So you want to… rent out a farm cottage?

Landlord and tenant

What type of agreements should be used for residential lets? Do they roll on?

The most common type of agreement for a new residential letting is an Assured Shorthold Tenancy.

These can be terminated by the landlord on two months’ notice expiring on a rent day and can be granted for a fixed term or as a periodic (e.g monthly) tenancy.

But possession cannot be obtained from a tenant under the usual two-month notice procedure if the notice period expires within the fixed term of the tenancy or within the first six months of the tenant’s occupation, whichever is the later.

After the fixed term has expired the AST can roll on as a periodic tenancy, when its length will be calculated according to the rent.

If rent is paid monthly the tenancy will probably become a monthly periodic tenancy after the fixed term has expired.

The most common fixed term for ASTs is between six and 12 months.

To fall within the AST framework, a dwelling cannot be let together with more than two acres of land, warns Mr Coupland.

What restrictions can reasonably be included in a residential tenancy?

All restrictions on use and occupation of a property should be included within the written tenancy agreement.

Consider whether decoration or alteration of the property should be allowed.

Residential lettings are often for a relatively short term, so the usual answer is no, and certainly not without the landlord’s prior written consent.

If you have livestock you may want to prohibit dogs from being kept at the property.

What happens if the tenant brings others to live at the property?

If adult occupiers (other than the tenant named in the tenancy agreement) are allowed to live at the property it is possible for them to gain some kind of interest in it.

A well-drafted tenancy agreement will specify that the property may only be occupied by the tenant named in the agreement and his children under the age of 18 and will prohibit sub-letting and sharing possession of the property.

A breach of this kind would give a landlord a separate right of action for possession distinct from the usual two months’ notice.

What happens if the tenant splits with his/her partner? Who is entitled to live there?

If husband and wife are co-tenants of a property and are divorcing, the court can order who should have the right to remain in the property.

Where cohabitees are co-tenants, they will have to agree between them who remains in the property.

A tenancy agreement granted to more than one tenant should state that the tenants’ obligations under the tenancy are “joint and several”, which means the obligations are enforceable against either of the co-tenants, says Mr Coupland.

An outgoing tenant can be released by the landlord from these obligations.

How should payment be organised?

The tenancy agreement usually specifies that rent is paid by standing order from the tenant’s bank account monthly in advance, although some tenants still pay rent in cash direct to the landlord.

To provide some protection against non-payment of rent or other breach of the tenancy, a deposit bond of two or more months’ rent is usually paid as security when the tenancy is granted.

What if the property has an agricultural tie, but is no longer needed for a farm worker? Can someone else live in it without the tie first being lifted?

If the dwelling is subject to a planning restriction limiting its occupation to a person now or last employed in agriculture, this should be lifted by applying to the local planning authority before letting the dwelling on a general residential basis.

This can be difficult.

A landowner must demonstrate that there is not (and will not be) any requirement for that dwelling to be used in agriculture in future.

But if a property subject to a tie has already been let outside agriculture as a residential dwelling for more than 10 years it is possible to apply to the planning authority for a Certificate of Established Lawful Use.

If successful, this will overrule the restriction.

What are the most common areas of difficulty for owners of let residential property?

Non-payment of rent and breaches of other terms of the tenancy agreement.

Also if a tenant remains in occupation of the property after expiry of a notice requiring possession, it can be necessary to issue court proceedings for possession.

Often, the most easily avoidable difficulties arise from landlords having no written agreements with tenants.

What questions should landlords ask prospective tenants?

Find out as much information as possible about tenants.

References should come preferably from a former landlord and/or the tenant’s bank.

If there is doubt about the tenant’s ability to pay rent and maintain the property, a landlord may require a third party to act as guarantor.

How much should I spend…

What is the rental market like at the moment?

When house prices are static, the rental market usually firms up as is happening now.

Well-presented rural properties are in demand, with unfurnished houses preferred.

There may be tenants who are willing to take on less well maintained houses and cottages, but a house worth a rent of £800 a month might fetch £200-£250 less if it is not in the right condition.”

How do I market the property?

The internet is increasingly the first port of call for those looking for rented property although local papers and agents’ mailings are still popular.

How much should I spend on getting the house in order?

It depends on the length of the let.

It costs £3000-£4000 to decorate and carpet a family house to a good standard, so if you are only letting for a year or so that will eat into the return significantly.

However, the job must be done properly.

The property must be clean and well decorated, preferably in neutral colours.

It should be carpeted and the kitchen and bathroom in good order. 

How do I choose a tenant?

First impressions are the best way to judge whether a prospective tenant is suitable.

Meet them, have a chat and base your decision on that.

Anyone can obtain character references which look acceptable, so these are not the most reliable guide.

A credit search is essential and will cost about £20.

As well as asking for referees, the tenancy application form should seek details of the tenant’s employment, how many cars will be using the property, pets, smokers/non-smokers and so on.

I am worried about damage to the property. Should I be?

A good schedule of condition is the best way to deal with this, then at least there is some yardstick for redress.

A deposit of at least a month’s rent should be taken as a precaution against the cost of making good any damage other than general wear and tear.

List any marks or defects at the start of the tenancy and point them out to the tenant.

Take photos, too.

…And what about tax?

Can VAT be recovered on letting expenses?

Rental income is classified as an exempt supply for VAT purposes.

So, recovery of VAT on costs incurred in letting is not allowed.

But where the rental income is received as part of a larger VAT-registered trading business, then VAT on letting expenses may be recoverable under the partial exemption rules, but only where expenditure is relatively modest.

Can VAT be recovered on renovation and construction costs for a let cottage?

The same principle applies.

Apart from some relief under partial exemption rules, recovery of VAT is not usually possible.

How is rental income assessed?

Rental income is almost always assessed separately to the trading of the farm.

This is an advantage, as rental income does not attract the normal Class 4 National Insurance charge, currently levied at 8%.

What expenses can be set against rental income when it comes to calculating tax?

Ongoing repair costs for remedial work can be set against rental income.

There are rules distinguishing between capital improvements and repair works, though the Inland Revenue agrees that some items (like installing double glazing) will count as repairs.

Will letting a cottage affect the capital gains tax position?

In almost all circumstances, yes.

CGT is only paid when an asset is either sold or gifted.

Generally, letting a cottage formerly occupied by a farm worker transforms the ownership status of the asset from business to non-business.

The rate of CGT taper relief for business assets is much greater than those for non-business assets.

The longer a cottage is let outside farming, the more diluted the business asset relief will become if CGT is triggered and, therefore, the greater the tax that will be payable.

Will inheritance tax relief still apply?

Probably not.

Where lettings are significant and long term this will call into question the ability to claim business property relief as part of IHT mitigation.

Agricultural property relief will not be available unless the tenant is a retired farm worker.

Should I do anything before letting?

Consider all the options available to you before changing the nature and use of a farm cottage.

You may want to gift all or part of surplus cottages down the generations, either by outright gifts or through trusts, before the property is decommissioned from agricultural use.

The tax implications of letting a farm cottage or house can be far reaching.

Mike Butler, national director of Tenon Rural Services, considers some of the issues

What sort of tenancy agreement should you use?

What happens if you get a difficult tenant?

These and other questions are answered by solicitor Chris Coupland from Birketts, Norwich

Knowing how much to spend on a property to make it rentable can be difficult. Giles Bilton of Carter Jonas, Harrogate gives some pointers

Keep it safe!

• Have Corgi-registered engineers inspect gas appliances annually
• Sweep chimneys and Agas regularly
• Have all electrical installations/appliances inspected regularly by a competent person
• Deny access to dangers like asbestos, deep water or power lines
• Tenancy agreements should specify that there is no access to farmyard areas Juliette Lowe, NFU Mutual

Case study

Jeremy mason, norfolk

Trust makes for hassle-free tenancy

Three of Jeremy Mason’s 13 cottages at Great Palgrave Farm, Sporle, near King’s Lynn are let on the open market.

An agent is used to assess the likely rental values of a property, advertise it and draw up a shortlist of applicants.

Applicants are usually asked to tender a rent.

“The charge for this is based on a percentage of the first year’s rent, plus expenses.

The rent is paid in full by standing order direct to the farm account.”

Once Mr Mason has got to trust a tenant, he allows them to contact approved local tradesmen direct for repairs.

Issues such as oil tanks being filled are dealt with by topping up each time the farm has a delivery.

Case study

Julia crockford, hampshire
Don’t go mad with the decorating

Estate Manager Julia Crockford lets out 12 of the 14 cottages on the Redenham Park Estate near Andover, Hants.

Most are occupied by long-term AST tenants, but one three-bedroom farm cottage is vacant, advertised at £850 a month. 

“Most people who want to live in the countryside want to go out in it, too.

They usually have dogs and I wouldn’t go mad decorating, curtaining and carpeting to attract new tenants.

It has to be respectable, of course, but if the carpet is acceptable, then leave it.

“Be careful also that improvements are in keeping with the property.

If you are spending money on a new kitchen or bathroom, for example, don’t be tempted to go for the latest or most popular design.”

Jeremy Mason’s tips

• Don’t think an older tenant will be a more responsible tenant, it is not always the case.
• No dogs, unless under exceptional circumstances.
• Avoid unmarried couples and, generally, young married couples. If there are relationship problems, it can become very complicated and you are likely to lose rent.
• Rent payments by standing order save time and hassle. The bank will charge for cash deposits and they are very time consuming.
• Don’t expect to retain your privacy; you are on call 24 hours a day as a landlord.
• Generally, the younger the tenant, the higher the likely rate of turnover.
• As a rule, single men do not look after properties as well as other tenants.
• Common problems include running out of heating oil.
• Rent should be paid by direct debit if possible.
• No lets shorter than a year.

So how much rent might you get?
Annual rental income from Assured Shorthold Tenancies on estates in Savill’s rural estates benchmarking survey increased 6.6% during 2005 to £6305 per dwelling.

Across all estates ASTs now represent over 66% of all rent-bearing housing stock compared with under 50% in 1998, says Ian Bailey, head of rural research.

The survey covers more than 8000 houses and 283,000ha (700,000 acres).

“In 2005, average total return from let residential property was 23.9% (of the value of the property), of which 22% was capital growth and only 1.9% net income return.

The slower residential sales market in 2005 is good news for rental incomes, which continue to rise, a trend that is set to continue.

But slower capital growth will take the shine off total returns.”

On all estates average repair costs per AST dwelling have been just over £2000 in each of the past three years.

These will include some upgrades as houses move from non-rent bearing to being let at market rents, says Mr Bailey, for example, where houses come out of agricultural tenancies or protected tenants die or move on and the property becomes vacant.