Letting out property

to letWhen planning to serve God abroad, one of the decisions we have to make is what to do with our houses.  Many of us let them out, either commercially or to friends, and the principal advantage of this is that we have somewhere to come back to, when (and if) we retire.  It can also double as a source of income, and somewhere to keep our furniture and other personal belongings.  However, there are also plenty of drawbacks to letting out our homes.  Lengthy periods without a tenant, and tenants who fail to pay the rent or abuse the property are some of the most obvious, but there are many other pitfalls.

We have discovered that most sending agencies and churches decline to give advice about letting one’s house out, since they are reluctant to be seen to be giving financial advice.  So we have produced this paper as a guide to some of the challenges involved in letting out property while you are abroad.  It is important to stress that this is not advice on what decisions to make, and you should consult professional advisers where appropriate.

Issues concerning tenants: you may need to think about the type of tenants you want to attract.  Do you want long- or short-term tenants?  Professionals?  Students? Other Christians you know?  Are you going to ask for references from prospective tenants?  Are you going to have a written contract in place?

Banning pets, children or smokers may preserve your furniture longer, but will reduce the size of the market you’re looking to.  Cramming in students may bring in a lot of money, but there is annual turnover involved and potential damage.  Some people refuse to take tenants who are claiming housing benefit, assuming that they are less dependable, but is this unfair discrimination against the poor?  Do you let the house furnished, in which case your furniture can be damaged – I heard of a tenant who threw away a mission worker’s dining table because she didn’t like it, and left the sofa in the garden – although you can claim an tax-deductible allowance for wear and tear and replacements.  If you let it unfurnished, where do you store your furniture?

Financial issues: one challenge may be getting a mortgage, particularly as you may not have a regular stream of income so lenders may be reluctant to take on your risk.  A buy-to-let mortgage may solve this, but may be more expensive.  You might like to investigate the options at Kingdom Bank, a Christian bank which is able to be more flexible than other banks.  If you already have a mortgage, you should check that by letting you’re not invalidating the terms of your mortgage.  You also need to recognise that part of the risk of renting is having periods when you have no tenant.  This increases costs, and some people deliberately keep a savings account with six months’ mortgage payments in it so that they can still afford to pay the mortgage when there is no tenant.  You also need to pay for building insurance (and contents if the property contains your furniture), and also emergency callout insurance in case the boiler breaks down or a pipe bursts.

Agent issues: if you engage a professional agent to administer your letting for you, be aware that a commission of 10-17% of the rent may actually cream off all your profits.  They may also charge you high fees for sending out plumbers or decorators.  But they do have insurance, and knowledge of the legal situation which can be a minefield.  Leaving this responsibility to a busy sibling or elderly parent may be a heavy burden.  If you do engage an agent, make sure you find a reputable one.  You can check that they are members of the Association of Residential Letting Agents or find independent reviews of estate agents at www.allagents.co.uk.  Even when using an agent you can still have friends or relatives involved to deal with small repairs and make decisions on your behalf, but make sure they hold a Power of Attorney to act for you.  They also perform a useful function of keeping an eye on the agent!

Maintenance issues:  looking after your property becomes harder when you are overseas.  Little repairs which you would normally do yourself will have your tenants calling out a professional who may charge you a significant fee, although this is tax deductible.  People often use the gap between tenancies to carry out light repairs and decorating.  How are you going to maintain the garden?  Expect the tenants to do it?  Pay for a professional gardener?  Replace it with low maintenance shrubs?  Most contracts specify that the garden must be returned to the original condition when the tenancy ends, but this usually is interpreted by tenants as doing nothing for two years, then mowing the lawn the day before they leave.  I once knew a lessor who was able to keep her tenants’ entire deposit back to cover the cost of restoring the garden

Tax issues: You will be liable to pay tax on the rental income you get, although you can claim your legitimate expenses as tax deductible.  Under HMRC’s Non-Resident Landlord Scheme, agents are normally required to pass on rent net of basic rate income tax, but if you are living abroad with little likelihood of having to pay UK tax, then you may apply for your rent to be passed on gross.  See www.hmrc.gov.uk/international/nr-landlords.htm for more information.  Items of expenditure which are tax deductible include:

  • Cost of repairs
  • Insurance premiums
  • Council tax
  • Replacement furniture
  • Utility bills
  • Mortgage interest
  • Allowance of 10% of rental income for wear and tear if this figure is more than the cost of repairs and replacements
  • Fees of professionals such as agents, solicitors and accountants (see SA105 notes)

It’s important to note that only the interest on the mortgage is tax deductible, so you could end up paying tax on a notional ‘profit’ when you actually have a negative cash flow, as I once discovered the hard way!

Legal issues:  Lessors are responsible for health & safety compliance, and failure to do so is a criminal offence which can result in a prison sentence and/or a substantial fine.  And that’s only for non-compliance.  If an accident occurs in or outside a rented property that is due to lack of maintenance or as a result of a breach of legislation, landlords may be sued by tenants, visitors, or by members of the public and prosecuted by the Local Authority.

You should be aware that as landlord you are responsible for the safety of gas and electrical appliances and piping/wiring.  You should also make sure that all gas and electrical appliances are serviced annually (where appropriate) and all are tested for safety.  You are also responsible for ensuring that fire alarms are in place and that all furniture and soft furnishings (excluding carpets and curtains) comply with fire regulations.  You are still responsible for this even if you are abroad.

Other obligations include payment of appropriate charges for utilities and council tax when the property is vacant, provision of an Energy Performance Certificate for the property, and ensuring the tenant’s deposit is held by a third party in accordance with current regulations.

And finally: Don’t become emotionally involved with your property ; no one will look after it as well as their own home; so don’t be upset with the state of the property at the end of the tenancy.  If you are using an agent, ensure that regular (3 month) checks, with a report back, are carried out that the property is being well maintained; that an inventory is carried out at the beginning and end of the tenancy with monies withheld to cover returning the property, garden and contents to its original state (allowing for normal wear and tear); that all keys are returned; and that forwarding addresses are left as well as the tenant making arrangements to have mail redirected.

You may also want to leave full instructions in the property for incoming tenants concerning (for example) local facilities, rubbish collection arrangements, operation of central heating and any equipment provided, location of stop cocks, meters etc.  If you are not using an agent, make sure the tenants have the names of emergency contacts, other key holders etc.

In conclusion: when letting your house out, our recommendations are that you should consider:

  • consulting an Independent Financial Advisor for help getting the right mortgage.  You can find a list of Christian IFAs here
  • engaging a reputable agent and having a formal tenancy agreement with your tenant
  • using a chartered accountant to prepare your tax return
  • having a solicitor briefed to help you in an emergency
  • opening a savings account with 6 months mortgage payments
  • checking out various ‘moving house’ related services on the Oscar website

Syzygy would like to acknowledge the help of Mike Frith of Oscar and letting agent Chris Scupham in producing this paper.  For more specific information please contact us at info@syzygy.org.uk.