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Financial responsibilities if you rent out a property

You might be a professional buy-to-let landlord, or you might rent out your home as an ‘accidental landlord’ because you have inherited a property, or haven't sold a former property. Whatever your situation, make sure you’re aware of your financial responsibilities.

Inform your mortgage lender

If you have a residential, rather than a buy-to-let, mortgage, you must tell your lender if someone other than you will be living there. This is because residential mortgages don’t allow you to let out your property.

You can get consent to let, but you will have to pay a fee, or be charged extra interest on top of your normal rate.

Unlike buy-to-let mortgages, consent to let agreements are time limited. This is usually for a period of 12 months, or for the length of time you have left on your fixed-term rate, so it can be useful as a stop-gap solution.

If you don’t tell your lender, there can be serious consequences as it might be seen as mortgage fraud. This means your lender could demand you repay the mortgage immediately or repossess the property. 

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Tax implications

As a landlord you need to know your Income Tax and Capital Gains Tax liabilities.

Here's an overview, with websites for more detailed information.

Income Tax

Rental income is added to any other relevant income you earn during the financial tax year.

For example, income from employment or possibly interest from savings – to calculate your tax liability.

You must declare this income on a Self Assessment tax return each year.

But you might be able to claim certain expenses to offset against your rental income and reduce your tax bill.

This includes some maintenance costs and letting agent fees, if you have a buy-to-let mortgage.

Landlords are no longer able to deduct mortgage interest from rental income to reduce the tax they pay. You’ll now receive a tax credit based on 20% of the interest element of your mortgage payments. This rule change could mean that you’ll pay a lot more in tax than you might have done before.  

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Property income allowance

 

The property income allowance means property owners can earn up to £1,000 rental income tax free each.

Basic rate taxpayers could save up to £200 and higher rate taxpayers up to £400. If you own a property jointly, for example with your partner, you can both claim the allowance.

If your rental income is £1,000 or less, you won’t have to declare or pay tax on this income.

If you earn more than £1,000 in rental income, you can deduct the allowance from your receipts. But if you claim this, you won’t be able to claim for other allowable expenses.

The property income allowance will also apply to Class 4 National insurance contributions.

You can’t use the property allowance against income from letting a room in your own home in conjunction with rent a room relief.

Capital Gains Tax

 

If you’re selling a property that isn’t your main home – including a rental property – it’s likely you’ll have to pay Capital Gains Tax on any gain (profit).

You can offset expenses of a capital nature such as replacement windows against capital gains when the property is sold.

As this might be many years later it’s important to keep records and evidence of any such expenditure.

Then when you come to sell, check with a financial adviser or accountant what you can claim back.

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Register your tenants’ deposits with a Tenancy Deposit Scheme

 

These schemes are used to protect the tenants’ deposits.

In England and Wales, you must by law put the deposits in a suitable scheme within 30 days of the date of the start of the tenancy agreement if you rent your home on an assured shorthold tenancy that started after 6 April 2007.

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What fees can you charge as a landlord?

Landlords are limited in what fees they can charge to tenants.

Refundable tenancy deposits are capped at no more than five weeks’ rent if the total rent is less than £50,000 a year, or six weeks’ if the total rent is more than £50,000 a year.

Holding deposits, used to reserve a property, are capped at one weeks’ rents.

You’re still allowed to charge fees if the tenant asks to end the tenancy early, for late rent payments and if you pass on costs for things like utilities, Council Tax and TV Licence.

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Tax rules for holiday lettings

The tax rules for full-or part-time holiday lets differ from those for private renting.

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You have many legal responsibilities to comply with as a landlord, including:

  • drawing up a legal tenancy agreement
  • safety of gas and electrical appliances you supply
  • fire safety of furniture and furnishings you supply
  • providing an Energy Performance Certificate for the property
  • protecting your tenants’ deposits in a government-approved scheme
  • checking your tenants have the right to rent your property if it’s in England.
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Rent Smart Wales

The registration and licensing scheme in Wales aims to raise awareness of the respective rights and responsibilities of:

  • agents
  • tenants
  • landlords.

If a landlord wants to manage the property themselves, they must prove they’re ‘fit and proper’ to hold a licence.

They must then take (and pass) approved training.

Alternatively, they’ll be able to appoint a licensed agent to manage the property on their behalf.

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