Top 5 questions landlords need to answer. Strategy & Tax guide for. New. Have I achieved the best rent for my property?

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1 Strategy & Tax guide for New Landlords Top 5 questions landlords need to answer Have I achieved the best rent for my property? Does my rental income cover my costs and liabilities? What are my rights and responsibilities as a landlord? Am I meeting my legal and tax obligations? What is my lettings exit strategy?

2 Investment Property Strategy Before purchasing your buy-to-let investment you need to consider several factors: what is the objective of the investment; can you afford the investment if your circumstances change; how long do you want to invest for and what is your exit plan? Conducting market research and gaining as much advice and knowledge as possible will help you decide on the type of property and its location. Market Research Your first points of reference in your search for an investment property are likely to be online property portals, property pages in local newspapers and your local lettings agent. By researching the rental property market properly you can quickly gain an insight into achievable rents for various types of housing and areas and build a robust property investment plan. Here are the key questions your research should answer at this point: What criteria makes an area ideal for buy-to-let investment? Which of my target areas exhibit this criteria? What type of rental property is likely to be popular in my target areas? What are the average monthly rents being charged for my preferred property type in my target area? Can I prioritise my target areas in terms of rental demand? Can I prioritise my target areas in terms of risk? Rental Income Rental income describes the amount of money paid by a tenant to live in your buy-to-let property. Like house prices, the rental income you can achieve from your investment property can fluctuate in line with market conditions. In the most basic terms rental yield is the return on your investment. Calculating a rental yield will provide you with a net rental income and therefore help you understand your returns and your ability to service any associated mortgage finance, letting fees and property management costs. Your local lettings agent can provide you with national statistics showing the average rental amounts in your region. Calculating Your Rental Yield Gross yield is an indication of how lucrative your investment is compared with other investments. It is calculated by dividing your annual rental income by the original cost of the property and multiplying by 100. If you were to purchase a property for 200,000 and achieve a monthly rental income of 1,000 the gross yield would be calculated as follows: Annual rent 12 x 1,000 = 12,000 per year Gross rental yield 12,000 = 6% 200,000 x 100 A net rental yield figure can be achieved by adding in associated costs. For example, if the 200,000 property had a mortgage of 150,000 at an interest rate of 4% that would mean the monthly (interest only) mortgage payments would be 500. Adding in estimated agency fees of 100 per month would result in the calculation below; Annual net rent (Months Rent) - (Mortage & Fees) = 4,800 Cash investment 200, ,000 (Property Price) - Net rental yield 4,800 x 100 = 9.6% 50,000 (Mortgage) = 50,000 (Deposit/Investment) Think About Your Target Tenant Buy-to-let investment properties should not be chosen on the basis of personal preference. Instead, put yourself in the shoes of your target tenant. Who are they and what do they want from a home? Students want affordable properties which are easy to clean and comfortable but not luxurious Young professionals prefer modern and stylish properties which are not overbearing Families like properties which offer a blank canvas as they will have plenty of their own belongings

3 Purchase When purchasing a buy-to-let investment there are several costs you should be aware of. Transfers of residential property are subject to Stamp Duty Land Tax (SDLT) at the following rates (based on 2014/15 tax rates): Property price Rate Up to 125,000 0% 125,001 to 250,000 1% 250,001 to 500,000 3% 500,001 to 1,000,000 4% 1,000,001 to 2,000,000 5% Over 2,000,000* 7% *Where the interest/property with a consideration in excess of 2 million is purchased in sole or joint names then a 15 per cent rate SDLT charge will apply to the following: all such purchases by bodies corporate (largely companies) all collective investment schemes all partnerships where there are one or more members are one of the above Mortgage In most cases you will need a buy-to-let mortgage. One example of not requiring such a mortgage is when you move out of your current property and start renting the property out. You will need to let your mortgage lender know if this is the case, this is known as a consent to let clause. The mortgage lender is likely to charge a fee and change the rate when this happens*. If you do not inform your mortgage lender this will be an infringement of the terms and conditions of your mortgage. Buy-to-let mortgages Buy-to-let mortgages are in many ways similar to a standard mortgage with some key differences. It is likely that the deposit amount required, the interest rates and the fees will be higher with a buy-to-let mortgage Most buy-to-let mortgages are calculated not on your occupational income, but on the potential rental income of the property (some lenders however may have minimum income criteria requirements regardless of the rental income obtainable) Buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA) In most cases buy-to-let mortgages are interest only, so it is important to consider how you will repay the loan at the end of the term. At this point capital gains tax should be factored in and this is explained further in the taxation section. Your market research is critical when applying for a buy-to-let mortgage as the amount you can borrow will most likely be aligned to the potential rental income. It is prudent to expect void periods. This is when there is no rental income being generated (for example when you are looking for a new tenant.) If you experience a rental void your income or savings will need to be able to service the monthly mortgage repayments whilst your property is vacant. If you are unable to do this you risk the possibility of defaulting on your mortgage. You can find even more detail and the latest products and offers by visiting mortgagescountrywide.co.uk. Investment Protection Protecting yourself from damages to your property As with all ventures, a property investment can have unexpected pitfalls. Damages to your property can happen, which may be the result of weather damage or the fault of the tenant. Careful planning and selection of the best quality protection will help a landlord protect themselves against such occurrences. Rental properties require specific landlord insurance. Standard insurance policies will not protect investment properties. Using a standard insurance product could invalidate the insurance policy and expose you to high costs. Landlord insurance may include features of other standard insurance policies such as building and contents insurance. Make sure you examine your policies carefully and look for overlaps to prevent you from unnecessary expenditure. Countrywide have a Landlord Insurance product called LetsCover**, which includes: Buildings cover Accidental damage to buildings - this cover is included as standard within LetsCover and includes accidental damage to underground pipes and cable for which you are responsible up to 5,000 Property owner s liability cover is automatically included up to 2 million for your legal liability for accidental death, bodily injury or illness of a person, or damage to property Alternative accommodation / loss of rent - up to 30% of buildings sum insured Lock replacement - replacement of locks to external doors following loss or theft of keys up to 250 Landlords content cover Limited accidental damage - accidental breakage of, or damage to mirrors, fixed glass in furniture, ceramic hobs and audio / audio visual equipment Landlord s contents in garages and outbuildings The risks of void periods and tenant arrears Any investment is dynamic and comes with a fair share of risk. Changes in the economic climate can have a major effect on your investment. House prices can go down as well as up, rental demand can decrease which could mean a drop in rental income and interest rates can change. This can all have a serious impact on your income. Rental arrears is a daunting prospect to any landlord. Having a tenant who is either unable to pay, or refusing to pay rent and being forced to go through the eviction process can be a stressful affair, during which there is no income being generated. You can protect against this using a feature of landlord insurance called Rental Protection Guarantee which will cover the rent whilst the property is facing tenant arrears. Void periods are another risk to property investment (the period in which your property is unoccupied, which is costing you in repayments as well as not generating any income.) It is advised that landlords have a buffer zone to cover themselves if this occurs. Choosing a proficient lettings agent with a large register of applicants can help limit the chances of void periods. For more information about Countrywide Insurance Services please visit insurancecountrywide.co.uk. * This decision is to the lenders discretion, they can refuse the change. ** Terms and conditions, exclusions, limitations and eligibility criteria apply. These are contained within the policy booklet, a copy of which is available on request

4 Types of Tenancy The tenancy that you are most likely to encounter is an assured shorthold tenancy (AST). This is the type of tenancy which affords a landlord the most protection with regard to evicting a tenant should the need arise. With this type of tenancy there are mandatory grounds defined in the Housing Act to ensure the landlord gets their property back. The other type of tenancy a landlord is likely to encounter is a Non Housing Act tenancy. This is likely to be the case if: A company wants to rent the property for an employee The property is a conversion where the landlord lives in part of it The annual rent exceeds 100,000 The tenant uses the property only during the week and it isn t their main residence Assured Shorthold Tenants Private rental tenants will automatically be assured shorthold tenants if they pay rent to a private landlord who does not live in the same building. An assured shorthold tenancy gives people a legal right to live in their home. The law provides basic rights and other conditions may be added into the tenancy agreement (if fair to both parties), to be signed by the tenant and landlord. Tenants have the right to: Live there until the agreement ends or a court order is sought Receive details of their tenancy agreement within 28 days Live in the property without harassment or interference by the landlord or their agent Expect some repairs and maintenance to be carried out by the landlord, so long as the tenant has not caused these works by their own actions or omissions Live in their home without being disturbed The landlord and other people cannot enter freely when they wish and must seek permission to visit typically at least 24 hours written notice should be given or a mutually convenient time arranged. Deposits A deposit is put into place to protect the landlord against any damages beyond reasonable wear and tear a tenant may cause and also protects landlords from tenants leaving without paying rent. The deposit will be written into the tenancy agreement. The tenant s deposit will be need to be protected by a government approved tenancy deposit protect scheme (TDP). The TDP is in place to ensure that if there are any disputes about the return of a deposit an independent committee will hear both sides of the argument and make a ruling. It is exceptionally important that the tenant s deposit is registered into a TDP, otherwise there are severe financial ramifications against the landlord for not doing so. Not protecting the tenant s deposit can impact a landlord s right to serve eviction notices. Rent Arrears Rent arrears is the amount of money that is not paid by the tenants at the agreed time. Unfortunately rent arrears increase in time of economical uncertainty. eviction notices and could possibly lead to void periods (no rental income at all) and the need to find a replacement tenant. A good quality agent can advise you on this as circumstances will vary. Rent and Repairs An agreed rent must be paid on time and if not, landlords may take action to have tenants evicted. It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as Rent Protection Guarantee. It may be possible for tenants to seek housemates to move in as subtenants or lodgers. It is vital to ask a landlord s permission for this otherwise a tenant may be in breach of their agreement. By law landlords are required to conduct certain repairs and their responsibilities include the heating and electricity supply, the water and gas supply as well as the structure of the building. Your local lettings agent can advise you about these. More information about this can be found in the rights and responsibilities section. Tenants are responsible for looking after their home, which includes keeping it clean and performing simple tasks such as changing bulbs and fuses. If repairs need to be done, tenants should inform the landlord. The landlord is accountable for certain repairs such as the water, gas supply and the electrics including wiring. Failure to tend to these repairs could create difficulties where eviction is necessary or when deposits need to be withheld from the tenant. Notice and Eviction A tenancy runs until it is ended by a tenant or landlord through agreed surrender of the property, a notice being served, or eviction. Tenants on fixed-terms can only end the tenancy during that time if their agreement says so, dependent upon the agreed notice period. A landlord must give notice if they want a tenant to leave. Unless the tenant has breached the agreement and the landlord is trying to evict, this notice may only be given if a break clause has been agreed within the terms of the tenancy. In order to terminate the tenancy at the end of the agreed term, and be certain of gaining possession, two months notice must be served using a Section 21 Notice. This notice period may be longer than two months if your rent is paid quarterly, bi-annually or a year in advance. Under an assured shorthold tenancy a tenant can be evicted reasonably easily however, there is a process to follow and a landlord is required by the Protection from Eviction Act 1977 to gain an order for possession from the court. This is common for problems such as rent arrears or consistent late payment but may also occur under: a periodic rolling contract, a fixed tenancy that has run out; if a tenant challenges a rent rise or demands repairs. Where possible landlords should do all they can to compromise with the tenants over rent arrears. Creating a repayment plan or giving a small reduction is not ideal but it avoids the costly process of serving

5 Rights and Responsibilities As a landlord you have certain responsibilities to the tenants that are dictated by law. Tenants have a right to: Live in a property that safeguards their health, welfare and safety and that is in a good state of repair Have access to an Energy Performance Certificate Have a full understanding of who their landlord is Live in the property undisturbed, which is known as having quiet enjoyment of the property Challenge excessively high rents (tenants can appeal to an independent committee if they believe their rents are too high) Providing their deposits returned to them at the end of the tenancy, if they have met all the terms in their tenancy agreement Be protected from unfair eviction In return you have rights that will help protect your investment. Landlords have the right to: Agree the terms of the tenancy Receive an agreed reasonable amount of rent on time Reasonable access to the property. You must give 24 hours notice unless it is an emergency Increase the rent at certain times as long as the rent is fair and justified Receive proper notice of the tenant departing the property Charge the tenant for repair to damages that have gone beyond reasonable wear and tear Serve an eviction notice if the rent is not paid or any other major infringements against the tenancy agreement The Property Requirements As a landlord you do have some legal requirements, which are generally concerned with the health and safety of your tenants. The tenants rights to live in a property in a good state of repair is protected by law so it is advised you adhere to your legal requirements. Gas If the property has any kind of gas supply (kitchen appliances or central heating) it is the landlord s responsibility to maintain this under The Gas Safety (Installation and Use) Regulations All the pipework and appliances must be maintained to a good working order, which will also mean regular inspections and occasional necessary repairs. A valid and up-to-date gas safety certificate must be available if there are tenants occupying the property. Gas safety checks are required every 12 months and must be carried out by a Gas Safe Registered engineer. If a tenant has a gas appliance the landlord did not supply, the landlord is responsible for associated parts of the installation linking to the supply but not the appliance itself. Electrics Landlords are accountable for any electrical wiring and appliances made available to the tenant. This involves the testing of electrics to ensure they are in good working order. There also needs to be enough plug sockets to minimise the need for using multi plug adaptors. The property will require residual current devices to protect tenants from electric shocks. Any electrical item should carry markings to identify it has passed the basic requirements as per EU legislation, ideally a British Standard Kitemark. It is recommended the property receives an electrical inspection every time a tenant departs the property and before a new tenants occupies it. An electrician can provide a landlord with an Electrical Installation Condition report, which will detail what has been tested and when. This paperwork should be kept and made available to tenants. Fire The landlord has a duty of care over their tenants to take general precautions, to ensure the safety of the people occupying the property and the immediate vicinity as this forms part of The Regulatory Reform (Fire Safety) Order Fire risk assessments will identify any potential hazard and a landlord must put into place a maintenance process to ensure the continued safety of tenants. As fire hazards and the maintenance to minimise the risk of fire damage, injury or death are specific to the property there is no all-encompassing set of guidelines. Ensuring tenants are aware of or have access to the below principles should help landlords maintain fire safety; Escape routes are identified and these have been explained to the tenants A fire detection system and smoke alarms that are hardwired to the electrical mains should be fitted. Landlords should advise their tenants to regularly check their smoke alarms are working properly Emergency lighting may be needed in larger properties or properties with many storeys Fire extinguishers and fire blankets should be supplied but tenants should be made aware that these are for small fires. This equipment should be regularly checked and safety certificates proving their effectiveness made available If the property is furnished, the furnishings will need to meet the standards laid out in the Fire Safety Regulations It is the landlord s responsibility to ensure all the furnishings have a label on them to identify that they meet the regulations.

6 Taxation As a landlord, you have to consider two forms of tax. Income Tax which is the taxation of the rental income from your investment property and Capital Gains Tax (CGT), which is the tax that needs to be paid against the profit you make from when you eventually sell the property. Reducing the Tax You Pay. With any form of tax there are legitimate ways you can reduce the amount of tax you pay on your investment.it is important to understand that the rental income is liable for income tax, just as any employment salary is liable. HMRC will take all income into account when calculating how much tax you owe.. Taxable Expenses for Landlords. The most common types of expenses you can deduct are: Council tax, and utility bills including gas, water and electricity General maintenance and repairs to the property (but not improvements that could enhance the property value) Landlord s contents insurance (remember standard insurance will not cover a rental property) Interest incurred on the mortgage of the property The costs of contracting services for maintenance including the wages to gardeners, builders etc. Letting agency fees Legal fees for lets of a year or less, or for renewing a lease of less than 50 years Accountant s fees Rents, ground rents and service charges Direct costs such as travel costs, phone calls, stationery and advertising for new tenants You will need to be able to prove that these expenses are wholly and exclusively applied to the investment property. Wear and Tear and Renewals Allowance Landlords can benefit from tax allowances set against renewals and the wear and tear to your investment property. If the property or properties you let out are fully furnished, you can claim for wear and tear of features of the properties such as carpets, white goods, beds and the decoration. You can choose whether to claim the renewals allowance or the wear and tear allowance, but you can t chop and change methods from year to year. Landlord s Renewals Allowance With the renewals allowance, you can claim the cost of furnishings as you replace them. Landlord s Wear and Tear Allowance The wear and tear allowance allows you to claim 10% of the net annual rent (income less expenses) each year. The key benefit to landlords is that it is easy to calculate and you may in fact save money if the expenditure is less than your claim. What is the Tax Position Where I Have Lived in the Property I am Letting. If you have lived in a property that you subsequently decide to let out, you are eligible to claim an exemption against CGT for the time you lived in the property as your main residence. By living in the property you can establish main residence exemptions, however you should be able to prove to HMRC that it was your intention to have that property as your permanent main residence. Therefore, by definition, if you move into the property on a temporary basis such as buying a property to make a profit after a quick sale, HMRC can challenge your intention and, in some cases, the residential relief can be lost. Other factors may also affect the amount of relief received. Capital Gains Tax Capital Gains Tax is set against the profit of assets when they are sold or disposed of. The Capital Gains Tax rates for individuals are 18% or 28% dependent on the total amount of taxable income. The basic rate 18% refers to individuals whose income is below 32,010 (in addition to the individual tax free allowance). Once you have established if you have Capital Gains Tax to pay then this must be registered with HMRC with your tax return. For more information in regards to Capital Gains Tax you can visit : hmrc.co.uk/cgt. Lettings Relief Capital Gains Annual Exemption If the property was your main residence at some point during the period of ownership you can claim Lettings Relief of up to 40,000. This is the maximum relief available and is reduced dependent on other gains. Everyone can make a capital gain free of up to 11,000 for the 2014/15 tax year. A jointly owned asset, therefore, may need a chargeable gain in excess of 22,000 before CGT becomes payable. But this means you have to deduct any profit as a result of disposing of them, and the cost of any improvements (for example, if you replace a refrigerator with a fridge freezer). Tax rates quoted are subject to change, visit hmrc.gov.co.uk for current rates. If you are in any doubt as to the tax implications regarding a buy-to-let property you should seek specialist financial advice.

7 Planning an Exit Strategy A buy-to-let investment is a long term investment strategy; the gains from rental income and capital gains (once you sell it) are likely to be achieved longer into the investment period as your costs (mortgage for example) are reduced through repayments. The profit made through the capital is dependent on the property increasing in value over time. Identifying the objective of your investment will help you plan for a future exit strategy. Was the objective of the investment made to supplement income, fund a retirement or to be left to children through inheritance? The buy-to-let mortgage will have a point of maturity. It must be in your plan to have paid the mortgage at the maturity date and if you re considering exiting, no tenancy agreement should pass that date. If there are any issues with repaying the mortgage, it is best to talk to your lender; there could be other options than selling the property such as a term extensions or another investment in order to pay off the mortgage. The Sales Process As with selling residential property, it is a timely process and should not be considered a quick fix; there are any number of variables that can affect a sale, changes in the market, a broken chain on the buyers side for example, so this must be considered. Recruiting a quality agent is advisable They will work to get the best value for your investment as possible. The Property being a rental property does not necessarily impact on the property value. If a landlord keeps the property in a good state of repair, it will not have an impact on the property value. Selling a property whilst it is vacant can expedite the process as this will appeal to buyers. However, if it is not financially viable to experience such a void period, it is advisable to work closely with the tenant to encourage them to keep the property in its best condition during the sales period. A landlord can offer incentives such as reduced rent during the sales process to ensure this. It is also important to understand that existing tenants require two months notice informing them that the property will no longer be available for rent and that the tenancy agreement can not be extended. Your property could appeal to investors like yourself, in this circumstance, sitting tenants could be appealing to investment buyers as there are no void periods for would-be landlords to worry about. A landlord will know what kind of buyers would be interested in your property based on who it has been rented out to. You should share this historical trend with the estate agent, as it will help them match buyers with the property.

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