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21 FAQs people ask about buy-to-let and letting.
- Do I have to get a special 'buy to let' mortgage, even though the interest rate is higher than on an ordinary mortgage?
- Will I need to make alterations to the property?
- What do I have to do about gas appliances such as the boiler?
- What do I have to do about electrical equipment?
- What do I have to do about furniture and furnishings?
- What checks should I make on prospective tenants?
- What sort of legal agreement should I use with the tenant?
- How should I handle the tenant's deposit?
- Should I use a managing agent and what are the key issues to look out for?
- What repairs am I required to make?
- What is my potential liability if a tenant or visitor is injured, and how can I protect myself?
- Am I responsible for my tenant's activities: for example, if he is a nuisance to the neighbours?
- What insurances should I have?
- What rights do I have to enter the property while it is let to a tenant?
- What should I do if a tenant fails to make a payment on time?
- If the tenant isn't meeting his obligations, can I just throw him out and change the locks?
- Is it worth inspecting the property from time to time during the tenancy?
- Can I refuse to return the deposit if the tenant has damaged the property or items within it?
- How is rental income taxed?
- What is the tax position if I decide to sell the property?
- Are there any special tax rules if I let out a property that I previously lived in?
1. Do I have to get a special 'buy to let' mortgage, even though the interest rate is higher than on an ordinary mortgage?
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. 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.
2. Will I need to make alterations to the property?
Legally, there are a number of obligations in relation to:
- gas appliances
- electrical equipment
- furniture and furnishings
- energy information
- repairs and general condition
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.
3. What do I have to do about gas appliances such as the boiler?
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.
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 online 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.
4. What do I have to do about electrical equipment?
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:
- ensuring that any appliances you purchase are in good condition (for example, by purchasing new appliances from reputable suppliers)
- having the electrical installation (eg wiring) reviewed by a qualified electrician
- ensuring that all appliances have the correct fuses installed
- periodically (eg annually) inspecting electrical appliances for any signs of wear and tear or problems (eg worn cables, or signs of scorching)
- periodically having all electrical equipment inspected by a qualified electrician
- providing appropriate instructions and safety information to the tenants
You should keep a record of all your safety measures.
5. What do I have to do about furniture and furnishings?
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.
6. What checks should I make on prospective tenants?
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.
Under new "right to rent" rules, landlords are now obliged to check their new tenant or lodger's immigration status to make sure they are legally allowed to rent property in England (the rules do not apply in Scotland, Wales or Northern Ireland). If you are found to be letting property to someone not allowed to stay in England you may face a fine of up to £1,000 the first time, increasing to £3,000 if caught again.
Ask prospective tenants for their proof of residency in England and make copies (write the date on the copy) of the relevant pages. This can be a valid passport or identity card from a European Economic Area (EEA) country, a passport with a visa showing a right to rent in the UK, an asylum seeker identity card endorsed with a right to rent, or two documents from a list of other options for those who do not have passports. If the prospective tenant's residency is only valid for a limited time, you must make a note of the date it expires and check again. You can read a full list of the documents and more information about the "right to rent" rules on the GOV.UK website.
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.
7. What sort of legal agreement should I use with the tenant?
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 live 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.
8. How should I handle the tenant's deposit?
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:
- Deposit protection service - any landlord can use this service to hold deposit in a bank account. When the tenancy ends the money is returned to the person entitled to it. There is no charge to the landlord or tenant for using this scheme.
- MyDeposits - this is an insurance-based scheme that can only be used by members of approved trade associatons. Under this scheme the landlord or agent holds the deposit, but pays a fee that funds an insurance scheme. If there is a wrongful failure to repay the deposit, the insurance pays it back. Tenants pay nothing.
- Tenancy Deposit Scheme - this is another insurance-based scheme that operates in the same way as MyDeposits.
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.
9. Should I use a managing agent and what are the key issues to look out for?
Letting residential premises typically involves a whole range of activities and responsibilities:
- finding a suitable tenant
- doing background checks on prospective tenants (including "right to rent")
- preparing an appropriate tenancy agreement
- preparing an inventory of contents
- insuring and maintaining the property (and any common parts such as hallways in a building with multiple occupancy)
- providing any services agreed
- ensuring that tenants are up to date with their rental payments
- making sure that tenants do not breach the terms of the rental agreement
- dealing with tenants' complaints and problems
- dealing with termination of the rental
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).
10. What repairs am I required to make?
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).
The rules on the expenses you can claim have changed. If you rent out an unfurnished, part-furnished or fully furnished property, you can claim the actual costs you have incurred in the improvement or maintenance of the property (previously there was an annual wear and tear allowance of 10% of your net rent).
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.
Finally, you must ensure that you carry out any repair obligations agreed in the tenancy agreement.
11. What is my potential liability if a tenant or visitor is injured, and how can I protect myself?
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.
To help protect yourself, you should have a program of regular inspection and maintenance. This should include proper maintenance of gas and electrical appliances.
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.
12. Am I responsible for my tenant's activities: for example, if he is a nuisance to the neighbours?
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.
If you let your property or a room in your house to someone that is not allowed to live in England, you can face an initial fine of up to £1,000 and £3,000 subsequently. Before letting your property ensure you have done the appropriate background checks. See 6.
13. What insurances should I have?
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.
14. What rights do I have to enter the property while it is let to a tenant?
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.
15. What should I do if a tenant fails to make a payment on time?
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 can negotiate with the tenant. For example, if the tenant has a temporary cash flow problem, you might agree smaller payments for the next few months, and then increased payments to cover the shortfall later on.
- You can take court action to evict the tenant. If you have let the property using an assured shorthold tenancy, and the tenant is at least two months in arrears.
- You can take court action to recover any money you are owed. In practice, you may be better advised to simply write off the debt.
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.
16. If the tenant isn't meeting his obligations, can I just throw him out and change the locks?
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.
17. Is it worth inspecting the property from time to time during the tenancy?
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.
18. Can I refuse to return the deposit if the tenant has damaged the property or items within it?
Any deposit has to be held in a tenancy deposit scheme 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.
19. How is rental income taxed?
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:
- repairs and maintenance - but not the cost of improvements
- your costs of owning the property (eg council tax, utility bills, any rent or service charges you pay, interest on loans) - but not the costs of buying and equipping the property
- your costs of letting the property (eg advertising, fees for advisors and agents)
- a capital allowance towards the costs of any equipment you need to buy for furnished holiday lettings only (eg lawnmower, vacuum cleaner)
If you let an unfurnished, part-furnished or fully furnished property, you can also claim your actual expenditure on repairs and maintenance.
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 £7,500 per year (from April 2016). However, you cannot claim any expenses under this scheme, and the allowance is halved 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.
20. What is the tax position if I decide to sell the property?
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). The rates are 10% and 20%, depending on the total amount of your taxable income. You also have a tax-free allowance of £11,700 in 2018/19 (£11,300 in the tax year 2017/18) 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.
21. Are there any special tax rules if I let out a property that I previously lived in?
The income is taxed in the same way as for any other rental property.
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:
- There is no CGT for the years that you lived in the property ie 2 years. The last eighteen months of ownership are also exempt even if you were't living there, bringing the total exemption to 3.5 years. This is called private residence relief (PRR)
- The PRR gives you exemption for 3.5 years out of the total 10 years' ownership, ie 35%. The capital gain is therefore reduced by 35%, to £195,000.
- There is an additional 'lettings relief', which is the lower of the PRR and £40,000; in this case, £40,000. This further reduces your taxable gain to £155,000.
The amount of tax payable is then calculated (at the 10% and 20% rates, depending on your total taxable income) after allowing for your CGT tax-free allowance in the year you sell the property (£11,700 in the tax year 2018/19).