Caught in the Accidental Landlord Setup? Here’s Your Next Move!

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Written by: Liez Comendador
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Approximately 30 per cent of landlords in the UK found themselves pursuing the letting business not by plan but by circumstance. These people are called “accidental landlords” who will then have to grapple their way to new responsibilities being in this position, from switching to a new mortgage set-up to dealing with tax and other legal obligations and relevant legislation. 

Property rental is a serious venture, and it’s easy for an amateur landlord to make mistakes around it as the property market and relevant renting rules in England, Scotland, Northern Ireland, and Wales are constantly changing. Whilst they have a lot to familiarise and deal with, accidental landlords can become good property investors once they learn all the ways of navigating investment properties. 

This article serves as a comprehensive landlord guide, covering all that accidental landlords need to do once they find themselves in that position—whether they plan to become a landlord for a length of time or at least temporarily—covering what exactly makes an accidental landlord, their mortgage options that will work best for their situation, tax responsibilities, legal landlord obligations, and allowances and reliefs. 

How Does One Become an Accidental Landlord?

Fifty-two per cent of landlords who purchased their first property intend to make rental income out of it, potentially made a trade union team, and have readied themselves for the tax and legal responsibilities required for the job. However, thousands of UK homeowners every year become a landlord yet did not initially plan to let for a sideline profit. They become a landlord without experience, knowledge, or guide on the next steps. 

Many cases leave a property owner no choice but to rent their homes out without originally intending to, where they become accidental landlords. In other words, they let out their homes out of necessity, not by choice. Usually, the reasons could be any of the following: 

  • Getting a job that needs them to relocate to the other areas in the UK or abroad for a certain period
  • Inheriting properties they cannot sell, such that they want to pass ownership to their baby/children
  • Moving in with a partner or moving out after a separation that renders the other home unused
  • Deciding to downsize or take on a change of lifestyle
  • Deciding to move to a bigger home, such that their family is growing, making the previous home no more suitable
buy to let mortgage

Caught in any of these situations, the next step homeowners usually take is selling their homes, and since many of them are non-professional property investors, fact is it can be very difficult, especially when it comes to finding buyers and forecasting if the local market guide and changes is good for putting up homes for sale. 

This is when they pursue renting out their homes whilst waiting for a buyer or for the local property market to have positive changes. Some remain on this path for a longer point of time after having known how much they can earn from their rented-out homes. Being able to familiarise the responsibilities and risks of this venture will serve as a crucial guide when they go on with being a landlord for the long term, or at least temporarily.

What to Do with Mortgage

One of the major problems and questions that comes to mind amongst accidental landlords is their outstanding mortgage payments and guide on what to do with it, especially since they are no more regular residential property owners but about to be full-fledged or temporary landlords. 

The first way is to inform their lender about their new situation and obtain permission so they can proceed to let their home. Failure to do so will subject the landlord to “mortgage fraud,” which has fines on its own. Landlords have three options in order to proceed, depending on the type of mortgage that they have, which are as follows: 

  • Consent to Let
  • Buy to Let Mortgage
  • Let to Buy Mortgage

Mortgage lenders are usually willing to give homeowners consent to let when they intend to put their home up for short-term letting, such that they are waiting for the right time to sell it and quickly or they will be away for six months or more (must be within a year) and plan to move back. 

Consent to let policy grants approval for new landlords to rent their home out without having to change their residential mortgage arrangement—the maximum period of which are 12 months. 

However, in other circumstances, property owners will have to consider switching to a buy to let mortgage, a longer-term solution than consent to let, which can take on a relatively straightforward process as its arrangement is almost the same as a residential mortgage, although with some differences. An example is a long-term leasehold property. 

Moving in a buy to let mortgage, the interest rates and arrangement fee are higher than the standard residential mortgages, as the former deals with more risks than the latter—they will have to depend on their tenants’ rental payments so they can pay their mortgage. 

The affordability criteria can be higher, requiring the homeowner to have a minimum salary starting from £20,000 or £25,0000. Given the risk, lenders offer a lower loan to value, keeping it generally at a minimum of 20 to 25 per cent, at a basis on how much profit their buy to let property can produce and their mortgage cost. 

Mortgage lenders will also want their rental proceeds to reach at least 125 per cent of their loan’s monthly interest payments. Homeowners should keep in mind the possibility of paying penalties when they end any existing fixed-rate deal earlier. 

Another option accidental landlords can take for their outstanding mortgage is switching to let to buy mortgage policy, the least common amongst many new landlords. This thing suits best for landlords who have adequate equity in their current home. 

Through a let to buy mortgage, homeowners can remortgage and purchase another home. They can then rent out their existing home and simply use the rental profits it generates to cover their mortgage arrangement fees.

Tax Obligations of Accidental Landlords

Having dealt with their outstanding mortgages, accidental landlords will then have to deal with the tax implications that come with letting rental properties, as well as other legal responsibilities listed in the government site, which will be discussed further below. 

Landlords have to sort their tax responsibilities first before they head onto the letting sector, given that HMRC has become even stricter on everything relevant to tax evasion, and not disclosing rental income nor paying its required tax is close to it. UK taxation authorities estimate in the government site approximately 700,000 landlords who are not disclosing their rental income. 

• What Is Let Property Campaign?

To mitigate this issue, HMRC came up with a voluntary disclosure initiative for landlords, especially the accidental kind, the opportunity to divulge their rental proceeds and sort tax matters by themselves or with the help of tax professionals or a mortgage adviser. This initiative is known as the Let Property Campaign (LPC), in which landlords can request to take part.

With HMRC’s wide source of tip-offs and relevant info, it is impossible for any non-disclosing landlords not to get caught being one. When they find out through these tip-offs about these landlords, they will be sending them nudge letters signifying an upcoming tax investigation, which may potentially result in a hefty fine.

consumer buy to let mortgage

It is best for landlords not to wait to receive a nudge letter and request to participate in LPC as early as they can, as the number of fines can be bigger when it is HMRC that makes the tax inquiry. Whereas when landlords volunteer to sort their tax affairs by themselves through LPC, they will have the chance to significantly trim any possible fines. Landlords will then be given 90 days, or up until the third month, to settle their tax bills. 

• Tax on Rental Profits

Landlords pay income tax on their rental proceeds. The taxable amount is worked out by deducting the allowable expenses from the total or gross rental revenue. For the 2022/23 tax year, the standard personal allowance is set at £12,570, which is the amount that landlords can keep for themselves without paying tax dues. Anything more than that will be subject to the same tax on investment income. 

Rental profits tax depends on which tax band the landlord’s income belongs to. For the 2022/23 tax year, they will be paying the following: 

Income Tax Band Taxable Income Income Tax Rate
Basic Rate
£12,571 to £50,270
20%
High Rate
£50,271 to £150,000
40%
Additional Rate
£150,001 and above
45%

• Reliefs That Small Landlords Can Claim

Aside from property allowance, landlords can take advantage of allowable expenses and mortgage interest reliefs, which is the most common guide on how to avoid paying tax on rental income, or at least minimise the bill. Allowable expenses are the amount “wholly and exclusively” intended for rental properties and do not include personal expenditures, such as the following list: 

  • Landlord building insurance or other landlord insurance policy
  • Property maintenance and repairs
  • Agents or management costs
  • Accountancy fee
  • Legal costs for letting
  • Redecorations between tenancies (e.g., fixtures, furnishing, fittings, etc.)
  • Cleaning and gardening services
  • Vehicle costs
  • Direct calls (e.g., phone call)
  • Mortgage interest payments
  • Purchase of things (e.g., furniture, replacement carpets, toasters, kitchenware supply, personal stationery, and others)

Landlords can also claim tax relief on their mortgage interest rates, particularly mortgage repayments at a rate of 20 per cent, regardless of which tax band their rental profit is categorised. This means that they will receive the same percentage of tax relief even when they are on a higher or additional rate tax band. 

• Registration for Self-Assessment

The taxable rental money is disclosed via self-assessments tax return. So, the first guide to paying self employed tax is registering for self-assessments, which should be by 5 October by the next tax year in which landlords earn rental income so that they avoid any penalty issues. Registering online is relatively quick and easy. 

Landlords have to also take note of the new scheme for submitting self-assessments—Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), which will be required every quarter. Expectations for the implementation of this digital scheme were supposed to be in April 2023 but postponed to April 2024. 

MTD for ITSA is intended to guide with tax-related landlord obligations so landlords would not be caught off guard by how much they owe at the end of the tax year. Though delayed, landlords will have to start familiarising this scheme as early as now to avoid issues on their tax returns in the upcoming years. 

• Financial Records to Keep for Tax Purposes

To make submitting tax returns easier, financial record-keeping is a must for landlords that includes their every detail for managing and maintaining their homes, including landlord insurance, fire safety regulations, and more. HMRC will send them notifications once their self assessment tax return is due. They will need to keep information for the following, which can also come handy when any dispute with HMRC rise: 

  • Dates of letting their home
  • Rental money received (examples: receipts, invoices, inventory, rent books, bank statements and figures, etc.)
  • Income from services provided by their tenants (e.g., repairs)
  • Allowable expenses

Landlords should keep documents of these contents and incidentals for six years or else face penalties when they become lost, incomplete, or inaccurate when their self assessment tax return is due. 

• Other Taxes to Pay

Other relevant tax responsibilities around having a property include capital gains tax (CGT) and stamp duty tax. When landlords finally sell their homes, they hold liability for CGT, as any previously rented possessions that are later on sold should be. 

accidental landlord capital gains tax

On the other hand, when they buy another property while keeping the previous one for rent, they will have to pay higher buy to let stamp duty rates on their new property, which is usually a 3% additional surcharge. 

Legal Obligations of Landlords

Landlords have their fair share of legal responsibility too, including checking their tenants’ right to rent or getting home insurance, aside from taking care of their mortgage. Here is a guide of all their legal responsibilities: 

• Right to Rent Check

Before letting someone in rental rooms for viewing and renting and signing an AST contract, landlords have to adhere to the Immigration Act of 2014, a right to rent legislation, and check if the tenant or lodger has the legal right to rent or live in the UK, regardless of whether or not they look like British citizens. Failure to comply with the right to rent law may subject the landlord to disputes, fines, law suits, or even a jail term. 

• Tenancy Deposits

Any deposit payments from someone renting intended to cover any potential damage or loss to the landlord’s property should be kept in a government-backed deposit protection (TDP) scheme within 30 days, which the other parties can get back in case they meet the tenancy agreement, did not damage the property, and have paid their rent and bills in full. Landlords can use any of the following: 

  • Deposit Protection Service
  • MyDeposits
  • Tenancy Deposit Scheme

• Safety Inspections, Landlord Insurance, and Certificates Requirement

Landlords will be responsible for making sure that their property’s condition is secure for everyone too, provide proof for the landlord liability insurance and licenses coming from a legitimate provider or insurer, and give a copy of property inspections and home emergency cover proof to the tenants, which include the following: 

  • Gas safety inspections. This ensures that annual gas safe inspections are done on gas appliances by a gas safety registered engineer. The visitor engineer will provide the CP12 state license to prove any combustion appliance is gas safe. 
  • Energy performance certificate. EPC pass grade rating of at least an E is required, except if the landlord is eligible for certain exemptions. The energy performance certificate rating serves as the insurer of the overall energy efficiency of the property. 
  • Electrical safety. Aside from the energy performance certificates, landlords are required to have a full electricity safety inspection in every section to see if there is any fault in heating, pipes, smoke alarm, and other equipment as well as check any potential for floods that would endanger wirings. Property inspections should be done at the start of the tenancy and every after five years. 
  • Fire safety. There is no certificate needed for this, but landlords have to make sure that there are functional carbon monoxide alarms or carbon monoxide monitor for each floor (at least one), all furniture should meet the fire safety regulations with a functional smoke alarm in every room, and provide home emergency cover for any combustion appliance and other precautionary measures. 
  • Legionella risk assessment. This is carried out by the Control of Substances Hazardous to Health Regulations that check every area of the property. 
  • Landlord insurance. Landlords are not legally obliged to get a landlord insurance policy, but most of the time, standard home insurance will not cover rental ventures. Most lenders only allow property owners to rent their homes once they have landlord insurance. There are different kinds of landlord insurance they can choose from, including landlord liability insurance, contents insurance, and buy-to-let landlord insurance 

• Licensing Schemes

House in multiple occupation HMO has their own licensing requirement. Selective landlord licensing schemes permits apply, so it is best for landlords to ask their local council first, especially in Northern Ireland, to make sure which types of licenses they will need, their pass grade, and how much they will pay for it according to their location. 

How Legend Financial Can Help

A sudden surge of tax and legal responsibilities can be very overwhelming for an accidental landlord, especially since they are most likely not prepared for the task—only caught up in the situation by necessity and circumstance. But renting out your property in the UK comes with a promising reward once you know what you ought to do. 

Whilst in the beginner phase, it’s best to partner with a letting agency or tax expert so you can be renting out your property on the right terms. Legend Financial is here to provide comprehensive guidance to help you understand your role better as a new landlord and do the complex tasks on your behalf. Reach us today!

References

Becoming an accidental landlord. (n.d.). Retrieved from HomeOwners Alliance: https://hoa.org.uk/advice/guides-for-homeowners/i-am-selling/becoming-accidental-landlord/

What is an Accidental Landlord? (n.d.). Retrieved from Mortgage Advice Bureau: https://www.mortgageadvicebureau.com/mortgage-advisers/tombland-norwich/latest-news/what-is-an-accidental-landlord

What to do when you become an accidental landlord. (n.d.). Retrieved from Online Mortgage Advisor: https://www.onlinemortgageadvisor.co.uk/blog/accidental-landlord/

THE TAX IMPLICATIONS OF BECOMING AN ACCIDENTAL LANDLORD. (n.d.). Retrieved from GO simple tax: https://www.gosimpletax.com/blog/tax-implications-accidental-landlord/

I’m An Accidental Landlord, What Do I Need To Do? (n.d.). Retrieved from Pettyson: https://www.pettyson.co.uk/about-us/our-blog/259-accidental-landlord-what-do-i-need-to-do

Accidental landlords – don’t get caught out by the income tax trap. (n.d.). Retrieved from Property Wire: https://www.propertywire.com/finance/accidental-landlords-dont-get-caught-out-by-the-income-tax-trap/

What To Do When You Become An Accidental Landlord. (n.d.). Retrieved from Progressive Lets: https://www.progressivelets.co.uk/landlords/accidental-landlord/

Advice for accidental landlords. (18 March 2022). Retrieved from Alan Boswell Group: https://www.alanboswell.com/news/accidental-landlord/

WHAT TO DO WHEN YOU BECOME AN ACCIDENTAL LANDLORD IN THE UK. (20 July 2020). Retrieved from Property Division: https://propertydivision.co.uk/accidental-landlord/

The tax implications for accidental landlords. (5 April 2022). Retrieved from Together: https://togethermoney.com/blog/the-tax-implications-for-accidental-landlords

English Private Landlord Survey 2021: main report. (26 May 2022). Retrieved from Gov.UK: https://www.gov.uk/government/statistics/english-private-landlord-survey-2021-main-report/english-private-landlord-survey-2021-main-report–2

Author

  • Junaid Usman

    Apart from being a partner at Legend Financial, Junaid is an expert on Business Tax including business management advisory services which has proven in the growth of company. He is a promising advisor with an ideology; "Any business success depends on the level of objectivity it maintains."

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Picture of Junaid Usman
Junaid Usman
Apart from being a partner at Legend Financial, Junaid is an expert on Business Tax including business management advisory services which has proven in the growth of company. He is a promising advisor with an ideology; "Any business success depends on the level of objectivity it maintains."

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