LANDLORDS LETTINGS CHECKLIST FOR. Top 5 Questions NEW. Landlords need to answer. 1 Have I achieved the best rent for my property?

Transcription

1 LETTINGS CHECKLIST FOR NEW LANDLORDS Top 5 Questions Landlords need to answer 1 Have I achieved the best rent for my property? 2 Should my rental income cover the mortgage? 3 Have I secured the correct permission from my mortgage and insurance providers? 4 Am I meeting my legal and tax obligations? 5 What is my lettings entry strategy?

2 Investment property strategy Before purchasing, have a lettings plan in place to reduce potential tax exposure and decide what you ll do with the property once you cease ownership. Capital Gains Tax and Inheritance Tax planning are best addressed with an appropriately qualified adviser prior to purchase, despite the fact that some tax bills are encountered at the end of ownership. Tax breaks should also be factored in. Market Research Your first points of reference in your search for a rental property are likely to be online property portals, property pages in local newspapers and your local lettings agent. By researching the rental property market, you can quickly gain an insight into achievable rents for various types of housing and areas. Then look in the property sales sections for the likely values of property in those areas. From this, you can build up a picture of your local property marketplace, including: Which areas are most suitable for buy to let investment. Which areas you should avoid. Which areas have significant rental demand. What type of rental property is likely to be popular in your chosen locality. Average monthly rents being charged for your chosen property type in your chosen location. Think about your target tenant Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? Students - affordable, easy to clean and comfortable, but not luxurious. Young professionals - modern and stylish, but not overbearing. Family - a blank canvas, as they will have plenty of their own belongings. Ownership Will the property be single or joint ownership? It is much easier to get the type of ownership agreed at the outset, as it will be more difficult to change it later. If your partner* is not working you may wish to arrange the ownership so that they take advantage of their personal allowance entitlement for those aged under 65 of 8,105 per tax year. (Based on 2012/13 tax rates). If you have already purchased, you may wish to arrange transfer of the property into your partner s name. In England and Wales, HM Revenue & Customs (HMRC) defines owners as: Those with an equal interest in the property are joint tenants. Any rental income is usually split equally between them for tax purposes. Those with separate and identifiable shares, for example 15% and 85%, are tenants in common. If the property is held in unequal shares, the couple can make a declaration on HMRC Form 17 to have the rent taxed in the proportion that they hold the beneficial interest in the property. Otherwise, spouses will be taxed on an equal share of the net rents from a jointly owned property. If you and your partner already own the property as joint tenants, it is quite simple to change to tenants in common, but there may be a Stamp Duty Land Tax charge where the property is mortgaged. * Whether you are living together as a married couple, civil partnership or operating as a partnership in business, it is important that expert financial advice is sought.

3 Purchase Transfers of residential property are subject to Stamp Duty Land Tax (SDLT) at the following rates (Based on 2012/13 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; and all partnerships where there are one or more members are one of the above. Mortgage As with many tax issues relating to buy-to-let, the individual circumstances surrounding mortgage interest tax allowance will dictate the level of relief that will be applicable. Each case will need to be assessed individually, however, the following information can be used as a guide. Interest payable on borrowings taken out wholly and exclusively to purchase or repair your buy-to-let business can be deducted from the rental income generated by the property before tax becomes payable. These borrowings include a mortgage, a personal loan, or even an overdraft. Choosing the right mortgage is important because it may provide you with significant benefits in relation to your tax position. The structure and precise timing of the loan facilities are also very important. The beneficiary of the policy should not necessarily be the policyholder. The policy could be written in trust to the beneficiaries of the estate to mitigate Inheritance Tax on death. Your home may be repossessed if you do not keep up repayments on your mortgage. Top Tip on Bank accounts: You should have a separate bank account for your rental business to record all rental income received and expenditure incurred. This will assist you with completion of your annual rental accounts and Self Assessment tax return and in the event of an HMRC investigation. Tax allowable expenses If you own a rental property you are obliged to pay tax on any income or profit you make from it. However, there are some legitimate deductions that can be made before tax is payable. Ongoing Only those expenses incurred wholly and exclusively in generating income are allowable: Management or letting agent fees You may claim tax relief on any management or letting agent expenditure. On request, at the end of the tax year, the letting agent should be able to provide you with details of your rental income and management fees. Mortgage interest You may generally claim tax relief on interest payments on a mortgage or loan taken out to fund the purchase, refurbishment or repair of a let property. Water rates You can include the full amount of water, sewerage and any other rates paid on the property, if these are not paid by the tenants. Insurance You may include all insurance policies paid by you in connection with your property. Service charge / ground rent You can include the service charge and ground rent on the let property in question if these are not paid by the tenant. Council Tax In certain circumstances, a landlord may be liable for Council Tax. This could then be included. Legal Legal fees in respect of ongoing tenancies are allowable. Accountancy Any accountancy costs can be offset as long as they relate directly to the let property. Lettings Checklist for New Landlords

4 Repairs and maintenance When making repairs to your let property you may be able to go beyond replacing like with like and make an improvement, although you need to be careful about how much of an improvement you make. For example, HM Revenue & Customs (HMRC) is unlikely to permit the replacement of a tatty bathroom with a spa bath and other luxury items. However, HMRC may be agreeable to replacing wooden window frames with UPVC. Professional advice should be sought from a specialist property accountant before you instruct any work to be done. Motor vehicle costs for visiting/inspecting the property As long as they are appropriate to the circumstance and are incurred visiting the rental property, petrol and vehicle costs are an allowable expense. You should speak to your accountant to identify what is and isn t deemed to be an acceptable expense. Advertising Any costs you incur advertising for tenants to fill your rental property are allowable. Landlord Energy Saving Allowance Landlords are allowed a deduction for Income Tax purposes up to a maximum of 1,500 per dwelling house on qualifying expenditure of specified energy saving items (such as loft or cavity wall insulation, draft proofing, insulation for hot water systems or floor insulation) incurred before 06/04/2015, subject to certain conditions. Property sale Capital Gains Tax (CGT) Should you sell your property, any profit made on a property other than a main residence is subject to CGT. The rates for 2012/13 are 18% and 28%, which means on a 100,000 gain, tax could take up to 28,000 of your investment profit. There are a number of deadlines associated with CGT and missing them may incur penalties, interest or surcharges on top of the tax you owe. When you sell, you will have to pay the CGT by 31 January of the year following the tax year in which you sell the property. However, your CGT bill can be reduced by a number of reliefs summarised below. Private Residence Relief Lettings Relief Capital Gains Annual Exemption You can claim exemption from CGT if you have lived in a property as your main residence: i) for the time you lived there, even if this is a short time during the overall ownership ii) for the final 36 months of ownership (regardless of whether you lived there during this time or not) 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 10,600 for the 2012/13 tax year. A jointly owned asset, therefore, may need a chargeable gain in excess of 21,200 before CGT becomes payable. 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.

5 How important is it that I register with HM Revenue & Customs (HMRC)? You have an obligation to register with HMRC and to submit Self Assessment Income Tax returns to them. There are penalties for late registration and submission. You should obtain professional advice. See for deadline and penalty details. With regard to mortgages, are capital repayments tax deductible? Capital repaid on a repayment mortgage and endowment/life insurance payments are not tax deductible against the income. What is the tax position if I have lived in the property I am renting out? 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. Types of tenancy The tenancy 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, as 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 isn t their main residence Assured shorthold tenants Private rented 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 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 Get information about their tenancy provided within 28 days Stop others entering their home Get repairs done 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. Lettings Checklist for New Landlords

6 Deposits Tenancy Deposit Protection (TDP) means that landlords who collect deposits, or agents who do so on their behalf, must join a statutory scheme to ensure tenants get their deposit, or part of it, back - if they have kept a property in good condition. Disputes over how much should be returned will be mediated by an independent dispute resolution service. Rent and repairs An agreed rent must be paid on time and if this is not done landlords may take court 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 guarantee insurance. If a person pays weekly rent, a rent book must be provided. 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. Landlords must by law do repairs to keep the building in good condition, keep gas, electricity, heating and water equipment up to scratch and do other agreed work. Landlords must have a valid gas safety certificate for every gas appliance and furniture should be fire resistant. Tenants are responsible for looking after their home, which includes keeping it clean, and simple tasks such as changing bulbs and fuses. If repairs need to be done, tenants should inform the landlord. If the landlord refuses to do them it may be possible to force them to. Property wear and tear is more likely to be to a greater degree from tenants who are students or families than from professional tenants.

7 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 this is for eviction, then this should be either be the agreed term in the tenancy agreement, or two months, or how long rent has been paid for, whichever is longer. 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 get 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, or fixed tenancy that has run out, or if a tenant challenges a rent rise or demands repairs. Under a rolling agreement or once a fixed term has ended, a tenant can be removed with a court order with the correct notice given, without any burden of proving wrongdoing. During a fixed term tenancy a court will require the landlord to give good reason for eviction and then consider whether that is a reasonable course of action. Other Responsibilities With rights come responsibilities and tenants must keep within the terms of their rental agreement, which may have specific clauses inserted. General conditions mean rent should be paid, in full and on-time, bills sorted, good care taken of the property, tenants and visitors must behave responsibly, permission be granted for access when needed and requests be made for any repairs or extraordinary occurrences. Tenants should also not leave the property empty without first advising the Landlord because there is usually a clause in the Landlord s insurance which says you must notify your insurers or the policy will be invalid. Common Sense You should be mindful that although we ask tenants not to hang pictures, smoke, have pets etc. without your consent, it is difficult in reality to enforce these terms. Whilst they are a breach of the agreement, they are not sufficiently serious that a Landlord could get possession. It is best to be flexible with regard to pets, smokers etc. It would be useful to build a pot of money, so that after 5 years you have a reasonable sum to put towards a new bathroom, new carpets, or decoration etc. Thus keeping the property up to date and in tip top condition, so you can get top rent and good quality tenants. Lettings Checklist for New Landlords

8 One point of contact 1,300 lettings and sales branches at your service. To find your nearest lettings specialist visit Produced by Countrywide Residential Lettings Registered in England No , Registered Office: 4th Floor, Thamesgate House, Victoria Avenue, Southend on Sea, SS2 6DF. VAT No. GB