Buy-to-let costs soar

Student landlords and other owners of houses in multiple occupation may have to obtain a local authority licence or risk a fine of up to £20,000. The licence will specify the minimum standards that the accommodation must meet and can require the landlord to carry out specified improvements some of which could turn out to be expensive.

The mandatory licence scheme came into force on 6 April and covers houses with three or more storeys that are occupied by at least five people who form two or more households. Some local councils may impose licensing on even smaller houses. Students who occupy separate rooms generally each count as separate households.

Local authorities are free to set the fee and some are charging as much as £1,100 for a licence for up to five years. The fee is normally tax deductible from letting income, but this is not necessarily the case for the costs of any work required on the property.

The general rule is that repairs are deductible, but improvements, extensions and expenditure on furniture and equipment are not. For example, creating en-suite facilities where there were none before, or installing central heating and additional toilets are not allowable deductions for tax purposes.

Landlords of furnished accommodation can claim one of two allowances. The simpler one is the wear and tear allowance of 10% of the net rent – rent less any water rates and council tax paid by the landlord. Alternatively, landlords can claim a renewals allowance for the actual cost of replacing items such as movable furniture, carpets and curtains, but not the initial cost of providing them.

All landlords, including those claiming the wear and tear allowance, can deduct the cost of renewing landlord’s fixtures, such as bathroom suites – but not any improvement element.

The new licensing requirements may make letting of some properties in multiple occupation uneconomic. We can advise on your tax position and calculate the projected return on your property investment taking into account the income, expected capital appreciation and costs, and help you decide whether it is worthwhile.