Accidental landlord and short term tenancy

[Degsy67]

Looking for some advice regarding short term letting of a primary residence. Apologies in advance for a long question but I’ve tried to provide relevant context and to show some things we think we’ve worked out so far.

For a variety of reasons, our adult daughter will be moving back in with us for somewhere between 6 months and 24 months. She currently has her own home with a residential mortgage. At the end of her boomerang period she’ll either be moving back into her house or potentially selling it to move elsewhere. It appears sensible to temporarily rent out her home as a short term tenancy. She has approached her mortgage lender and they are happy for her to go down this path for up to 27 months on a temporarily letting basis without any admin charges or changes to her mortgage (phew!).

This will sort of make her a ‘temporary accidental landlord’ rather than her looking to build a long term property portfolio.

We are just trying to help her get her head around the potential costs. She is planning on engaging a property agent on a fully managed basis. We know this can be expensive and agent services rarely appear to justify their fees however she is trying to keep this period as hassle free as possible and she doesn’t want the responsibility of chasing tenants for rent. She will be renting out the property as unfurnished and will put any major items of furniture in temporary storage (our garage!).

What potential costs are we missing from this list (includes some estimates I spotted in a website article):

Setup:
- Change of mortgage fee (quote: £0)
- Energy performance certificate (£65)
- Electrical Safety Inspection/Report (£199)
- Gas Safety Certificate (£45)
- Professional appliance & house cleaning
- Initial repairs to get the house suitable for rental
- Initial agent sign up fees

Ongoing:
- Increased mortgage interest charges (quote: £0)
- Income tax
- Landlord buildings insurance
- Landlord rent guarantee insurance
- Agents management fees
- Ad hoc repairs

End of Tenancy
- Professional appliance & house cleaning
- End of tenancy repairs (potentially covered via tenants deposit)
- Legal costs (hopefully not but may be required to recover any unpaid rent)

Which of these costs can be deducted when calculating income earned for income tax purposes? I know she can’t deduct her mortgage interest.

What questions would you have when discussing the process and costs with potential managing agents based on bitter experience?

Are there any capital gains tax issues to be considered if she subsequently decides to sell the property and she doesn’t reoccupy the house between the end of the final tenancy and selling the house?

I appreciate any inputs, thoughts and advice.

Degsy

[servodude]

With the uncertainty in the duration has she considered AirBnB?

[modellingman]

I know she can’t deduct her mortgage interest.

Whilst that is true, what most property journos fail to understand properly is that a tax credit is available that provides a basic rate tax credit on mortgage interest. For taxpayers whose income (including net income from property) remains below the higher rate threshold the tax credit offsets exactly the additional tax liability caused by not being able to deduct mortgage interest as an expense when calculating the rental business profit, so the effect on income tax is neutral for such taxpayers. It is higher and additional rate taxpayers, including those whose property income takes them beyond the basic rate threshold, who end up paying more tax as a result of the changes introduced by George Osborne.

For 2022-23 the land and property self-assessment form is SA105 and it is box 44 where the mortgage interest costs are entered. The tax credit gets added back in when the subsequent tax calculation is performed.

There are some limits on the tax credit. For example if the property business makes a loss it does not get applied, but any unused interest costs can be carried forward to future years. The page https://www.gov.uk/guidance/changes-to- ... se-studies provides more details.

modellingman

[Degsy67]

With the uncertainty in the duration has she considered AirBnB?

Yes it was considered but the area she lives in doesn’t feel like AirBnB would be appropriate and could lead to more voids with a higher level of uncertainty for her. Your comment is appreciated however.

Degsy

[monabri]

I'd advise getting an "inspection report" before a tenant starts occupancy. A 3rd party will compile a report on the condition of the property before the tenant starts. So, if the tenant does damage then you have the evidence it happened under their tenancy. You might need this to argue any case if you wish to retain a part of the deposit to cover damage. You will find that any deposit won't go far to covering costs. I'd supplement any report with your own with digital photos, with a pdf copy to the tenant.

Smoke detectors ...mandatory.
Carbon monoxide alarm...mandatory
EPC ....mandatory

Gas safety check...£45 quid is cheap! I'd budget another £20 on top.

Any electrical items supplied ( toaster, kettle) will need to be electrically tested by an electrician.

Keep ALL receipts for ANY expense. You can also look into claiming mileage allowance to visit /inspect the property.

If your daughter has any sentimental attachment to the house...that's the tricky bit. Tenants generally don't look after someone else's property- your newly installed kitchen worksurface might become a chopping board or a workbench.

What about the garden....I've never known a tenant to look after a garden..weeding, what's that!

Insist on a special term in the AST that the renter looks after the garden ( basic level) such as mowing the lawn.

Join "The Landlord's Blog" - it's free. Download the new landlords e-book and check lists.

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And the Best of British !

[MyNameIsUrl]

I think the plan to use an agent for full management is correct. I’ve been a landlord for over 20 years and still use full management. I pay 11.5% plus vat, and although it’s expensive it’s worth it to me to avoid hassle. The agents know the many legal requirements, and are used to chasing rent and organising tradesmen.

When your daughter want to move back in, the process obtaining possession is something beyond the abilities of an amateur so you must use an agent for that.

How to find a good agent though? You can call a few, but I expect as a prospective landlord you may get the red carpet treatment. Maybe you could do some ‘mystery shopping’ and call a few posing as a tenant? If you have any fiends who are landlords, obviously personal recommendations are best, but nowadays people don’t like to admit they are landlords.

Regarding costs, you seem to have a comprehensive list of headings, but I wonder if you are getting a bit lost down in the weeds with gas safety certificates at £45. It’s the repairs which can dwarf other costs and are unknown at this stage. They could be nothing, they could include major items such as replacement patio doors, and will probably include lots of minor works such as pullcords coming away from the ceiling, door handles dropping off, coat hangers falling off and so on. I wouldn’t leave a washing machine in a rental, cooker yes if built in, fridge at a pinch if built in.

Obviously flooring, especially carpets, can get heavily used. My agent works on the basis that a carpet has a life of 4 years. Obviously many of the carpets in my properties are much older than that and are totally fine, but if there is an incident which ruins the carpet, then if it’s older than 4 years the tenant pays nothing towards it replacement. If the carpets are 4 years old already, you won’t get anything for replacement if they are damaged. If your daughter does decide to move back in after a couple of years she may feel she wants to replace all the carpets at that time anyway. Let’s hope she doesn’t feel the need to replace the kitchen as well (as monabri hints).

Your daughter may or may not want to allow pets. I don’t want to say anything negative about animals or about their owners, so I’ll just say that when I’ve allowed pets the houses are frequently returned to me in a much poorer, dirtier condition than when I didn’t. However on one tenancy where pets were not allowed, the house was returned to me with a cat flap in the back door. Bear in mind you might be able to charge a little bit more for allowing pets, so you may feel it’s worth it.

Regarding tax, this is probably more simple in practice than you might think. You can read around a bit to get the principles, but if you understand the difference between capital and revenue then you’re most of the way there. Pretty much every item of cost is deductible from one or the other (the slightly special case of mortgage interest is clarified above by modellingman).

[Degsy67]

Whilst that is true, what most property journos fail to understand properly is that a tax credit is available that provides a basic rate tax credit on mortgage interest. For taxpayers whose income (including net income from property) remains below the higher rate threshold the tax credit offsets exactly the additional tax liability caused by not being able to deduct mortgage interest as an expense when calculating the rental business profit, so the effect on income tax is neutral for such taxpayers. It is higher and additional rate taxpayers, including those whose property income takes them beyond the basic rate threshold, who end up paying more tax as a result of the changes introduced by George Osborne.

Many thanks for that and the links. I’ve followed the links and had a quick read through. It talks about calculating the basic rate tax credit based on finance costs. Her loan is a repayment mortgage with a monthly charge which includes capital and interest. I’m assuming her finance costs are only the interest element of this and the capital repayment cost is excluded from the calculation. Is that correct?

To get a rough estimate of this in advance over the course of a year is it simply her outstanding mortgage at the start of the year multiplied by her interest rate (5 year fix)? I appreciate her actual interest will be a little lower than this as her outstanding capital will reduce during the course of the year and she’ll need to get the actual figures from her mortgage provider via a statement at the end of the tax year. Her mortgage still has a long time to run so I’m assuming the majority of the monthly mortgage amount is to pay the interest rather than the capital.

TIA

Degsy

[Degsy67]

Sorry, further follow on question. When I’m calculating her allowable deductions relating to costs, do I include or exclude VAT. For example, agents fees have been quoted as 8% + VAT. She won’t be registered for VAT and won’t be running this ‘business’ through a limited company.

Degsy

[Mike4]

We are just trying to help her get her head around the potential costs. She is planning on engaging a property agent on a fully managed basis. We know this can be expensive and agent services rarely appear to justify their fees however she is trying to keep this period as hassle free as possible and she doesn’t want the responsibility of chasing tenants for rent.

This bit jumps off the page at me.

In my limited experience of letting agents, they never notice missing rent. That's down to you. And yes they will perhaps send a reminder email if you pester them but you might as well do it yourself. It will be quicker.

[Gerry557]

Generally if they don't pay the rent it takes a while for the agent to inform you. You probably already know anyway as you have a missing payment.

Whilst the agent might initially attempt recovery, ie an email or phone call, if that doesn't result in positive outcome then they will put it back to you anyway to deal with.

Hopefully you are friends with a motorcycle gang

[Dod101]

I was a landlord some years back before most of the current regulations were in force and it worked well but I must say on reading all of this I wonder whether the hassle is going to be worth it for the net financial reward and the risks of tenants not looking after the family home very well? Especially if for a term of anything less than a couple of years?

There may be good reason not to want to leave the house empty but if that is the case is selling and buying later not another option?

Dod

[Mike4]

I was a landlord some years back before most of the current regulations were in force and it worked well but I must say on reading all of this I wonder whether the hassle is going to be worth it for the net financial reward and the risks of tenants not looking after the family home very well? Especially if for a term of anything less than a couple of years?

There may be good reason not to want to leave the house empty but if that is the case is selling and buying later not another option?

Dod

The frictional costs of selling up and then buying again are significant, as is the market risk of selling now into a moribund market then buying again after (hopefully) some sort of recovery.

[monabri]

Sorry, further follow on question. When I’m calculating her allowable deductions relating to costs, do I include or exclude VAT. For example, agents fees have been quoted as 8% + VAT. She won’t be registered for VAT and won’t be running this ‘business’ through a limited company.

Degsy

You claim the amount paid in full, including VAT.

[servodude]

I was a landlord some years back before most of the current regulations were in force and it worked well but I must say on reading all of this I wonder whether the hassle is going to be worth it for the net financial reward and the risks of tenants not looking after the family home very well? Especially if for a term of anything less than a couple of years?

There may be good reason not to want to leave the house empty but if that is the case is selling and buying later not another option?

Dod

The frictional costs of selling up and then buying again are significant, as is the market risk of selling now into a moribund market then buying again after (hopefully) some sort of recovery.

When would CGT kick in after it ceases to be ones primary residence?

[monabri]

The frictional costs of selling up and then buying again are significant, as is the market risk of selling now into a moribund market then buying again after (hopefully) some sort of recovery.

When would CGT kick in after it ceases to be ones primary residence?

https://www.gov.uk/tax-sell-home/let-out-part-of-home

( i see there's another stealth tax slipped in there, the reduction from 18 to 9 months ).

It is something the OP should consider.

[monabri]

House insurance. You will insure the buildings only ( not contents) but this is likely to cost more than if you were if you were living there yourself and had both buildings and contents cover.

I'd suggest getting some quotes online if possible. Even though you are only insuring for "buildings" you might find the cost to be 3x what she is paying now. You (OP) mentioned it but have you got a quote?

[DrFfybes]

When would CGT kick in after it ceases to be ones primary residence?

https://www.gov.uk/tax-sell-home/let-out-part-of-home

( i see there's another stealth tax slipped in there, the reduction from 18 to 9 months ).

It is something the OP should consider.

This seems to change on a fairly regular basis, no saying it will still be the same when the daughter finally sells, and any CGT tax will depend on how long she has lived there prior to selling.

Depending upon the property size, area, and demand, she could rent out (say) 2 bedrooms to lodgers and keep the place registered as her primary residence. Obviously she has to pay as though she is living in the property, but it would largely avoid tax implications. I had 2 lodgers in a place paying me £500 plus a share of bills, and I mainly lived elsewhere with a partner. I kept the box room as 'mine'. 2 doors up a full rental was fetching £650/month, so whilst I had to pay some bills I paid no income tax or CGT. The place was mortgage free so I would have had little to offset, but it also meant I got more control over the tenants (usually visiting students/workers at a nearby place so generally 3-6 months).

Paul

[Mike4]

https://www.gov.uk/tax-sell-home/let-out-part-of-home

( i see there's another stealth tax slipped in there, the reduction from 18 to 9 months ).

It is something the OP should consider.

This seems to change on a fairly regular basis, no saying it will still be the same when the daughter finally sells, and any CGT tax will depend on how long she has lived there prior to selling.

Depending upon the property size, area, and demand, she could rent out (say) 2 bedrooms to lodgers and keep the place registered as her primary residence. Obviously she has to pay as though she is living in the property, but it would largely avoid tax implications. I had 2 lodgers in a place paying me £500 plus a share of bills, and I mainly lived elsewhere with a partner. I kept the box room as 'mine'. 2 doors up a full rental was fetching £650/month, so whilst I had to pay some bills I paid no income tax or CGT. The place was mortgage free so I would have had little to offset, but it also meant I got more control over the tenants (usually visiting students/workers at a nearby place so generally 3-6 months).

Paul

This seems a good plan. Especially as I notice single room rents around Reading have shot up to within an ace of the price of a whole studio flat nowadays. Similar might be the case in the OP's area, in which case rent from two tenants in a room each might well add up to what the whole house would fetch as a single rental. Or something along those lines.

[mark88man]

Interesting idea, Mike4.

For me though I think OP and family want to keep this as simple as possible, and I think this may require more admin plus loss of access to professional management support for repairs ... . Although my own children's experience is that property managers are a device to cause confusion about who is responsible for fixing stuff and adding delay and difficulty to resolving valid complaints

[monabri]

This seems to change on a fairly regular basis, no saying it will still be the same when the daughter finally sells, and any CGT tax will depend on how long she has lived there prior to selling.

Depending upon the property size, area, and demand, she could rent out (say) 2 bedrooms to lodgers and keep the place registered as her primary residence. Obviously she has to pay as though she is living in the property, but it would largely avoid tax implications. I had 2 lodgers in a place paying me £500 plus a share of bills, and I mainly lived elsewhere with a partner. I kept the box room as 'mine'. 2 doors up a full rental was fetching £650/month, so whilst I had to pay some bills I paid no income tax or CGT. The place was mortgage free so I would have had little to offset, but it also meant I got more control over the tenants (usually visiting students/workers at a nearby place so generally 3-6 months).

Paul

This seems a good plan. Especially as I notice single room rents around Reading have shot up to within an ace of the price of a whole studio flat nowadays. Similar might be the case in the OP's area, in which case rent from two tenants in a room each might well add up to what the whole house would fetch as a single rental. Or something along those lines.

After earning so much under the "rent a room" scheme, what do you do about tax on the rest of the income?