Even with HMRC’s new unsavoury tax reforms for landlords, such as increased buy-to-let stamp duty tax, income tax relief restrictions, and capital gains tax changes, the number of landlords in the UK kept climbing. Currently, there are 2.6 million landlords of all types in the British rental market, which means a 2.4 per cent increase in the last three to four years.
Just as there are a lot of types of property rental, landlords come in different terms too, from professional landlords who know exactly what they are dealing with to accidental landlords who might not have the slightest idea what to do next once they decide to rent out their unused property. Exactly what type of landlord are you? This article will guide you to what the different types of landlords are, or if you are yet planning to be one, which type will fit best for you.
In the UK private rented market, approximately 14 per cent are professional landlords. These types of landlords consider their letting venture as a serious full-time business and their major source of income, and thus, invest a lot of time and money in it.
They have a structured business plan and consider their properties as their products and occupants as customers. Moreover, they are well-familiar with relevant tax and legal obligations that landlords are fraught with, even using software to streamline their business processes, stay tax compliant, store and track data, and more, which is why they are more able to provide their tenants with better rental experience and protection and attract good tenants.
Some professional landlords manage their business alone or employ a team to take care of rental-related matters, such as maintenance and tenancy paperwork. Usually, they have Houses in Multiple Occupation in their rental portfolio. However, given the heavier tax obligations for landlords, many professional landlords start to transfer their portfolios into partnerships or limited companies.
Being a professional landlord will suit you when you earn sufficient rental income from your property to continue operating the business in a larger term. Professional landlords, given their specialty knowledge in the field, are more compliant with government regulations; hence, avoiding any penalties. They are usually the first who take part in the Let Property Campaign as possible, which is voluntary disclosure of rental income, knowing the possible penalties that HMRC might impose on them if the latter were to do tax investigation themselves.
In full contrast to professional landlords, accidental landlord often come unprepared for their new responsibilities. They became landlords not on purpose but because of circumstances that put them in a position to rent their property out. They make up 28 per cent of the private rented sector, and thousands of them are added to this category annually.
Usually, accidental landlords become one when they move in with their partner, inherit a property which they can’t sell for legacy purposes, move to another city or outside the UK for work, need an upsized or downsized home, etc., which renders their former homes unused. The most viable next step to take for their property is usually letting, especially when the market is not yet good for putting their property up for sale or they have trouble looking for a buyer.
Especially to have funds for paying their mortgage, they continue the letting venture. Accidental landlords often need the help of estate or tax experts so they can face their legal and tax obligations as new landlords on the right terms.
These landlords are usually first- or second-time property investors and have at least one or two properties in their portfolio. They make up approximately 42 per cent of the private rented sector. Specific areas in the UK, such as Leicester, Liverpool, and Glasgow, have higher potential, with rental profits as high as 8 per cent. The rest are as usually just around 3 per cent.
Buy-to-let landlords usually buy new apartments or typical rental properties such as those with one or two beds, and of course, make sure the location has an averagely good rental yield, most often between 4.5 per cent to 6 per cent. This setup can be risky when you plan to depend on its income for daily living expenses, given the changes in the tax system, and you can no longer receive the 40% tax relief on your mortgage payments.
The most common reason people opt for buy-to-let setup is for retirement purposes, usually taking thousands of pounds from their pension pot to do so. Buy to let is best for you when you intend to make it your source of income for retirement.
This category only takes up 2 per cent in the private rented sector. Let-to-buy landlords are usually those who rent their existing home and buy a new one to move in, which means they have two mortgages to pay. If you have enough equity for your home, this option is best for you since you can move to a new home whilst keeping your existing property for long-term investment.
Somehow, they can also fall under the category of accidental landlord, being in the difficult position of selling their property due to poor market conditions, or transferring elsewhere for a fixed time but planning to move back in the future years, or moving in with a partner in a new home they both bought but want to maintain ownership of their existing home.
The difference between buy to let and let to buy is that the latter is specifically bought for the sole purpose of renting it out, whilst the former is about buying a new property to live in and so, just rent the former home.
These landlords make up 8 per cent of the private rented sector. This might be a good option for you when you are travelling out of the country for a holiday or an overseas adventure between one week to six months. For this, you apply your property under the category of the furnished holiday let and so, will have to take the occupancy tests and strive to meet the criteria.
Whether you are a new or long-time landlord already, it’s best you work with tax professionals, so you get your legal and tax obligations straight. Reach Legend Financial today. We are here to help you with all the complex matters regarding property investment and taxes.