Accidental landlord: Capital gains tax, income tax, stamp duty & more

Property investors, for the most part, likely consciously move into the buy-to-let market. But it’s not unheard of for homeowners to end up becoming “accidental” landlords.

In fact, in recent years, this type of landlords have become an important part of the buy-to-let scene. Where demand drops, some property investors have little choice but to generate rental income from their existing assets. As opposed to selling them on.

You yourself may be an accidental landlord, or worry that you’ll become one without knowing what it all entails. To help you avoid any nasty surprises, this blog will break down the key details you need to know including accidiental landlord capital gains tax, income tax, insurance and more.

What is an accidental landlord?

Generally, this is someone who owns a property that they let out as a result of unexpected circumstances. Rather than because they planned to become a landlord.

While this may sound like an unlikely scenario, accidental landlords may make up as much as 29% of all landlords across the UK. This number could rise even further over the coming months.

Of all the properties new to the lettings market in early 2023, 3.7% were listed because their owners couldn’t sell them, according to Hamptons. This was higher than the percentages seen in both 2021 and 2022.

This equates to around 34,000 more properties available to rent from accidental landlords than last year. What’s more, these landlords have become a crucial element of the private rented sector (PRS).

If amateur or accidental landlords were to leave the PRS, due to changing legislation or an unfavourable market, there would be 383,600 fewer homes to rent. Or, from another perspective, £223.5bn in value would be wiped from the market.

Source: Mortgage Advice Bureau, Online Mortgage Advisor, The Times, Property 118

How do people become accidental landlords?

There are many reasons why this might happen. Especially in the current market. Homeowners may not be able to sell their properties to other buyers, and so may have no option but to rent them out instead.

They may also end up becoming accidental landlords following a separation. Many people could inherit a property, which they can then rent out if it proves too difficult to sell.

Shifting working habits can also play a part. Homeowners may need to relocate for a long period of time. While they’re away, they could end up renting out their main residence until they return.

Some of these scenarios may sound familiar to you. They may even come upon you without warning. But regardless of whether you’re expecting to move into the buy-to-let market or not, you should at least be prepared for the possibility.

Source: The Telegraph

Do I need to change my mortgage, and what about accidental landlord taxes?

While becoming a landlord brings with it several new rules and commitments, your chief concern will likely involve your mortgage set up. If you’re on the verge of becoming an accidental landlord, you’ll want to speak with an expert mortgage advisor.

This is because you’ll need to tell your lender about your changing circumstances to get approval to rent out the property. There’s two main ways to go about this. You could obtain a “consent-to-let-agreement” from your lender, which will allow you to rent out your property without needing to formally change your mortgage. These agreements are ideal for short-term plans.

Or, you could switch to a buy-to-let mortgage. This may be the likelier option and fortunately, optionality is on the rise in the market. The number of available buy-to-let mortgages has bounced back to pre-mini-Budget levels.

If you’ve become an accidental landlord, tax changes will likely be your main concern. Landlords face many unique tax obligations, which can catch you off guard. Tax rules for any investment will always be complicated. The fact that the government can tweak the rules as it sees fit doesn’t help.

To fully be on top of what you owe the state as a landlord, it’s probably best to seek out expert guidance from accountants and other professionals. But, there are a few key levies you can get ahead of.

Source: This is Money, Mortgage Advice Bureau

Income tax

Accidental landlords will be liable to pay tax on the rental income they generate. You will need to pay this through a self-assessment, which you need to submit to HMRC. This tax is paid on your net rental income – the profit made on all the income you get from your properties, minus any tax allowances, reliefs, or expenses you’re due.

Some of these allowable expenses include the costs of insurance, letting agent and accountants fees, maintenance, and business expenses.

How much income tax you’ll pay will be dependent on the amount of profit you make from your property, or properties, along with how much income you generate from other sources. In England and Wales, everyone gets a “Personal Allowance” of £12,570. This is how much income you can generate before you’re taxed at all.

Beyond this, the following tax rates are applicable from April 6, 2024:

• Basic rate: Income between £12,571 and £50,270 = 20% tax
• Higher rate: Income between £50,271 and £125,140 = 40% tax
• Additional rate: Income over £125,140 = 45% tax

But remember, we haven’t covered the numerous perks that may be available to you. These include self-employed trading allowances, property income allowances, and other reliefs.

What you’ll owe in income tax as an accidental landlord could be a tricky question to answer. You’ll want to seek out expert advice.

Source: John Charcol, Alan Boswell Group, Alan Boswell Group, Gov.uk, Which?

Stamp duty

Property investors and homeowners are currently benefiting from stamp duty cuts, which will remain in place until 2025.

Stamp duty is usually levied on increasing portions of a property price when you buy a residential home valued over £250,000. But, as always, there are reliefs and exemptions for certain buyers including charities, registered social landlords, and first-time buyers.

If you’ve become an accidental landlord, and go on to buy a property that you plan to live in (and you have already owned a house before), you’ll pay the following stamp duty rates:

• Property price: £250,001 – £925,000 – 5%
• Property price: £925,001 – £1,500,000 – 10%
• Property price: Over £1,500,000 – 12%

Also, in England and Northern Ireland, there is an additional stamp duty rate in place for investors who purchase additional property, holiday homes, or buy-to-let assets for more than £40,000. These property investors will need to pay an additional 3% on each tier of stamp duty.

So, any accidental landlords in England could end up facing the following stamp duty rates if they expand their portfolios:

• Property price: £0 – £250,000 – 3%
• Property price: £250,001 – £925,000 – 8%
• Property price: £925,001 – £1,500,000 – 13%
• Property price: Over £1,500,000 – 15%

Source: FT Adviser, Gov.uk, Money Helper

Accidential landlord Capital Gains Tax (CGT)

For an accidental landlord, capital gains tax will be payable if you sell a rental property that has risen in value. This is a tax which could hit you particularly hard. You don’t have to pay CGT if you sell your main residential home. However, you need to pay capital gains tax on profits you made from the sale of your buy-to-let properties, business premises, land, or inherited property.

Currently, you only have to pay CGT on your overall gains above your tax-free allowance, which is £3,000. This was a reduction from £6,000 in 2023/24.

This will result in accidental landlords having to fork out more for the taxman should they sell on their assets. Also, property investors may have to pay more in CGT than other types of investors or entrepreneurs.

Higher or additional rate taxpayers must pay 20% on gains made from non-property chargeable assets. On the other hand, you will pay 24% tax on gains made from residential property in 2024/25.

Source: Gov.uk, Gov.uk

Corporation tax and National Insurance

If you become an accidental landlord, you may choose to incorporate a limited company to manage your new asset through a property business. This would then make you liable for corporation tax, over income tax or capital gains tax. Your National Insurance could also be affected.

Currently, corporation tax is charged at 25% on company profits. If your company makes a profit of less than £50,000 a “small profits rate” of 19% will instead be applicable.

Also, you will have to pay Class 2 National Insurance if your profits are more than £11,908 a year, and what you do counts as running a business. This could be the case if being a landlord is your main job, you rent out more than one property, and/or you’re buying new properties to rent out.

Source: Ellis & Co, Gov.uk

What about insurance?

Currently, there isn’t a legal requirement to have landlord insurance. But, it’s probably wise to invest in some. If you end up with tenants, regular home insurance won’t cover you should anything costly happen to the property. Also, some mortgage lenders may require that you take out landlord insurance before they move forward.

Landlord insurance costs can vary widely, being affected by everything from the location of your property, through to how many tenants you have. But, accidental landlords who are new to scene could benefit from insurance. With tenants to house, you’ll face many new obligations and scenarios.

Would you be ready for a tenant to lose their job and suddenly stop paying their rent? What about if they accidentally leave the bath running too long, leading to flood damage? Landlord insurance can help with these kinds of issues and more.

Source: Money Super Market, Which? NimbleFins

What rules do accidental landlords need to follow?

Landlords have several responsibilities to their tenants. Broadly, you’ll need to:

• Keep your rented properties safe and free from health hazards
• Make sure all gas equipment and electrical equipment is safely installed and maintained
• Provide an Energy Performance Certificate for the property
• Protect your tenant’s deposit in a government-approved scheme
• Check your tenant has the right to rent your property if it’s in England
• Give your tenant a copy of the How to rent checklist when they start renting from you (you can email it to them)

You’ll also be required to make repairs to a property where needed, review rent on a regular basis and agree increases with your tenants, and settle disputes as they arise.

However, more stringent rules may be on the way. A “Renters Reform Bill” is in the works, and Housing Secretary Michael Gove has vowed to tackle rogue landlords and bad practices. Accidental landlords could be caught by all this if they’re not careful.

Source: Gov.uk, Property Notify, Property Industry Eye

Do I need a license to be an accidental landlord?

It depends on where you’re based. Some local authorities in the UK may have powers to introduce selective licensing for privately rented homes. This would be done to tackle problems in their areas. But generally, landlords do not need to be licensed, unless they’re renting out a house in multiple occupation (HMO).

You will need to get a licence from your local council if your property is rented out by at least 3 people who are not from 1 household, but share facilities like the bathroom and kitchen. These properties are sometimes called a house share and are popular with students.

Source: Gov.uk, Gov.uk