In a sluggish property market, it may be tempting for fiduciaries to let a property rather than allow it to stand empty and drain the value of an estate. But, as Paul Saunders explains, there are issues to consider, and regulatory and financial implications if you get it wrong
In recent years, there has been a significant fall in the number of property transactions in most areas of the UK and, in some, it’s been suggested the property market has effectively ceased to exist for now. This fall-off is also reflected in lower-than-expected prices achieved on a sale. There is not much a seller can do to influence a sale other than by reducing the asking price. In many situations, they may have little choice other than to pursue a sale. This is often the case where the seller is a fiduciary, such as:
- a personal representative (PR)
- an attorney (under either an enduring power of attorney (EPA) or lasting power of attorney (LPA) for property and financial affairs)
- a deputy, or
- a trustee, where either the trust has terminated or the property is no longer required (for example, the life tenant has moved into care).
If the property is unoccupied, waiting for a sale to materialise, is it an asset or a liability? Council tax, water services charges and insurance will still be payable, and, if the property is leasehold, such as an apartment / flat, service charges due.
Insurers may require regular visits to check an unoccupied property remains secure and that no insurable events or damage have occurred (such as water leaks). Some insurers might agree to the fiduciary assuming this responsibility, while others will require visits from an agent, which is unlikely to be cost-free.
In order to stem the financial bleed, the fiduciary may consider letting the property until a sale can be agreed. The case for this is often forcibly made by beneficiaries of the estate or trust or, where the fiduciary is an attorney or deputy, family members of the vulnerable person (P).
On the face of it, letting the property sounds like a good idea, but with the level of regulation in the rented sector, there are factors to consider, and any failure to comply could result in fines or even criminal sanctions for the fiduciary. Either could be damaging to their reputation, especially if the fiduciary is a professional.
It is not unheard of for family or beneficiaries to let a property without first consulting the fiduciary (or even despite the fiduciary’s clear refusal). If this happens, the fiduciary may be deemed to at least share responsibility for breach of any regulations. Any letting is likely to be an assured shorthold tenancy (AST), under which a tenant has significant protection from eviction during the first six months of the tenancy. Even if they have not sanctioned it, a fiduciary is likely to become aware of the existence of the tenancy within this period, and will need to try to promptly remediate any breaches of consent or regulations.
Who might occupy?
The primary options are to grant a licence or to have a rent-paying tenant.
It is important to formally document the granting of a licence, identifying the respective duties and responsibilities of the parties. As the licensee might also have effective exclusive possession, it is important that they pay only the costs relating directly to their occupation (for example, gas and council tax). Any contribution towards payment of a property owner’s normal costs (such as insurance) could constitute rent, and thereby mean that a tenancy has been created, resulting in all the usual landlord responsibilities. Depending on the status of any licensee, their occupation might have beneficial consequences for capital gains tax (CGT) (see below). Subject to the terms of any agreement, a licence has no minimum period before a notice to quit may be issued, and can usually be terminated at short notice.
Where a tenancy is to be created, the fiduciary will be the landlord and subject to all a landlord’s obligations under the Rent Acts and other regulations (see statutory obligations, below). Most tenancies will be an AST, which must run for a minimum of six months (the fixed period), unless the tenant has committed serious breaches of their covenants, and even then, it is likely that a court order may be required for possession. Subject to the minimum six-month period, a notice to quit may be issued with a two-month minimum notice period – but if issued within four months from the start of the tenancy, any such notice may be void.
The government has announced plans to limit the ability of landlords to terminate an AST automatically after the fixed period. Legislation is planned for the next parliamentary term that may reduce the attractiveness of letting property intended to sell with vacant possession.
While there may be no issue in continuing to market the property and have viewings while a licensee is in occupation, where a tenancy exists, viewings may not be permitted before the last two months of the fixed period.
Is the property in a lettable state?
While this question encompasses compliance with regulations (discussed below), at this stage, we are looking at the general condition of the property.
Ask yourself: is the property structurally safe and not subject to any fungal, bacterial, or other infestation?
Those renting property tend to look towards a certain level of comfort. Many people would be unwilling to rent where, say, the kitchen and/or bathroom facilities, or even the décor, are outdated. There will be some who would rent regardless of the condition, mindful that the condition will be reflected in a reduced rent.
Provided the property complies with the appropriate regulations, when considering letting any property not fitted out to current market expectations, you should compare the cost of remodelling with the level of rent that might be achieved. Factors informing the comparison will include the time lapse before any letting could commence and the likely period of letting before a sale.
When talking with agents, family and/or beneficiaries may hear what they want to hear to support their wishes and disregard the rest. Accordingly, fiduciaries should have direct contact with any agents involved and, if what they hear conflicts with other accounts, obtain the agent’s written report to inform their view.
Is there consent to let?
Before looking at the regulatory aspects, you need to identify if there are any barriers to letting the property. For example, there may be a bar to letting without consent where the property is:
- charged as security for a mortgage or guarantee, or
- subject to an equity release arrangement.
There may be other criteria that any occupant will need to meet even if no consent is required (for example, if the property is social housing or a retirement apartment).
It would be ill-advised to pursue letting until any such hurdles have been crossed. Professional letting agents charge fees for ‘tenant search’ services, which are unlikely to be waived if a ‘suitable’ tenant is identified and the prospective landlord then withdraws due to a failure to obtain any necessary consent.
If the property is to be let, even for a nominal rent (which will include the occupier paying any of the property owner’s usual costs, such as insurance and, for leaseholds, service charges), the fiduciary must comply with a landlord’s statutory obligations as they relate to tenanted property. Even where property is managed by professional agents, primary responsibility for compliance remains with the landlord.
While most statutory obligations may not apply where occupation is by a licensee, it may be good practice to comply with them in any event, if only to protect the fiduciary’s reputation. Fiduciaries should be aware that the right-to-rent checks apply to the grant of licences as well as tenancies.
There are various statutory obligations, and sanctions for non-compliance can range from a fine to a custodial sentence, depending upon the severity and outcome of any breach. The main obligations are generally considered to be the following.
Right to rent
The Immigration Act 2016 (chapter 1, part 3) makes landlords, and their agents, responsible for checking that a prospective tenant has a right to reside in the UK before entering into a tenancy agreement. Copies of documents evidencing the right to reside should always be retained as proof that the checks have been made. Any breach of this obligation may be subject to a fine of up to £3,000.
Landlords are required to have had a Gas Safe-registered engineer complete a gas safety inspection before any tenancy commences, and to provide the tenant(s) with a copy of the gas safety certificate when or before the tenancy starts. The certificate must be renewed at least annually, and a copy displayed at the tenanted property. The usual homeowner’s annual gas service is insufficient to fulfil the landlord’s obligation, as it is not as extensive as the landlord’s gas safety check. Failure to comply may result in civil and criminal penalties, depending on the nature of the deficiency and its consequences (for example, if the failure to comply results in a gas explosion and death, the landlord might be subject to a charge of manslaughter).
Landlords must ensure that the electric circuitry and any electrical appliances provided with a property are “safe”. In Scotland, landlords are required to obtain an electrical installation condition report before the tenancy commences (renewing it at least every five years, or shorter if specified in the report), and complete portable appliance tests (PATs) before the tenancy starts, and then annually. It is understood the government intends to extend that requirement to England during 2020. A failure by a landlord to ensure the safety of electrical circuitry and appliances in a tenanted property may result in civil or criminal penalties, depending on the nature and consequences of the deficiency.
PATs apply to any electrical item “provided” by the landlord, not just items which might be included in any inventory attached to the tenancy agreement.
Where furniture or furnishings are provided by the landlord, they must comply with the relevant fire safety regulations. For soft furnishings, this will usually be evidenced by a label attached to the item by the manufacturer. Many people living in their own homes tend to think them untidy and remove them. If the property is subsequently let, all such furniture may need to be replaced to be certain of compliance. Failure to comply may result in both civil and criminal penalties, depending on the nature and consequences of the deficiency.
Smoke and carbon monoxide detectors
While smoke detectors must be installed on every storey of the tenanted property on which a room is used wholly or partly as living accommodation, a carbon monoxide (CO) alarm must be fitted in every room that is so used and contains a gas or “solid fuel combustion” appliance.
CO alarms must be installed within a specified distance of the relevant appliance, which could result in multiple such alarms in a single room. All alarms must be in place before the tenancy commences. Failure to comply may result in both civil and criminal penalties, depending on the nature and consequences of the deficiency.
If an alarm is battery-operated, although it is the landlord’s responsibility to ensure that all required alarms are installed and working when the tenancy starts, the tenant is responsible for replacing the batteries.
From April 2020, there will be a bar on letting residential property with an energy efficiency rating of less than E on the energy performance certificate (EPC). Landlords must provide tenants with a copy of the EPC before the tenancy commences. In the absence of compliance, in addition to the potential for civil penalties, the landlord will be unable to serve a valid notice to quit until the EPC has been provided to the tenant.
Regardless of whether a professional agent is involved, where any rent deposit is taken in respect of an AST, it must be lodged in a government-backed tenancy deposit scheme and prescribed information provided to the tenant within 30 days. Failure to lodge the rent deposit in an approved scheme may result in financial penalties for the landlord and undermine their ability to obtain vacant possession at the end of the tenancy.
There are also regulations relating to contamination and environmental pollution, asbestos, legionella disease, and the general state of repair (dangerous structures) which relate to property ownership generally, and are not specific to tenanted property.
Although beneficiaries or family members may look to contain expenditure by sourcing tenants informally or managing lettings themselves, in the first instance, it will be the fiduciary who is held responsible for any failure to comply with, say, the need for consent to let or any statutory obligations. While informal arrangements may save money, if something goes wrong, it is the fiduciary that will pay the price.
In most situations, you should consider looking to a qualified professional to advise on and manage the property.
Many agents seem to offer a choice of three service levels.
The agents will identify suitable tenants and obtain references and so on only.
Rent collection and general management
Agents tend to be the tenant’s primary point of contact, dealing with the rent collection, arranging any necessary repair works and accounting to the landlord for monies received and paid out. They will also arrange lodgement of the rent deposit under an approved scheme. Although they will also undertake work to ensure the landlord’s compliance with statutory obligations, it will normally be the landlord’s responsibility to monitor their own position and instruct the agent at the relevant time.
Full management service
This is the ‘gold standard’: in addition to rent collection and general management, the agent will also manage compliance with the landlord’s statutory obligations and so on. This does not completely free the landlord from the need to maintain an overview of their position, but it should reduce the potential responsibility for a failure to comply.
Agents who offer the full management service will usually charge a premium fee.
It would take considerable time and effort for fiduciaries to research and familiarise themselves with the swathe of regulations and procedures to satisfy their professional indemnity insurers of their competence in such matters. Bearing in mind that any letting arrangement is likely to be relatively short-term, the costs for the fiduciary to gain the relevant knowledge would likely significantly exceed any agent’s fees and would likely be challenged if billed to the client.
Avoiding the issues
Where the fiduciary is acting as a deputy, or under an EPA or LPA, there is little they can do to avoid these issues, other than relinquishing their role. Trustees of an ongoing trust are in a similar position.
However, PRs and trustees of a trust that is absolutely distributable have a let-out clause if they transfer the legal title to the entitled beneficiaries. It is not enough merely to appropriate the property to the beneficiaries – the fiduciary must divest themselves of the legal title. If considering this route, the PRs and trustees should be mindful of the provisions of sections 190-198 of the Inheritance Tax Act 1984, as the transfer of legal title could result in the denial of inheritance tax relief if the property is subsequently sold at a loss.
Capital gains tax
The PRs of a deceased estate have an annual CGT allowance equal to an individual’s allowance for the year of death and the two succeeding tax years. Gains arising to the PRs after that period are taxable without any allowance. If the PRs’ disposal of assets gives rise to a loss for CGT purposes, that loss can only be set against gains accruing to the PRs and cannot be passed on to the beneficiaries.
With deputies and attorneys, any gains or losses arising on a disposal of P’s assets will be treated as P’s for CGT purposes and net gains are assessed on P under the usual criteria for an individual.
With a trust, until such time as the trust is absolutely distributable, any gains or losses arising on the disposal of assets by the trustees are assessable on them. In most trusts, the trustees will have an annual CGT allowance equal to one-half of an individual’s CGT allowance. However, if the trust is for the benefit of disabled persons (within the definition in schedule 1C to the Taxation of Chargeable Gains Act 1992 (TCGA 1992)), the trustees’ annual CGT allowance will be the same as that for an individual.
CGT main residence relief
Under sections 222-226 of the TCGA 1992, where residential property is sold, it may be wholly or partially exempt from CGT if it’s the main residence of:
- P (deputies and attorneys)
- beneficiary(s) entitled to occupation (trustees), or
- beneficiary(s) who have at least a 75% interest (whether absolute or under a life interest) in the property and, before their death, the property was the main residence for CGT purposes of the deceased (PRs).
When property ceases to be occupied by an individual as their main residence, there is a grace period for which main residence relief will continue to be allowed. This will usually be 18 months from the date the property ceased to be the individual’s main residence, and 36 months where the individual is a long-term resident of a care home at the time of the disposal (section 225E of the TCGA 1992). If a disposal is made once the grace period has lapsed, any gain is apportioned between the qualifying and non-qualifying periods.
However, where the owner dies, the entitlement to main residence relief ceases and there is no grace period for the disposal, so that, unless (iii) above applies, any sale of residential property by a PR is subject to CGT by reference to the “date of death value”.
Often, beneficiaries and/or family members will look to a short-term letting to reduce the financial burden that keeping an empty house will have on the remainder of the estate or trust fund, understanding it to be a relatively simple (and straightforward) matter.
As identified, this often may not be the case. Indeed, it may be necessary to spend further, significant sums before the property can be offered for rent. This may take some time, during which its condition could put off potential buyers.
If, in due course, a tenancy is put in place, marketing may need to be suspended until towards the end of the fixed period. Any agreement to sell would be subject to securing vacant possession, and the tenant would need to be given a minimum of two months’ notice. Would the buyer be willing to wait that long, especially if they are in a chain? The position may become more uncertain if the government’s plans to amend section 21 of the Housing Act 1988 come into effect – the provision which currently allows an AST to be automatically terminated after six months, subject only to two months’ notice to quit.
While securing an income stream to cover ongoing property expenses may appear sensible, in addition to the above points, one must consider the impact any such arrangement has on the timing of and ability to complete a sale.