Soon to be 1st time private landlord

[Sabbatical]

Hi there

I am new to this site so please excuse my many questions!!

I am taking a sabbatical from work and going travelling for a year. While away I plan to rent out my 2 bed house furnished to friends of best friend's brother. I have found this site invaluable for sourcing information and forms etc.

I was initially going to go through a letting agent and get them to find a tenant and manage it for me. However I am sick to the back teeth of the numbers game they seem to be playing and the unsuitable tenants that don't meet my requirements. This is despite being with more than one agent. Therefore am contemplating doing it myself. My relatives will manage it on my behalf while I'm away.

So here we go with the questions:

1. What are the tax implications? Will I need to complete a NRL1 before I go? Will I need to complete a tax return when I get back?

2. Am planning on renting to two girls who are friends. Am a I better off asking them to sign a joint tenancy agreement or have two seperate ones?

3. Landlords obligations: As well as the gas safety certificate am I required to have an electrical certificate?

4. Tenants credit checks: Is it advisable to use one of the companies that advertise on this site? Or can I do it myself using companies like Experian or Equifax?

5. I am looking to rent out my place for a year. With regards to tenancy agreement do I go for a 12 month fixed term contract with 2 months notice? Or 12 months with a 6 month break clause, bit confused how this actually works in practice?

I greatly appreciate any advice than can be provided. I travel in 3 weeks time so have got a lot to sort out in very little time!!

[Reg]

From my experience, letting to friends and family is not always a great idea.

(many buy-to-let mortgage lenders specify in their mortgage conditions that letting to friends/family is forbidden).

I personally have let a room to a friend's brother (he knocked me for one month's rent when he vacated) making out that someone else had been sleeping in his room, which was absolute troddle. I tried to press his brother (my friend) and the whole situation started to get awkward, I had to drop it otherwise a friendship would have been lost.

In the past I have also let a room to my kid brother. He used to regularly say he was skint, in the end he was practically paying no rent at all.

What can you say without causing long-term regret, nothing, you just have to grin and bare it.

It's too easy for friends and family to advantage of your good nature.

If you do let to friends, try and be as formal as you can from the start, lay down a few rules. I would get each friend to sign a seperate tenancy agreement (downlaoable from this website).

I would definately get some money up front, I specify at least the monthly rent paid in advance, and some sort of deposit. Make an excuse up if you need to, but get some money b4 you hand over the keys!

I personally vet tenants myself through www.letsure.co.uk. I don't personally trust letting agents as an old friend of my who I met up with the other week over a beer, told me he had just moved into a flat (through a letting agent) and couldn't believe how he had, because he had a CCJ and had left his previous residency owing £2k, in a nutshell, the letting agent had taken the money to reference him and had pocketed the money without checking his reference!

You do not need an electrical certificate but you need a gas certificate.

Regarding tax, if you do not usually fill in a yearly tax return and you are letting to friends, the chances of the inland revenue finding out is tiny. So I personally wouldn't notify the inland revenue.

I wouldn't notify your mortgage lender either.

But I WOULD make sure the insurance is valid for tenants (your friends will technically be tenants), otherwise change your insurance to cover tenants, this is important 'cause if the worse happened and you haven't upgraded your insurance you would be stuffed.

Not totally sure which agreement would be best, I would peronally set-up a 6 month tenancy agreement, this comes with an automatic 2 month notice period and rolls on after 6 month indefinately.

[plym77]

Hi Sabbatical

Just for your information, I am a Chartered Tax Adviser and property tax specialist - I provide free general advice on this forum on behalf of my firm - Horwath Clark Whitehill LLP.

I note what Reg has said and most of his advice is very wise, but would absolutely disagree with not alerting H M Revenue and Customs! They have ways and means of find things out - access to your bank account transactions, the fact that your tenants will probably have correspondence going to the address, council tax will be due by them etc etc - it isnt worth it as if you are found out, it is fraud and is a criminal offense. At best you would get off with interest and penalties.

For the sake of probably a minimal amount of tax - obviously depending on what the rental income will be, less mortgage interest, wear and tear allowance, buildings and contents etc - and if you are travelling you will not be earning probably - meaning your personal allowance would be avaiable also - it just isn't worth trying to pull a fast one - why risk paying extra charges when in reality the tax may not be very much?

As far as a tax return - yes, you will need to prepare one for each tax year (6/4 to 5/4 next) in which the property is rented out. You will need to inform HMRC by 6 October following the end of the tax year in which you first rent the property our - ie. rent first in March 2007, inform 6/10/07, rent first in May 2007, inform by 6/10/08.

For Capital Gains Tax Purposes, as long as you return to the property as your main residence within 3 years of leaving it, the period will retain PPR exemption, thus no CGT is due - incidently, if you rent a property out that was once your PPR, then on sale you would also be entitled to Lettings Relief (a maximum of £40k per owner - for example husband and wife at sale - depending on a number of factors), so even if you didnt return to the property prior to sale, then you would be entitled to the last three years of ownership as deemed PPR (ie. exempt), Lettings Relief, probably Taper Relief, possibly indexation, and an Annual CGT exemption (again for each owner - providing it hadnt already been used in the tax year on other chargeable disposals), so in reality, the tax may be minimal - obviously depending on how much profit you make!!

So in summary - declare it - don't take this risk when the benefit is so minimal!!

I hope this helps

Kind regards

Sherena Glanton CTA

[Reg]

My Uncle let his house out for six months to a friend of his, he got him to sign a tenancy agreement and changed his home insurance to cover his friend (tenant). He let it out on the understanding that his friend wouldn't technically be living there whilst he was away. My uncle left the council tax under his own name. His friend paid him a month of rent and a months in advance (in cash). The remaining 4 months was paid monthly in cash into his bank account.

I know this isn't full proof, but you have to admit he would have been extremly unlucky to have been found out?

[GPEL]

Do find out your mortgage companies terms and notify them, it's not worth the risk. Put all tenants on the same tenancy agreement with joint & several liability - it makes it more binding. You will also need to notify them of someone in the UK to call if there are problems. Who will handle repairs in your absence. Don't forget to include section 48 contact details on the agreement or they technically don't owe you rent. If your permanent residence is overseas you will need to complete an NRL form.

[plym77]

I appreciate what you are saying Reg, but it just isn't worth it - particularly in view of the savings involved

Even a risk taker would surely weigh up the pros and cons and if the tax payable is minimal - is it worth it??

Your uncle broke the law and was lucky to get away with it - but I have more than once seen landlords caught out and in one case the interest and penalties - even after mitigation were on par with the tax payable in the first place, meaning that the landlord in question paid almost twice as much in the end for trying to save a few quid - incidentally, he wasnt founf out until the property was sold.... so just because someone 'gets away with it' in the short term.... doesn't mean they have necessarily got off scott free!

I am not trying to 'police' but offer my experience. At the end of the day evasion is a criminal offense.... a landlord should be smart with his expenses and structure of the investment and declare - rather than evade.

With regard to form NRL1 - it should be completed by a landlord whose normal place of abode is outside the UK - however, 'normal place of abode' includes individuals who are outside of the UK for more than 6 months - so is a different test to 'residence' entirely - you could still be deemed a UK resident, but if you are out of the country for more than 6 months then ensure form NRL1 is completed so that your receive the whole of the rental income - not net of tax.

Regards

Sherena

[Reg]

Fair comment Sherena, each to their own.

[odecar]

There are 2 issues here

1.) that you are travelling and getting your house looked after

2.) renting out a property.

If you intend to return to the property and live there then letting to trusted friends after doing the check is a potentially good idea just as long as you are aware that if there is damage done it could mean end of friendship. Its a house sit where you can cover your costs.

The renting out is smaller issue as you will return but just make sure you do it above board as if anything happens then your insurance company could walk away if not properly informed.

[Sabbatical]

Hi there

Thanks for all your helpful responses. I am a little bit more clearer. The two girls that I will be renting my house to are friends of my best friend's brother not actually my friends. They go to the same Kingdom Hall as they Jehovah Witness.

Ok so here goes my list of what needs doing or have done:

- carry out tent reference checks on both tenants using either AMI or Clarity

- Ask for a rent guarantor

- Sign them up to a joint tenancy agreement for 12 months. Can someone explain what a section 48 is?

- Take out landlord rent guarantee insurance

- My mortgage company are willing to consent me to let for 12 month but state the AST must include a 'break clause'. I am still not quite sure what this means. Any further advice would be gratefully recieved.

- My insurance company are willing to amend my cover accordingly

- I will complete a NR1 and P85

- I have a CP12 in place. The gasman discovering a leak on the supply pipe to the cooker. £180 and a new suppy pipe later I have a CP12!!!

-Decided to get a electrical certificate. Turns out there was no earth to the light switches. My fancy brass fittings could have acted as a conductor!! Also some of the sockets were polarized the wrong way £930 later my house is as safe as houses!!

- Still determined to do this myself without a letting agent.....maybe I'm mad??!!

- My sister will look after things for me while I'm away. She will be able to contact me if required.

- I fly out on the 9 May. With the tenants moving in on 7 may. Is it feasible to get everything sorted in time?

- Is there anything vitally important I have forgotten??!!

[plym77]

1. make sure you register for self assessment by 6 October 2008, and your tax return will need to be prepared and submitted by the due filing deadline, which if you submit online, will be 31 January 2008, reporting all income for the tax year ended 5 April 2008 (as I assume you havent started to rent the property yet.

2. Enjoy your travelling!!

Regards

Sherena