Making a buy-to-let work for you
As Philip Hammond read out the 2018 autumn budget, landlords across the UK were on the edge of their seats. Past years have seen a number of tax and legislative changes that have directly affected property owners, not least the scrapping of tax relief for mortgage interest payments.
This budget announcement brought with it a relative amount of ‘no news’ for the private rented sector, which has put landlords more at ease. One significant announcement, though, concerned personal tax, specifically a rise in the higher rate income tax threshold to £50,000 and a rise in the personal allowance to £12,500 to come into effect in April 2019. Another important announcement concerned a restriction on lettings relief from April 2010, meaning only landlords that have used the property as their only or main residence can claim and, in turn, potentially reduce the amount of Capital Gains Tax (CGT) payable on the sale of the property.
What this means is that those looking to invest need to have all the facts and make sure this is an investment right for them. If you are considering this, continue reading as the guide below will help you weigh up your buy-to-let options.
Buy-to-let risks and rewards
Like most big decisions, it pays to know what you’re getting involved in to be sure of your decision. There are of course risks and costs to take into consideration, such as:
- Changes in the property market, meaning your investment capital is tied up in a single asset
- Changes in the Bank of England interest rates, which in turn have an impact on mortgage rates
- Ongoing costs through general maintenance and repairs
- Additional costs like insurances, for example income protection
- Vetting tenants to help reduce the risk of property damage
These risks have to be weighed against the potential rewards of owning and letting property. Some rewards may include:
- Buying property at less than market value
- Standing to gain income through property value growth, particularly as a longer term investment
- Additional value added to the property through sweat equity, such as through renovations, extensions or additions, or perhaps landscaping
- Direct and steady income stream from renters
- A concentrated asset position that offers stability
What to consider before investing
There are several factors to take into account before you can know whether you’re ready to invest.
It is essential to research the property market thoroughly before making the big decision to invest. Halifax reported that the cost of buying a house is increasing, with the average price having hit a record £230,020. On top of that, the Bank of England recently raised key interest rates by 0.25%. This does not necessarily affect mortgage affordability, but the best thing to do is research different regions in the UK as well as the overall market. Manchester is currently the fastest growing area.
Once you’ve identified where and what you want to buy, you will likely need a mortgage in order to do so. There are a large number of different mortgages available, including specific buy-to-let mortgages.
Due to having larger risks, buy-to-let mortgages tend to be more expensive than standard ones with an average £20,000 higher deposit tacked on. It might be enticing to opt for a cheaper standard mortgage, however if you rent out your property without the bank lender knowing then you could be charged with mortgage fraud. If convicted, you could face up to 12 months in jail and a hefty fine. Always be transparent with your plans, listen to the recommendations made to you by your bank, financial advisor or mortgage broker, and factor in a potential higher deposit amount as part of your budgeting.
It is also good to be aware of the fact that since April 2017, landlords have had to declare their rental income in a different way. Landlords used to be able to deduct all mortgage interest payments from their tax bill, only paying on profits not turnover. However, this has started to decrease year-on-year leading up to April 2020 where landlords will be taxed on their full rental income.
Before you buy the property, you need to check whether it is already rented out. If this is the case, your purchase may be subject to the tenancy. This means that you will also become responsible for the existing tenancy agreement and the current tenants will start to pay the rent to you. This would make the process simpler and cheaper as there would be no up-front marketing and vetting costs to find a suitable tenant. However, it does not come without complications.
You’ll have to see the current tenancy agreement in order to identify:
- The type of contract in place
- How much rent is paid and when
- The tenancy period
- Notice period length
- Agreed obligations from either party
- Whether property items are owned by the tenant or included in your sale
- Any special terms or clauses
You should also ask for extra information on the tenancy and tenant, such as confirmation that rental payments are up-to-date, if the person(s) in the property is the same as those named in the agreement, the deposit amount and where it is held. You should also request to know if any notices have been served and ask to see any recent exchanges between the current owner and tenant.
There is also the chance that the current owner is looking to sell the property with ‘vacant possession on completion’. This means the seller will have to make sure that the tenancy is terminated and the tenant leaves the property before the sale is completed. If the existing tenant refuses to leave, it could delay the completion process.
Unfortunately, the purchase price of a property is not the only cost that has to be considered. In fact, with buy-to-let properties the extra costs could be higher than if you were going to live in the property.
Firstly, you have to ensure that the property’s Energy Performance Certificate (EPC) has a rating above ‘E’ before a tenancy can begin. If you buy a property and the rating is below this then it could cost you to make these improvements. More information on EPCs and the requirements you must meet as a landlord can be viewed here.
You should also bear in mind that when the tenancy agreement begins there will be ongoing maintenance costs, as well as safety checks that you will need to pay for. On top of that, there is a proposed ban on letting fees charged to tenants that may be enforced from early 2019. Tenants will not be charged by letting agents, which could have a knock-on effect with agents increasing their fees to landlords. Deposits will be capped at a maximum amount equivalent to six weeks rent, with holding deposits at one week. If you do not adhere to these new rules, you risk a fine of £5,000.
If you have purchased your desired property and are preparing to rent it out, there are a couple of final things you need to arrange:
First and foremost, you need have a formalised tenancy agreement between yourself and your tenants. If there is continuation of a formal tenancy speak to a specialist conveyancing solicitor who will be able to draft an agreement to cover you for all renting aspects, including rent amount, payment dates, property condition, and any break clauses or special conditions.
Although this is not compulsory, you may consider buying specialist insurance. This will protect you if the property is damaged by your tenants or if you stop receiving rental payments. Landlord insurance is for those who rent their property out for periods of six months or more.
Further information on landlord insurance, and where to find the cheapest policies, can be found in this useful MoneySavingExpert guide.
As a landlord, you will have a number of obligations to your tenant to ensure the liveability of your property, its structural upkeep and the safety of the premises. In the first instance, you need to check your potential tenant’s ‘Right to Rent’ to verify whether they can legally reside in the UK. Section 22 of the Immigration Act 2014 details what ‘right to rent’ checks must be performed. If you do rent to an illegal immigrant, you could face a fine of up to £3,000 or even imprisonment. Some basic checks to perform include verifying your tenant:
- is aged 18 years or over;
- will use the property as their main residence;
- they are who they say they are; and
- they have the appropriate permits to reside in the UK.
Take copies of original identity documents and permits and record the date you checked, as well as any visa or residency permit expiry dates. If you are using a letting agent, they will be able to do these checks for you.
You also have to provide information on the protection scheme you will be holding your tenants’ deposit in. In England and Wales, landlords legally have to place tenants’ deposits in one of three government-approved deposit protection schemes. These are:
- Deposit Protection Service
- My Deposits
- Tenancy Deposit Scheme
You also have to provide your tenants with a copy of the government’s ‘How to Rent’ guide. This forms some of the ‘prescribed information’ that landlords are required to provide their tenants. Failure to provide this could mean you would be unable to evict your tenant in certain conditions.
We’ve already mentioned EPCs, however you are also expected to provide a number of other tests on a regular basis. For example, Gas Safety Certificates have to be produced and share with the tenants every year, whilst electrical safety tests have to be carried out every five years.
It is also your responsibility as a landlord to ensure that working smoke and carbon monoxide detectors are fitted (ensuring these are regularly tested could be the tenant’s responsibility, which you should specify in the tenancy agreement). If you are renting a furnished property, it would be wise to familiarise yourself with The Furniture and Furnishings (Fire Safety) Regulations 1988, put in place to ensure that upholstery components and composites used for furniture supplied in the UK meet specified ignition resistance levels and are suitably labelled. More information on the regulations can be viewed here.
You will also have to declare your rental income to the HMRC each year. This is in addition to any other income you may acquire from a full-time job, for example. Visit the official Government website on paying tax to find out more.
Finally, any substantial assets, such as your buy-to-let property, should be recorded in your Will. An invalid Will could cause issues later down the line for loved ones, as it will be treated the same as having no Will at all in the eyes of the law. Without a Will in place, the rules of intestacy will apply, which may see loved ones left out of our estate.
Need more advice?
If you are considering a buy-to-let, speak to one of our specialist buy to let solicitors. There are a number of factors to consider throughout the conveyancing process, when you are going to seek tenants, and throughout the length of your ownership if any disputes arise.
Insight Law’s property solicitors are experts at what they do, helping ensure a smooth rental process for everyone from new landlords to experienced property moguls. Before you invest, get straightforward and tailored advice by calling our team on 0117 925 6257 (Bristol) or 02920 093 600 (Cardiff).
 Josh Hall, ‘Autumn Budget 2018: a summary for landlords’, Simply Business (online), 29 October 2018 <https://www.simplybusiness.co.uk/knowledge/articles/2018/10/autumn-budget-2018-for-landlords/>.
 Hometrack, UK Cities House Price Index – June 2018 (25 July 2018) <https://www.hometrack.com/uk/insight/uk-cities-house-price-index/june-2018-cities-index/>.
 Tom Wilson, Buy-to-let mortgage interest tax relief explained (November 2018) <https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782>.
Posted by Insight Law on
20 November 2018
Buy to let, Buy to let property, Investment property, property
Commercial, Guide, Residential