Buy-to-let Guide What is buy-to-let?

Buy-to-let refers to the purchase of a specifically with the intention of it out.

This guide will provide you with an introduction to the buy-to-let process, including what your responsibilities are as a and what to consider in terms of financial planning. As the UK’s leading provider of services, we take care of the legal side of moving; so whether you are buying a flat, house or a portfolio of to rent out, we are here to help.

1 Choosing & financing a buy-to-let property

Picking the right property Purchasing the property

When choosing a buy-to-let property, it is worth If purchasing the property with a mortgage then a remembering that this is essentially a business special buy-to-let mortgage will need to be secured transaction and the kind of property that a landlord from a lender. Alternatively, if a client decides to rent buys is not necessarily the kind of property that they out their current home, it is advisable to notify their would like to live in. Ultimately a landlord needs to mortgage provider, as many lenders will change the ensure a good return on their investment, so will need terms and conditions of their mortgage for a small to remember to pick a property that will be popular admin fee. If the client is a cash purchaser, then these with renters. conditions do not apply.

Tips when choosing the property: A landlord must comply with a number of statutory requirements to ensure the safety of their tenants Talking to a local estate agent helps as they will know while they occupy the property. A full list of these which areas are popular with renters and what rent responsibilities can be found at: www.gov.uk/private- can potentially be charged. renting/your--safety-responsibilities.

Choosing the property and location based on the When letting out a property, it is advisable to have type of tenant can be a good idea and help to a tenancy agreement drawn up. Once signed, this narrow the search area down. For example, young is a legally binding document that outlines what is professionals will be looking for a property close to expected of each party involved in the rental process; good transport links, shops, bars and restaurants; while including how much the deposit will be, how much a young family will be looking for a location near to a rent is to be charged and what condition the property good school and a property with a garden. is expected to be returned in. Talking to a letting agent or a solicitor is advisable when preparing these Finally it’s time to do the maths. The rent collected documents. needs to be enough to cover the mortgage, associated management bills (including the amount charged by a lettings agency if they are instructed Securing a mortgage for to manage the property) and leave some spare to pay for the maintenance of the property. In most cases, lenders will stipulate how much needs to be a buy-to-let property generated in rent, in order to qualify for a buy-to-let mortgage. Buy-to-let mortgages differ from standard residential mortgages, as the lender will work out how much can be borrowed based on the rental income of the property. As a general rule, lenders will be looking for the rental income to be at least 125% of the monthly mortgage payment e.g. if a mortgage is £800 a month, then the rent will need to be at least £1,000 a month.

Most lenders will also require a higher deposit compared to residential mortgages (somewhere around 25%). They are also likely to take into account the amount the landlord earns per year.

A mortgage broker will be able to help find the best deal that fits with each individual’s circumstances.

2 myhomemove Choosing & financing a buy-to-let property Other costs to consider When calculating the costs for a buy-to-let property, there are a number of factors to consider. These include:

Mortgage fees - most lenders will Stamp duty – when purchasing a Management fees – if a lettings typically charge a mortgage fee buy-to-let property, stamp duty agent is required to look after of circa £1,000 for the product will need to be paid. The amount the property then they will need taken out. This will either need to will vary depending on the value to be paid a fee. This is usually a be paid upfront or in some cases of the property. So for example percentage of the rent charged, it will be added to the mortgage. if the purchase price is £180,000, but it is worth negotiating. £1,800 will be required in stamp Survey fees – a range of surveys duty. Repairs – the landlord is responsible are available for the property for repairing any item listed in the being purchased; from a basic Stamp Duty Charges rental agreement; for example the mortgage valuation through to a boiler or cooker. detailed structural survey. Each Under £125,000 0% survey will provide different levels £125,001 - £250,000 1% Covering the mortgage and any of information on the property. As £250,001 - £500,000 3% bills when the property is empty a guide, a mortgage valuation £500,001 - £1,000,000 4% – there may be times when the will typically cost around £400. £1,000,001 - £2,000,000 5% property is vacant with no tenant. Over £2,000,000 7% In these instances the mortgage, Buildings insurance – at the point gas, electricity, water and council of exchange a mortgage lender For further details visit: tax bills still need to be paid. The will require buildings insurance to www.hmrc.gov.uk/sdlt landlord will need to make sure that be in place for the new property. they have some money available for this situation.

myhomemove, through its wholly Dedicated conveyancer – a consistent point In addition to providing excellent service, we owned subsidiary, Premier Property of contact to help guide the client through also offer clients additional reassurance in the Lawyers (PPL), is the leading provider each stage of the conveyancing process. form of: of conveyancing services in the UK – including buy-to-let purchase and Online Case Management – our revolutionary Fixed Fees – our fixed fee policy means that conveyancing. eWay service allows clients to track their case the client only pays the amount that they see 24/7 via a smartphone or tablet. They can on their quote. We offer a No Move, No Fee We have extensive experience review all documentation and complete the guarantee, so if the sale falls through, no legal and a wealth of knowledge gained majority of paperwork via a laptop or PC. fee will be charged; although costs will be from handling buy-to-let cases from incurred in respect of any disbursements paid, professional landlords through to first Regular contact - via email, SMS, phone call or e.g. searches, obtaining landlord information. time buy-to-let clients; and we have letter dependent on the client’s preference. developed and introduced a range Search Guarantee – in the unlikely event that of services to make the buy-to-let Extended Opening Hours – we’re open into a purchase does not proceed to exchange of conveyancing process as seamless the evening and at weekends; so clients can contracts, the cost of the next set of searches and stress-free as possible: contact us at a time that suits them. will be supplied FREE of charge*.

*Terms and conditions apply 02 3 Tax on buy-to-let properties As a buy-to-let property is an investment, the landlord may be liable to pay tax on it.

Income Tax Capital Gains Tax

The income received as rent is taxable and will need If a landlord sells a buy-to-let property for more than to be declared to HMRC through a self-assessment tax they bought it for, they will be liable to pay tax on the return. A number of costs can be offset against the rent capital gain; if they sell it for less, then there is no capital before tax is charged including: gains tax due. There is an annual tax-free capital gains allowance which is currently £10,900 (2013/14) – which Interest on your mortgage payments (not the means that if the total gain from all investments is this capital repayments). amount or less, then it is not liable for capital gains tax. If Maintenance costs for repairs and upkeep of the gain is more, then tax will need to be paid on it. the property. Letting agency fees. Like income tax, there are a number of expenses that Buildings and contents insurance premiums. can be offset against the capital gain to reduce the Council tax and some utility bills if it is the landlord, overall amount. These include: rather than the tenant, who pays these. A loss made on the sale of a buy-to-let property in the To help understand the amount of tax that must be previous year. paid, it is advisable to talk to an accountant, especially Conveyancer’s fees. as HM Revenue and Customs require a record of Estate agent’s fees. income and expenses for at least 6 years. Marketing costs for the property. Stamp duty.

Inheritance Tax The above information as provided by myhomemove and Premier Property Lawyers does not constitute advice In the event of the landlord’s death, the buy-to-let and is merely intended as a guide. For up-to-date tax property will form part of their estate. If the estate advice please talk to a registered accountant or visit exceeds £325,000 for an individual or £650,000 for a www.hmrc.gov.uk couple, inheritance tax is charged at 40% for everything above this amount.

4 myhomemove

Managing & maintaining a buy-to-let property

If a lettings agency is chosen Marketing the property via their It is possible to negotiate with the to manage and maintain the website and associated channels. lettings agency so they are responsible property, then they can be for some of the more complex tenancy expected to take responsibility Finding suitable tenants. issues e.g. finding the right tenant, for: carrying out reference checks and Carrying out reference checks preparing the tenancy agreement, on the tenant. leaving the day-to-day to the landlord. Preparing tenancy agreements for the tenant and landlord to Alternatively, the landlord can decide sign. not to use a lettings agency at all, making them solely responsible for all Collecting rent from the tenant and the tenancy matters. paying the landlord their share. Landlord insurance is a specialist Organising for the inventory insurance that can also be taken out – check-in and check-out at the this will help to cover the landlord in the beginning and end of the tenancy. event of any damages to the property and may also cover any unpaid rent. Acting as liaison between the landlord and tenant, helping to If you do decide to engage a lettings resolve any problems. agency, we would recommend choosing a member of The Association Organising for any maintenance of Residential Letting Agents (ARLA). work to be carried out on the property during the tenancy. For further details visit www.arla.co.uk

5 Landlord obligations

A landlord is required to fulfil a Furniture: Since 1st January 1997, Deposits: Nearly all private landlords number of obligations. These all furniture in tenanted residential and letting agents taking deposits for include: property must comply with the 1993 assured shorthold tenancies in England amendments to the Furniture and and Wales are required to safeguard Holding a gas safety certificate: Furnishings (Fire Safety) Regulations them with a government authorised the landlord must ensure that the 1988. tenancy deposit protection scheme. gas appliances in the property are The landlord can choose from a safe and are inspected at least Smoke alarms: All properties built Custodial or Insured scheme, both once a year by a Gas Safe Registry after June 1992 are required by are offered by the Deposit Protection registered tradesperson. A property the Buildings Regulations to have Service, which is authorised by the cannot be rented out without a mains operated inter-connected Department for Communities and Local gas safety certificate. The gas smoke alarms fitted on every level Government. safety certificate must be kept by a of the property. Older properties do landlord for a minimum of two years not have to comply but landlords For further details please visit: from the date of the inspection. are well advised to have battery www.depositprotection.com. operated alarms fitted. Electrical safety check: In order Failure to ensure a property is safe to demonstrate ‘due diligence’ Energy Performance Certificate for tenants could result in a fine, in relation to ensuring a property (EPC): an EPC is required in order invalidation of property insurance, is safe, it is recommended that to market a property for rent; a possible manslaughter charge an electrical safety check is otherwise the landlord risks a fine in the event of a death, six month conducted. This is not a legal of £200 from the local Trading imprisonment or a tenant may sue for requirement in the same way as Standards officer. civil damages. a gas safety certificate, but under the Consumer Protection Act 1987, House in Multiple Occupation which encompasses the Electrical (HMO) licence: if letting out a Equipment (Safety) Regulations property to three or more tenants, 1994 and Plugs and Sockets etc who form two or more households (Safety) Regulations 1994, there is an and who share a kitchen, bathroom obligation for the landlord to ensure or toilet then a HMO license is that all electrical equipment is safe. required. For a full list of conditions and types of properties that qualify please see www.gov.uk/house-in- multiple-occupation-licence.

Useful contacts:

ARLA: www.arla.co.uk myhomemove – www.myhomemove.com/buy-to-let

Gas Safe Register: www.gassaferegister.co.uk NICEIC: www.niceic.com

GOV.UK: www.gov.uk The Deposit Protection Service: www.depositprotection.com

HMRC: www.hmrc.gov.uk

6 Landlord obligations

Industry recognition for excellent service

myhomemove myhomemove myhomemove Head Office The Maltings Linley House Frances Way Blisworth Hill Farm Dickinson Street Grove Park South Entrance Manchester M1 4LF Enderby Stoke Road Telephone 0845 234 0230 Leicester LE19 1SH Blisworth Fax 0116 281 5978 Northamptonshire NN7 3DB Telephone 0845 234 0230 Email [email protected] Fax 0116 281 5978 Telephone 0845 234 0230 Email [email protected] Fax 0116 281 5978 Email [email protected]

www.myhomemove.com