So, you’ve read our Buy to Let Basics and you’re serious about becoming a landlord… Great!
Now, you’re ready to get down to the nitty-gritty and learn about the responsibilities and tax implications associated with becoming a landlord:
What Are Landlords Responsible For?
There are certain legal responsibilities tied to becoming a landlord. You need to assure your tenants that their rights are protected via a tenancy contract and that their deposit is safe in your possession.
Tenancy contracts can come in different forms, but most popular by far is an Assured Shorthold Tenancy (AST). This type of contract gives the tenant a legal right to live in the property for a fixed period. They can also be agreed on a rolling term if this suits both parties.
An AST normally lasts for six to twelve months. The contract will detail how much the tenant must pay in rent during that time, who is responsible for repairs, the required notice period upon eviction, when rent can/will be increased, how long the tenancy lasts for, and the tenant’s rights in terms of deposit protection.
It is a legal requirement that you provide a deposit protection scheme. You (or your letting agent) will be fined if you don’t. There are two types of government-backed scheme, insurance and custodial:
Under an insurance-based scheme, the landlord or agent retains the deposit and pays interest to an insurer. The custodial option (where the deposit is paid directly into the scheme) is free-of-charge to use. Each scheme comes with an independent resolution service, just in case a disagreement arises between landlord and tenant. They are available via the Deposit Protection Service, MyDeposits and Tenancy Deposit Scheme.
These government-backed schemes ensure your tenant will get their deposit back a long as they:
- Meet the terms of your tenancy agreement
- Don’t damage the property
- Pay the rent and bills
Additional Landlord Responsibilities
- Ensuring the property is safe to live in
- Maintaining heating and water systems
- Dealing with any required structural repairs
- Ensuring that gas and electrical systems are safe
- Making sure any furniture provided meets fire safety regulations
- Providing your tenant with certain paperwork by law
What is Buy to Let Insurance?
Also known as ‘landlord insurance’, buy to let insurances provide cover for buildings and contents, as well as landlord liability.
Buildings insurance
You’re required to have buildings insurance in order to secure a mortgage on a property. This covers you in the event that your property is damaged and needs to be repaired or rebuilt.
When applying for buildings insurance, make sure you enter the correct cost to rebuild; this will be different to the amount you bought the property for. If you’re not sure, consider hiring a chartered surveyor to value the property for you.
Contents insurance
Contents insurance will cover any furniture in the property in case of damage. Even if your property is unfurnished, it’s a good idea to get some level of cover. This will protect carpets, curtains, white goods etc. Your tenant will be responsible for insuring their personal property.
Landlord liability
Liability insurance covers you in the event that someone is injured whilst on your property. Often, this cover is optional, however, you’ll be required to have a minimum level of liability cover if you want to rent to students. Some local authorities also insist on this type of cover.
Becoming a Landlord: Tax Implications
When it comes to taxes, there are several you will need to pay on your buy to let property:
Tax on rental income
You’ll pay tax on any rent you receive at your relevant tax band. And bear in mind that this new income could push you into a higher tax bracket.
However, some costs can be deducted from the amount of tax you pay. This includes letting agent fees, insurances, council tax and utility bills (if you pay them on the tenant’s behalf), and essential maintenance. Landlords letting furnished properties can also claim for damage and repairs to furniture in the property.
To make things more difficult, from April 2020, relief on mortgage interest will be capped for all landlords at the basic rate of 20%, regardless of whether you are a higher rate (40%) or additional rate (45%) taxpayer.
Capital Gains Tax
Buy to let property is unfortunately not exempt from Capital Gains Tax. This tax is paid on any increase in value when you come to sell the property. Capital Gains Tax is charged at 18% or 28%, depending on your tax bracket.
However, there are some allowances. This tax year (2019/2020), you won’t pay Capital Gains Tax on the first £12,000 you make in profit. For couples with joint assets, this is doubled to £24,000. Stamp Duty and various other fees (solicitors, estate agents etc.) can also be written off against your Capital Gains Tax.
Stamp Duty
From April 1st 2016, anyone purchasing a property in addition to their main home (including a buy to let property) will pay an additional 3% Stamp Duty for the first £125,000, 5% on the portion between £125,001 and £250,000 and 8% on the amount above £250,001.
The lower threshold for Stamp Duty on additional property is £40,00 – way below the residential threshold of £125,000 – meaning almost everyone will be eligible to pay.
Do You Need an Agent and How Much Will It Cost?
Whether or not you’ll want to use a letting agent will depend on your budget and planned level of involvement with the property.
Letting agents can provide services ranging from sourcing and carrying out credit checks on potential tenants, to arranging for a broken boiler to be repaired or chasing up overdue rent payments. They can also arrange for all the mandatory checks (gas safety etc.) to be carried out for you.
The charge for these services will vary from one agent to another, but for a lettings-only agreement, you’ll pay around one month’s rent. Ongoing property management can start from around 10% of the monthly rental income.
If you’re thinking of becoming a landlord, you’ll want to make sure you minimise costs as much as possible. Our team of friendly, independent mortgage advisors can help you find the best mortgage deal, usually at no cost to you! Visit our mortgage broker in Southport, Preston or Garstang, or get in touch via phone or email.
