Landlords are any legal entity, be it an individual or a company, who have purchased property for the purpose of renting it out in order to generate an income. In some cases, the property itself is on lease to the landlord and they have decided to sublet it out.
This guide is aimed at individuals who are landlords as opposed to companies however the majority of the guidance applies regardless of whether the property is held by an individual or a company.
Buying, maintaining and selling buy-to-let properties can be an expensive business, so it is important to understand all the costs you will face before deciding whether to become a landlord.
Buy-to-let mortgage costs
If you will need a buy-to-let mortgage, your monthly repayments are likely to be your biggest regular outgoing. You should consider if you could afford it if the property was empty for a period of time.
Property maintenance & refurbishment costs
A rental property will require maintenance from time to time so be prepared for these costs as they tend to occur sporadically.
The property may require refurbishment every few years especially after the end of a long lease agreement which is not renewed by the tenants.
Letting agent fees
If you decide to let someone else manage the property on your behalf, then be prepared to pay letting fees. Have a look around to find out what letting agents in the area you are looking to invest are charging customers.
It's a good idea to take out landlord insurance and, if you have a mortgage, your lender will usually expect you to do so.
You can get different levels of insurance – for instance, cover for the building and cover for your contents if the property is furnished.
Tax on buy-to-let properties
The profit generated by a rental property will be subject to income tax.
Buy-to-let stamp duty
The buy-to-let stamp duty surcharge is a major consideration when buying an investment property. The extra charge potentially adds thousands to the cost of a buy-to-let property. The current stamp duty rates on buy to let properties are shown below:
Landlords must ensure that any gas equipment has been installed and maintained by a registered Gas Safe engineer and that an engineer does an annual gas safety check on appliances.
Tenants should be provided with a gas safety check record before they move in, or within 28 days of a check being done.
It's the landlord's responsibility to ensure the property's electric system is safe, including wiring, fittings and any appliances.
Landlords must provide a smoke alarm on each storey of the property and a carbon monoxide alarm in any room with a 'solid fuel burning appliance' (for example a wood-burning stove or coal fire).
There must also be access to escape routes at all times and furniture and furnishings must be classified as fire safe.
Landlords with larger HMOs must also provide fire alarms and extinguishers.
You need to get an energy performance certificate (EPC) when you let the property to new tenants. This tells them how energy efficient the property is and gives you recommendations for how you can improve energy efficiency.
If you do not have an EPC available for prospective tenants to view, you could risk a fine. The only exception is houses in multiple occupation (HMO). These are exempt from the EPC rules as they typically have to abide by stricter regulations.
Rental properties need to achieve a minimum EPC rating of E.
You could be fined up to £5,000 if you provide false information, fail to adhere to compliance notices or let properties that don’t meet the regulations.
Landlords are required to carry out 'Right to Rent' checks when setting up a new tenancy agreement.
A house in multiple occupation (HMO) is a property rented by at least three people from more than one household who share facilities such as a bathroom and kitchen. If you're letting out an HMO, you should check with your local council to see if you need a licence.
Licences are mandatory for 'large HMOs' - properties inhabited by five or more people from more than one household. You'll need a licence for each HMO you let, and licences are valid for five years.
You can find out more and apply on the government's website.
If you are an individual who is now the owner of the buy to let, you will have to include a breakdown of the income and expenses when filing yourself assessment income tax return. The income figure will be the total rental income for the tax year running from the 6th of April to the 5th of April.
The rules around what type of expenses can be deducted can be complex and we have tried to summarise the main tax-deductible expenses in a separate section below.
Please note that in order for a business expense to be deductible for tax purposes, it must meet the wholly and exclusively test which is that the expense has been wholly and exclusively incurred for the purposes of the trade.
The purpose of this test or caveat is to stop people abusing the tax system by claiming personal expenses when arriving at income subject to tax.
If some expenses have an element of personal and business purpose, the amount deductible is the proportion relating to the business purpose.
There are 2 other main classes of expense which are not deductible for income tax purposes:
1. Capital assets - these are expenses which would increase the value of your property such as an extension, a structural improvement to the building (new roof or re plastering the house) or a new high specification kitchen or bathroom. You should hold onto the receipts relating to this work and claim it as a deduction when the property is sold and capital gain subject to tax on the property is calculated.
2. Mortgage interest - this has been a relief which used to be available up until a few years ago and its removal has had an adverse effect on landlords in the form of higher income tax bills. Relief now is only provided on the interest paid on a mortgage at the base rate which is currently 20%.
With regards to point 2 above, it is worth noting that if rental properties are held in a company, interest on any loans taken out will be fully deductible under corporation tax.
Spire Accountants are experienced in preparing income tax submissions for landlords who are individuals. Please contact us by email on Shakeela@spireaccountants.net, call us on 07442202165 or visit us at www.spireaccountants.net.
Self-assessment under income tax for landlords is part of the next phase of the roll out of the government's Making Tax Digital (MTD) initiative and this goes live in April 2024. This will require landlords who have income of at least £10,000 (rental income and self-employed income) to use MTD compliant software to submit details of their income and expenses to HMRC at the end of each quarter during the tax year.
Spire Accountants already utilises fully compliant MTD software which is available to our clients to use - access is given to clients to a mobile app and an online dashboard for them to upload documents supporting the numbers being submitted by the business. We can then take this information and process it through the system to arrive at the submissions required. More information is provided on our Making Tax Digital page.