Whoops! You’ve accidentally become a landlord – here’s what you need to know

As house prices begin to drop – and with more price falls forecast – estate agents have reported a rise in “accidental” landlords.

Over the past few years, the sales market has been strong. But in recent months, activity has begun to slow while rent has continued to soar.

Fearing that they won’t get the price they want, homeowners are holding on to their properties and renting them out until they can sell it at their desired price. In the meantime, they are renting in the area they need to move to.

Gary Hall, head of lettings at agent Knight Frank, said: “If they bought the property in the past five years, it might be that the value hasn’t grown enough or that rising mortgage costs have eaten into that value.

“Rent is so high and demand is so strong. The risk of not having a tenant in a rental property is at its lowest in ten years.”

There are two parts to the rental market. The mass market, where rent of up to £1,000 a week is charged, and the prime market where far higher rents can be commanded by landlords.

Mr Hall said he is seeing a particular rise in accidental landlords across the prime market, largely because these homeowners are able to keep a hang on to their properties and hold out for the best price.

Other accidental landlords are created by couples moving into a shared property and renting out the other, or the death of a parent or grandparent who passed on a property in their will.

The average tenancy length is now 22 months, giving new landlords nearly two years for values to recover before they reassess the market.

So, what do you need to know if you become an accidental landlord?

Understand the tax implications

When you become a landlord, you can lose certain tax benefits – stamp duty relief being one.

Buying a second home usually comes with an additional 3 percentage point stamp duty “surcharge”.

If you do become a landlord, then you will have to pay income tax on the profits (less a 20pc tax credit offset against costs) as well as capital gains tax.

When you come to sell the rental property, you will be liable for capital gains tax on the profit you make from the sale because it is no longer your main residence. For basic-rate taxpayers, it is 18pc. For higher-rate taxpayers, it is 28pc.

Weigh up the pros and cons of incorporation

An increasing number of landlords have been switching ownership to limited companies. They allow landlords to shelter their properties as separate legal entities and give access to more tax relief on mortgage costs. This used to be the case for properties held by individuals by has been gradually cut back.

Company structures allow landlords to:

• Pay corporation tax, rather than income tax, which is levied at a rate of 19pc, compared with the 20pc, 40pc or 45pc income tax bands.
• Deduct mortgage interest from their profits as a legitimate cost. Since 2017, landlords without limited companies have not been able to claim mortgage interest relief.
• Pay themselves a mix of salary and dividends. Dividends are taxed at 8.5pc, 33.75pc and 39.35pc depending on your income tax band.

But there are downsides, too. Landlords must pay stamp duty and capital gains tax on existing properties they transfer in, as this move is classed as a sale for tax purposes.

Corporate mortgages are also typically more expensive, charged at higher interest rates, than those for individuals.

If you have one property it is probably not worth incorporating, but if you are planning on growing your buy-to-let portfolio you should consider it.

Keep investing in the property

Knight Frank’s Mr Hall said those who suddenly become landlords should not forget about investing in their first rental property.

He explained: “Well-maintained properties will hold their value or grow over time.”

Dressing up a kitchen with a new worktop, floor and cabinet doors costs around £4,000, according to the HomeOwners Alliance, an advice group.

In return, this investment could add £17,000 to the value of a London property and £15,000 to one in Cambridgeshire, it said.

Retrofitting your property can help too, bringing its energy performance rating up and helping your tenants – or future buyers – save on bills.

Small but effective changes could include replacing doors’ seals to keep in the heat, adding fibreglass insulation in the roof, and replacing old extractor fans in the bathrooms with newer versions which have small flaps that close when the fan isn’t in use to save on heat loss.

Protect the deposit – or you could lose thousands

Jessica Parry, a partner at law firm Bryan Cave Leighton Paisner, said one of the biggest potential slip-ups for new landlords is the risk of not protecting a deposit properly.

This, she said, can lead to a compensation claim for up to three times the deposit.

Ms Parry explained: “Landlords cannot use the Section 21 ‘no fault’ eviction process, which enables them to terminate a tenancy without specifying any particular reason, if they have not protected the deposit in a deposit protection scheme.

“Landlords also need to make sure they provide certain information or have certain documents at the outset of the tenancy, if they want the ability to evict under the Section 21 notice procedure later on.

“Sometimes we are asked to serve Section 21 eviction notices, but without the paper trail showing these documents were provided, the court won’t provide the possession order.”

A landlord cannot use a Section 21 notice if they have not given the tenant copies of the following:

• The Energy Performance Certificate
• The Government’s ‘How to Rent’ guide
• A current gas safety certificate

Set out clear terms

Becoming an accidental landlord can be a product of unexpected family situations.

This can lead to issues where there is an implied agreement, but the precise terms are uncertain.

Ms Parry recalls one scenario where a property owner had let to their daughter-in-law for a number of years rent-free. An implied family licence had arisen. As there were no terms in writing, it was arguably implied that she could stay at the property until the children left school or education and that she was entitled to a long notice period.

But the owner had assumed they could evict her whenever they wanted, which led to a legal dispute.

In another instance, a couple had let their home out to three students while they were away travelling. One tenant sublet to a third party who refused to leave when they came back.

She explained: “They didn’t give the occupier a formal or sufficient eviction notice, before changing the locks, and the occupier sued them for unlawful eviction. She was legally entitled to do that.”

Residential occupiers generally have the right to four weeks’ notice under the Protection from Eviction Act, even where they are not a direct tenant.

Ms Parry said this particular dispute cost the couple thousands of pounds in legal fees and settlement sums, as well as a significant amount of stress, which could have been avoided if they had given a formal eviction notice.

She concluded: “Agree terms in writing at the outset even if it’s a family or friend situation. Ideally, a formal tenancy. But if nothing else, at least have an email chain showing the key terms agreed at the outset, so that everyone knows where they stand.”

Be ready for new renters’ rights

Later this year, the Government will introduce the Renters Reform Bill. It was introduced to Parliament in May, and proposes an overhaul of the private rental sector to boost tenants’ rights.

The Bill still needs to be debated in Parliament, and is likely to be amended before it becomes law. But it will fundamentally change how landlords can operate.

For new or temporary landlords, the impending law changes are especially important because they affect tenancy length and the ability to regain possession.

This article was first published on July 26 2023 and has since been updated.