Your IndustryJan 31 2013

Advice you can give about risk and tax

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“Most mortgage brokers will not be authorised to give investment advice but those who are can discuss the relative merits of residential property investment compared to other asset classes,” says Ray Boulger, senior technical manager at John Charcol.

“However, it is sensible to explain the risks to a novice landlord, as well as giving some other generic advice, e.g. about the fact it is possible to buy insurance to guarantee the rent.”

He warns that the client’s ability to pay his or her BTL mortgage could be compromised if insufficient regard is made to the potential risks.

As a minimum, all intermediaries should explain to prospective investors the financial obligations concerning a buy-to-let mortgage and help them choose the right product to suit their needs, says Greg Went, senior product manager at Nationwide.

“Lending criteria can vary between mortgage providers, so these differences should be made clear. There are many other considerations that landlords need to make, including finding a suitable property, choosing the right tenants and knowing their legal responsibilities.”

Landlords will of course need to disclose their rental income on their tax return.

Good advice about this subject might include ensuring the client keeps an accurate record of rental payments and expenses so they, or their accountant, can properly advise HM Revenue & Customs and offset any allowable expenses against their profit.

Mr Went adds: “There a number of expenses that the landlord can usually deduct to establish their profit, including mortgage interest, insurance, utility bills, maintenance and repair services and advertising.

“In addition, when a landlord decides to sell their buy-to-let property, the proceeds from the sale will be subject to capital gains tax.”

Landlords should also check with a solicitor about which legal responsibilities apply to them, says Mr Boulger.

One of these responsibilities will include making sure the tenant’s deposit is placed in a recognised scheme and ensuring annual gas safety checks are carried out, while if the property is classed as a house in multiple occupation (HMO) there are additional obligations, including fees payable to the local authority.

“A specialist buildings insurance is also required, plus contents is recommended if the property is let furnished,” he adds.

“Including a legal expenses option in the buildings insurance is a low cost worthwhile addition. A policy to cover loss of rent and the costs of evicting bad tenants should also be considered.”