Whilst becoming a landlord is nothing out of the ordinary, not everyone who has a property to rent out is in that position because of purchasing a second property on a buy-to-let mortgage.
One reason is that several homeowners are opting to rent out their own homes (which they have purchased) in order to rent somewhere else for themselves. In London particularly, the driving force behind this decision is high property prices in desirable areas and the expense that buying and selling a property incurs, especially stamp duty. The lack of affordability of upscaling the size of their home is causing many homeowners to use the rental income from their existing home to rent somewhere bigger elsewhere.
The other is when people inherit a property as a result of a family bereavement. While some may choose to sell the inherited property on, there is the option to earn additional income – and add to your pension pot – by renting the property out.
Whilst the former group will have a made a conscious decision to become a landlord ahead of vacating and letting out their property, the latter are often unprepared, and it can be the first time they will have owned a property other than their main residence.
Nathan Mead-Wellings, Director at Finura, comments: “Whilst inheriting a property will generally be viewed as a positive position to be in, many inheritors may not realise that they fall under HMRC rules with regard to buy-to let. Recent changes in buy-to-let legislation have meant that being a landlord has become a much more complex tax issue and those who are not experienced in multiple home ownership could be caught out.
“While those who have become accidental property owners may not have intended to become a landlord, and have no intention of building on their portfolio, they will still be subject to many of the same taxes and other costs that those with larger property portfolios have to pay. You could also be liable for inheritance tax too. Failure to pay the correct taxes on a property could result in large penalties from HMRC.”
Whether an accidental landlord through inheritance or opting to rent out your home rather than sell and move, there are a number of facts to consider.
1. Make sure you have the right mortgage – there is a key difference between residential and buy-to-let mortgages and it’s important to check that you have an appropriate product so as not to breach your mortgage terms and conditions. Some lenders will give permission for you to rent your property out (usually subject to a small admin fee), even if you have a residential mortgage.
2. Seek advice from an adviser or accountant – generating rental income will incur new tax implications which need to be declared to HMRC.
3. Be insured – while specific landlord insurance isn’t a legal requirement, many standard policies won’t cover all the risks you may face as a landlord such as missed rental payments, damage to possessions by a third party and if the tenant makes a claim against you.
4. Consider how you will manage the property – whilst using an agency will incur additional costs, they will have experience in dealing with tenants and also have links with contractors who can rectify any maintenance issues that arise. If you don’t live near to the property, an agent could prove particularly useful.
If you have inherited a property or are thinking of renting out your own to move into rented property yourself, and need some advice, please contact your Finura Partners adviser.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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