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Help! I'm an accidental property owner

Ellie Duncan

deputy content plus editor at FTAdviser

Many people who inherit a property and rent it out may not realise they fall under HMRC rules with regard to buy-to-let. How can advisers help the 'accidental' landlord?

The death of a family member or loved one is a traumatic and upsetting time.

For many people, it can often mean inheriting either a sum of money or, in some cases, a property.

Becoming an accidental property owner may sound like something that only happens to other people but it is a situation anyone can find themselves in.

The decision about whether to keep the property on as a rental is an important and often emotional one to make.

It can be the first time many people will have owned a property other than their main residence, and becoming a landlord does mean falling under HM Revenue & Customs rules.

Donna Hopton, director at Cherry, notes: “Perhaps surprisingly, so-called accidental landlords represent a large proportion of the overall community.”

Eyes wide open

She points out that whatever the reason for becoming an accidental landlord, it often means that “a new, potentially naïve, landlord joins what is essentially a complex industry with equally complex issues and regulations.

“The buyer who keeps their main residence generally does this with their eyes open and tends to know what they are getting into, albeit they may have a somewhat simplistic viewpoint.

The inheritor is thrust into the industry, possibly unexpectedly, but with the thought they have hit upon a money maker. These people need the most help - Donna Hopton, Cherry

Whatever their ages, Ms Hopton adds many of these people may have little experience of the property market beyond owning their own residence, and most of them will never have had tenants or the responsibilities that these bring.

While the accidental property owner may not have intended to become a landlord and does not plan to add to their buy-to-let property portfolio, they will still be subject to many of the taxes and other costs that those with a much larger BTL portfolio are.

Liz Syms, chief executive at Connect Mortgages, explains: “Anyone who is looking to move home and decides to keep their existing property and let it out does need to understand they are in effect setting up a BTL business, even if they have no intention of holding other BTL properties.

“As with any business, they need to register with HMRC, keep records of income and expenses and submit these to the revenue, paying any tax that is due.”

She advises these people should also look to consider how they will manage the properties and how they will deal with difficult issues such as tenant problems or rental voids.

“They need to consider that they will still have a mortgage to pay on the property as well as their new residential home, even if they do not have a tenant”, Ms Syms adds.

Avoiding property pitfalls

With so much to navigate, alongside the ongoing emotional impact of inheriting a property from a recently deceased family member, seeking the right advice will be essential.

On top of this, a number of reforms to the BTL market have created new pitfalls, which might be easy for those not familiar with the market to fall into.

As Charles McDowell, commercial director, mortgages at Aldermore, acknowledges: “There have certainly been a number of huge changes in the buy-to-let market in recent times, making it far less attractive for ‘new’ landlords - whether they are accidental or not.”

Anyone inheriting a property, whether they are familiar with the BTL market or not, should seek financial help and advice.

“Most advisers have experience in the buy-to-let market and, as a result, they have accumulated a vast amount of knowledge in this area - knowledge that can help clients avoid the many potential pitfalls,” Ms Hopton points out.

“Hopefully, they can direct the client on the tax implications of rental income over and above their main earnings, although advisers who don’t have a very thorough and up-to-date knowledge of tax issues should take great care not to leave themselves and their clients vulnerable.”

Understanding the tax implications of owning a BTL property are important, as failure to pay the correct taxes on a property could result in large penalties from HMRC.

While not all financial advisers and mortgage brokers are tax experts, as such, they can give guidance and maybe even put their client in contact with a specialist tax adviser.

David Hollingworth, associate director communications at London & Country Mortgages, points out: “Although mortgage brokers shouldn’t assume the role of a tax adviser, being able to flag tax issues will be helpful to their clients.

“For example, some simple information online could help to point out the issues they need to consider.”

Armed with advice

Mr McDowell believes advisers with clients who are landlords by chance and not design, can help them to avoid the main pitfalls by doing the following:

  • Making sure your client has the right mortgage – many accidental landlords are unaware of the difference between a residential mortgage and a buy-to-let one and it is important they have the appropriate product so that they do not breach their mortgage terms and conditions.
  • Ensuring they seek advice from a tax adviser or an accountant – generating income from a rental property needs to be declared and HMRC has a current focus on landlords who fail to declare the right amount of income.
  • Understanding the market – investment advice is not the role of a mortgage adviser. However, it is important that brokers understand the private rental sector. This will improve and deepen client connections and ultimately lead to longer and more fruitful relationships. There have been a number of significant changes recently and accidental landlords will look to brokers for their knowledge and experience.
  • Ensuring they’re insured – while it is the landlord’s responsibility to make sure they have the appropriate cover, information you can share with them about the types of insurance will undoubtedly help.
  • Making sure they understand that they get what they pay for – cutting costs always seems like the right thing for any enterprise. However, ensuring they have the right advisers and agencies in place will benefit them in the long term.

Accidental landlords who do seek the right financial, mortgage and tax advice are more likely to be able to reap the rewards of owning and renting their property, and enjoy their new-found landlord status.

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Ellie Duncan

deputy content plus editor at FTAdviser