Before investing in property, do your research. You’ll need to estimate your rental yield, which means working out how much income you can expect from the rent, minus expenses (we’ll talk about your typical outgoings later) and tax.
When searching for an investment property, check out its location and ask letting agencies and other landlords for an insight into the area. Does it contain all the usual amenities and transport links? What kind of rental income do properties of this type usually achieve? Find an experienced and trained agent to help with your search l.
When assessing a property, try to view it through the eyes of your prospective tenants. Is the property up to standard? Is it homely and in good condition? What kind of repairs would it need? How much would ongoing maintenance cost? Getting a detailed survey will help you to understand if there are any underlying problems with the property.
Knowing your responsibilities
Never forget that your investment will become someone’s home. This means that the safety of your tenants will need to be at the forefront of your mind.
Start with the new Minimum Energy Efficiency Standards (MEES). From April 2018, landlords in England and Wales will need to make sure their properties have an Energy Performance Certificate (EPC) rating of at least an E, so check this is met before purchasing.
You must fit smoke alarms on every floor and carbon monoxide alarms in any room that where solid fuel is burned (such as coal, wood or biomass). If the property has any gas appliance, you must arrange an annual Gas Safety certificate and give your tenants a copy. You must carry out a Legionnaire’s Disease risk assessment on the property before tenants move in and it’s also a good idea to have all electrical appliances PAT tested.
An accredited Domestic Energy Assessor (DEA) will also need to provide an Energy Performance Certificate (EPC), which explains the energy efficiency rating of the property. You must also give your tenants a copy of this certificate. It’s also important that you understand whether your property is a House in Multiple Occupation (HMO) and, if so, obtain the correct licence. In Scotland, Wales and Northern Ireland, you’ll also need to register as a landlord. In England, you’ll need to pass your new tenant a copy of the Government’s How to Rent Guide.
Landlords are responsible for protecting a tenant’s deposit by registering it in one of three government-authorised schemes. Although written agreements aren’t a legal requirement, it’s best practice to provide one so the tenant and landlord are both clear on their rights and responsibilities. Furthermore, it’s necessary to protect your property with the right landlord insurance.
If you’re looking for an agent that understands the legislation governing the private-rented sector, choose an ARLA Propertymark Protected agent. These agents are experienced and trained professionals who complete regular training to keep up-to-date with complex legislation and best practice.
They are also backed by Propertymark’s Client Money Protection (CMP) Scheme which means that you and your money are safeguarded.
The first £1,000 of your income from property rental is tax-free and known as your ‘property allowance’. If you’ll be earning up to £2,500 on your property each year, then it’s necessary to contact HMRC. If your rental income is between £2,300 and £9,999 after allowable expenses, make sure you complete a tax return.
There are some tax deductions that are considered day-to-day expenses of running a buy-to-let property. These can make a positive difference, so remember to record them and include outgoings such as letting agency fees, accountancy fees, buildings and contents insurance, interest on property loans, maintenance and repairs (but not improvements) as well as Council Tax and utility bills (if you pay them on the tenant’s behalf).
If you don’t purchase the property outright, your buy-to-let mortgage repayments are likely to be an important consideration. Don’t forget that mortgage lenders will need to see evidence that your rental income will cover your mortgage payments in order to lend you the funds – typically up to 145%. It’s worth knowing that the laws around mortgage tax relief are set to change over the next four years, with the end result being a single claim allowance of 20% across all tax bands.
Tax on your UK income if you live abroad
You usually have to pay tax on your UK income even if you’re not a UK resident. Income includes things like:
- rental income
- savings interest
The country where you live might tax you on your UK income. If it has a ‘double-taxation agreement’ with the UK, you can claim tax relief in the UK to avoid being taxed twice.
When tax is not due or is already deducted
Non-residents do not usually pay UK tax on:
- the State Pension
- interest from UK government securities (‘gilts’)
If you live abroad and are employed in the UK, your tax is calculated automatically on the days you work in the UK.
When to report your income to HMRC
You usually have to send a Self Assessment tax return if:
- you rent out property in the UK
- you work for yourself in the UK
- you have a pension outside the UK and you were UK resident in one of the 5 previous tax years
- you have other untaxed income
You do not need to report your income to HMRC if you’ve already claimed tax relief under a ‘double-taxation agreement’.
Sending a Self Assessment tax return
You cannot use HMRC’s online services to tell them about your income if you’re non-resident. Instead, you need to:
Fill in the ‘residence’ section (form SA109 if you’re sending it by post) to tell HMRC you’re non-resident. Fill in any sections relating to your type of income.
You’ll be fined if you miss the deadline – it’s earlier if you’re sending your return by post (31 October).
If you’ve overpaid
Apply for a refund if you think you’ve paid too much tax. This might happen if tax is deducted automatically (for example by your bank) but your total UK income is below your Personal Allowance.
Stamp Duty Land Tax
From 1 April 2016, anyone purchasing an additional residential property in England and Northern Ireland (that isn’t their only or main residence) for £40,000 or more must pay an extra three per cent stamp duty above the current Stamp Duty Land Tax (SDLT) residential rates. The current rates mean that you’ll pay SDLT on increasing portions of the property price above £125,000 – much like income tax. For example:
- up to £125,000 the SDLT rate is zero
- the portion from £125,001 to £250,000 is 2%
- the portion from £250,001 to £925,000 is 5%
- the portion from £925,001 to £1.5 million is 10%
- the portion above £1.5 million is 12%.
New stamp duty land tax surcharge for non-UK resident homebuyers to be introduced. Proceeds of the new surcharge would be put towards measures to tackle rough sleeping.
It was proposed towards the end of 2019 that there may be a 3% rate – which would only apply to England – represents a hardening of an earlier proposal for a 1% surcharge, which the government consulted on last year. It would be charged on top of all other stamp duty already payable, including the 3% surcharge on second homes and buy-to-let properties that took effect in 2016.
If you decide to exit the market and make a profit from the sale of your buy-to-let investment, it’s likely you’ll have to pay Capital Gains Tax. The rate applicable to gains made on the sale of a property is currently 18% for basic-rate taxpayers and 28% for higher-rate taxpayers, irrespective of whether you intend to reinvest these gains.
Choose Your Tenants
When purchasing your buy-to-let property, you should have a clear picture of the kind of tenant you’re looking to attract and how you’ll need to cater for their needs. For example, students usually move home each September and will start searching for a property in the December/ January beforehand.
Before taking on a tenant, you should always undertake reference and credit checks (and Right to Rent checks if your property is in England) to make sure they are reliable. Carry out a detailed inventory of the property which includes photographic evidence to protect your investment. This will be important if you need to claim any money back from the tenant for any damage after they have moved out.
If you’re looking for a tenant and aren’t sure where to start, speak to your local ARLA Propertymark letting agent for help.
Weighing Up Your Options
Letting residential property can be a rewarding and exciting experience. Landlords can enjoy a healthy and mutually beneficial working relationship with their tenants, but letting property is a hands-on job and you must keep the right side of the law.