Buy to Let advice - The things you must know

Whether you are a Buy to Let veteran or an entrant to the market, this article provides the best advice to buy to let landlords and includes some of the most recent changes in 2018.

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    Independent Inventory Clerk
There can be very contious arguments over the condition of the property at the end of a tenancy so it is very important to get an an independent inventory clerk to catalogue at the start and end of a tenancy of the condition of the property and fittings, including photographs, when you get a new tenant.

Without an independent inventory clerk you may struggle to succeed with any claim for damages in a court regarding any dispute with a tenant about the condition of any of the fixture or fittings when they leave.

Fixed Fee, No Sale No Fee with a 5 out of 5 rating

    How to handle 'General Repairs'
You have to carry out basic repairs to any property you let in compliance with Section 11 of the Landlord and Tenant Act 1985. This is regardless of whether your tenancy agreement is in writing or has been agreed orally.

The landlord is responsible for for keeping in repair:

  • the structure and exterior of a home, such as the walls, roof, foundations, drains, guttering and external pipes, windows and external doors;
  • basins, sinks, baths, toilets and their pipe work;
  • water and gas pipes, electrical wiring, water tanks, boilers, radiators, gas fires, fitted electric fires or fitted heaters;
  • communal parts of a building - entrance halls, stairs and lifts (tenancies that began on or after 15 January 1989);

You can't cancel out any of these obligations by tailoring a tenancy agreement to do so and you can't pass on repair work costs to a tenant.

    Know Your Tenant
You now have a legal obligation to carry out background checks on people you offer tenancies to, particularly regarding their right to reside in the UK. This has been termed 'Right to Rent' (click for more information about this topic or see below).

Selecting a good tenant in the first place means you're more likely to avoid a costly, long and stressful eviction process further down the line. And if someone you let to doesn't have leave to remain and reside in the UK, you face a £5,000 fine.

You therefore need to carry out your due diligence thoroughly. Ideally you should check all past landlord references (particularly to see if rent has been paid on time), obtain bank statements which at least cover the previous 3 months, credit checks (particularly being vigilant about any references concerning fraud) and references from employers.

You'll need to conduct basic identity checks (normally by viewing and taking copies of driving licences or passports) and get proofs of current addresses. You should also form your own impression using your 'gut instinct' by taking the time to talk to a prospective tenant before offering a tenancy.

    You can't evict a tenant using a Section 21 notice for the first 4 months of a tenancy
It is now nearly impossible to evict new tenants who have an initial 6 month tenancy before that initial period has expired. This law was brought into force ostensibly to act against 'revenge evictions'.

Section 21 Notices are also time-limited. If you issue a notice, you have to start repossession proceedings immediately, if possible, and within 6 months of the issue of the notice. If you have not started proceedings within 6 months, you'll have to serve a new Section 21 Notice.

Improvement Notices etc.

Additionally, a tenant can make a written complaint about the condition of a property to you and you must reply within 14 days in writing, setting out how you will make good the issue. If you do not reply then the tenant can inform your local council - they can also do this if you issue a Section 21 Notice.

After examining the tenant's information, the local council can choose to serve you with an Improvement Notice, which is an order to make repairs or renovate a property to comply with the law. If you do not respond to this notice, you face imprisonment and large fines.

If you adjudge a tenant to be making a tactical complaint to avoid paying rent, you can pursue issuing a Section 8 Notice of repossession, but you will have to establish the statutory grounds and the eviction process is likely to be drawn out and costly.

    Carbon Monoxide (CO) and Smoke Alarms - legal requirements
By law, as a private landlord in the UK, you must:

  • Fit a smoke alarm on every storey;
  • Fit a Carbon Monoxide (CO) alarm in every room with a 'solid fuel burning appliance'; and
  • Test all alarms at the start of a tenancy: these must all be functioning properly.

If you don't comply with these requirements, you are liable to a £5,000 fine. The Government expects landlords to 'make an informed decision and then choose the best alarms for their properties and tenant'.

NB Despite the legislation only referring to solid fuel burning appliances in relation to CO alarms, the Government guidance given is 'we would expect and encourage reputable landlords to ensure that working carbon monoxide alarms are installed in rooms with these [gas appliances]'.

    Deposit Protection Scheme
As a buy to let landlord, you normally take a deposit from a tenant to hold as security. You put the deposit money in a government-backed tenancy deposit scheme (TDP). In England and Wales a tenant's depo deposit can be registered with:

  • Deposit Protection Service (Custodial and Insured)
  • MyDeposits - including deposits that were held by Capita
  • Tenancy Deposit Scheme

Are all rental deposits monetary?

You can accept valuable items (eg a car or watch) as a deposit instead of money; items such as these are not protected by the above scheme.

You must make sure a tenant gets their deposit back if they:
  • meet the terms of your tenancy agreement
  • don’t damage the property
  • pay your rent and bills

You or your letting agent must put deposits in the scheme within 30 days of getting them. Failing to register a tenant's deposit in a registered protection scheme and/or not providing the prescribed information about the scheme has automatic penalties of up to 3 times the sum of the deposit.

    Help to Buy Guide
As a landlord you must ensure that you make available to new tenants the Help to Buy Guide, a Government document which makes tenants aware of most of the issues discussed in this article. Failure to do so can invalidate any Section 21 eviction process. For more information, please read Prescribed Information - Section 21 New Rules.

    Furnished vs unfurnished? Wear and Tear matters
The Wear and Tear Allowance for fully furnished properties has been replaced with a relief which allows for landlords of residential properties (not commercial) to reduce the taxable profit for the year by deducting the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The tax relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Read more here - HMRC - Reform of the wear and tear allowance

'Reasonable Wear and Tear'

When a tenant moves out you can reasonably expect to receive your property and items in it back in a reasonable state. Note that you can't expect to receive these back 'as new' but as allowing for 'reasonable wear and tear' given the length of a tenancy.

If you find cracked tiles, marks on walls, scuffs and minor knocks, these will invariably regarded as 'reasonable wear and tear' and you should not expect compensation for repair or replacement from a tenant. On the other hand, broken doors, smashed windows and any seriously damaged items on the inventory might form a claim for reasonable repairs (but not to a 'like new' standard) from a tenant.

    From April 2016 - 3% in stamp duty for buy to let property buyers
From 1 April 2016, properties bought for buy to let purposes are subject to an additional 3% surcharge on top of the normal stamp duty (SDLT) payable. This is a complex area, however: you should seek appropriate advice about this surcharge as, like with so many tax matters, the devil is in the detail.

If you own a UK property and have tenants or are looking to let your property then get in contact with us. We can help provide:

  • Inventory Clerks
  • Assured Short-term tenancy Agreements
  • Defect reports
  • Expert witnesses
  • Dispute & Mediation services

    Overseas Buy to Let Investors liable for Capital Gains Tax (CGT)
If you're a foreign investor in the UK Buy to Let market or are intending to be, you are liable for CGT on the proceeds of the sale of any second home i.e. any home you possess which is not your primary residence in the UK. CGT rates for overseas residents are the same as for UK residents i.e. the tax is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate is 28%.

We therefore strongly recommend that you take appropriate financial advice when looking to sell property assets.

Click to view the Government's current guidance on Capital Gains Tax for non-UK residents: UK residential property

    Buy to Let Tax Changes for Mortgage Interest
If Previously, as a landlord, when you came to pay tax on your rental profits, you could deduct the cost of mortgage interest and other finance costs before you arrived at the profit figure you'd be taxed on.

From 2017/18 however, the tax taken is based on a calculation of turnover rather than profit. The deduction of mortgage interest and finance costs from your taxable profit is to be replaced gradually with a tax relief allowance. This is to be set at the basic rate of tax and partly offset tax due on rental profit. The tax relief allowance amount is being phased in and gradually increased over 4 years starting April 2017.

The following table illustrates:

Mortgage interest deduction* 100% 75% 50% 25% -
Tax relief allowance on mortgage interest*
(at the basic rate of tax)
25% 50% 75% 100%

*and other finance costs

The overall tax you have to pay depends on all your different sources of income and includes rental profits, employment, pensions, etc.

The changes will have most effect on higher and additional rate tax payers because they are set to reduce the rate of relief on interest costs from the marginal rate to the basic rate. The changes may also mean you move between tax bands and become a higher or additional rate tax payer.

You should seek specialist tax advice

Please note, you should take any of the above as tax advice - you should consult an independent tax advisor or click here to consult HMRC's Guidance on Restricting Finance Cost Relief for Individual Landlords

    Make sure you get an Assured Shorthold Tenancy Agreement (AST)
Assured Shorthold Tenancy agreements (ASTs) are the most common type of rental agreement between a private tenant and private landlord and most lenders insist on them.

If all of the following apply, you automatically have an AST with your tenant, unless you specifically set up another type of tenancy:

  • You and the tenant live in different properties
  • The tenant has control of the property such that you (or any others) can't enter it as they please
  • The tenant moved in on or after 28 February 1997. Alternatively the tenancy began 15 January 1989 and 27 February 1997 (inclusive) and you issued notice of the AST before the tenancy began.

The benefits of an AST are:

  • You grant the tenancy for a fixed period of time - usually either 6 or 12 months
  • You can decide not to renew the tenancy at the end of the period
  • ASTs are not normally subject to rent controls
In sum, you have more rights over the possession of the property.

As a landlord you can bring an Assured Shorthold Tenancy to an end before the fixed period of time without reason, but the following must apply:

  • You’ve protected your tenants’ deposit in a deposit protection scheme 
  • You’ve given your tenants at least 2 months’ written notice that you want the property back (‘notice to quit’) and the date they must leave
  • The date they must leave is at least 6 months after the original tenancy began (the one they signed on first moving in)
  • They have a periodic tenancy – or they have a fixed-term tenancy and you aren’t asking them to leave before the end of the fixed term

If you're still in the fixed term, you can only request that your tenants leave if you have a reason for wanting possession according to the Housing Act 1988.

Reasons include:

  • your tenants are behind with rent payments (‘in arrears’)
  • your tenants have used the property for illegal purposes, eg selling drugs

The notice period you must give varies from 2 weeks to 2 months, depending on the reason you’re using.

Click on the following for guidance from The Department for Communities and Local Government on reasons for possession for a property let on an AST.

    Tips for absolute beginners
  • Higher deposit means lower mortgage repayments
  • Consider fixing your mortgage rate as a hedge against uncertainty
  • Be aware of rental cover requirements - normally rent required from tenants is 125% of monthly mortgage repayments
  • Be aware that you can access interest only mortgages - residential customers cannot
  • Be aware that you have less protection from repossession if you default compared to a residential mortgage
  • Consider buying more properties rather than concentrating on one

    Selling your buy to let property - Capital Gains Tax (CGT)
If you sell your buy to let property for profit, you become liable for Capital Gains Tax (CGT) if your gains exceed your personal tax-free allowance (£11,100 as of February 2017).

The rates are 18% and 28%, depending on your total taxable income. You can find out more by clicking on Capital Gains Tax When you Sell your Property

Additionally, rental income that exceeds your mortgage interest repayments + allowable expenses is liable for income tax.

We always recommend that you take appropriate financial advice when considering tax matters.

'Right to Rent' - Immigration Act checks for Landlords

Immigration Act 2014 compulsory checks came into force for 'residential tenancy agreements' (most private lettings) and also cover sub-leases and sub-tenancies and failure of landlords to carry out due diligence on any tenant's right to rent is punishable by a Penalty Notice which carries a maximum £5,000 fine, as stated above.

All tenancies, leases below 7 years, sub-lets and lodging arrangements are affected for agreements granted on or after 1 December 2014.

The provisions only affect dwellings where relevant non-nationals without the right to remain use as their 'only or main home' and where they pay rent - 'house guests' are unaffected.

No due diligence is required when a tenant is a 'relevant national' - this either a United Kingdom citizen, or a national of a European Economic Area (EEA) state (the European Union states as well as Iceland, Norway and Liechtenstein).

If you are a landlord, you are strongly advised to consult the Home Office's Code of Practice on Illegal Immigrants and Private Rented Accommodation (click to view).

Right to Rent - the checks

  • These must be carried out at any time before any residential letting is allowed and at least 28 days before someone who is known to have limited right to remain takes up a letting.
  • You must inspect and take photocopies of standard documents in the presence of the tenant applicants. These standard documents are official passports or identity cards (to prove EEA/Switzerland citizenship) and paperwork issued by UK Government departments which clearly set out the prospective tenant's right to remain.
  • For non-EEA/Switzerland nationals, these are official documentation from the Home Office, including naturalisation documents, passports with accompanying paperwork which detail a right to remain (and how long, if this is temporary) and include, for instance, Police documents setting out that a person is a recognised victim of crime and therefore has the right to remain.
  • You must obtain a maximum of 2 documents taken from List A and List B, defined in the Code of Practice (see above), check them in the presence of the prospective tenant and make a record of the check.
  • If there are any doubts or the correct evidence is not available, you must contact the Home Office Landlords Checking Service (click to access)  guidance. The Home Office states that a 'yes' or 'no' reply will be forthcoming within two days. If the answer is 'no', then the landlord must not allow the prospective tenant to take up residence.
  • If you have correctly followed the above procedures, you then have a 'Statutory Excuse' - which means you cannot be prosecuted - which lasts a minimum of twelve months or as long as the tenant has documented right to remain. You have to conduct follow up checks if a tenant's documented right to remain period runs out and must do this before the right to remain expires.
  • If there's any doubt, you must contact the Home Office. The guidance makes clear that you should not evict a tenant on the basis of the above, this is a matter for the Home Office.
  • You have 28 days to appeal if you receive a Penalty Notice. You must pay any fine by the date stated, which will be at least 28 days after the notice was issued. If you pay within 30 days, the fine is reduced by 30%.

NB We strongly advise that you add these checks to your initial tenant checklist to avoid the possibility of falling foul of the law.

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