Selling A Buy To Let With A Sitting Tenant

Some landlords will retain their properties long-term and never intend to sell. On the other hand, others will want to sell their property, and it's not easy to know whether they should leave the tenant in situ. There are many reasons why a landlord might choose to sell, including:

1. Retirement: Some landlords may choose to sell their property as they move into retirement and no longer want the responsibility of managing a property.

2. Rising Interest Rates: If interest rates increase, the cost of a landlord's mortgage may rise, making it less financially viable for them to keep their property.

3. Market Conditions: If property prices are high, landlords may decide to sell to make a profit.

4. Maintenance Costs: As a property ages, maintenance costs can increase. A landlord might decide to sell if these costs become too high.

5. Relocation: If a landlord moves to a different city or country, managing the property could become problematic, prompting a sale.

6. Health Issues: If a landlord has health issues, they may sell their property to pay for medical expenses or reduce stress and responsibility.

7. Changing Laws or Regulations: Changes in laws or local regulations related to property ownership, taxes, or tenant rights may prompt a landlord to sell.

8. Tax Implications: If a landlord faces high taxes on rental income or anticipates a capital gains tax increase, they might choose to sell their property.

9. Cash Flow Issues: If a landlord struggles with cash flow, perhaps due to vacancies or non-paying tenants, selling the property might be a good solution.

10. Estate Planning: Landlords may choose to sell the property as a part of their estate planning, for example, to divide assets among heirs.

11. Debt Reduction: Selling a property can provide substantial money to pay off debts or mortgages, reducing financial stress.

12. Diversification of Assets: To balance their investment portfolio, landlords might decide to sell a property and invest in other types of assets.

13. Tenant Issues: Problems with tenants, like frequent turnover or disputes, may encourage a landlord to sell.

14. Changing Personal Circumstances: Life changes such as divorce or having children may necessitate a landlord's financial planning change, leading to a property sale.

This guide looks at how landlords can sell with a sitting tenant.

What is a sitting tenant?

A sitting tenant rents a private home that the landlord wants to sell. The renter has a contractual right to stay in the house while the terms of their tenancy agreement are in force.

Protected tenancies

The type of tenancy can make a difference. Some renters have rights as protected tenants. This generally applies if they rented the home before 15 January 1989, as assured shorthold tenancies were enacted after that date. Although, between that date and 28 February 1997, there could be many assured tenancies which have greater protection for tenants. A protected tenancy gives the renter, spouse or other family the right to stay in the home for the rest of their lives. 

They also have the right to a fair rent, typically well below market value. 

These Rent Act 1977 tenancies significantly dent the value of a property and restrict the number of interested buyers. They are often sold at auction rather than through estate agents. 

The Ministry of Housing publishes an online guide about protected tenancies.

Selling a house with a sitting tenant

Selling a house with a sitting tenant comes with pros and cons. A sitting tenancy narrows the marketing options. Someone looking to buy and move into the property is unlikely to want to consider a home with a sitting tenant, which significantly restricts the number of buyers interested in a purchase. 

That leaves another property investor as the likely buyer, who may like taking over a home with a tenant already in place. That means they have a guaranteed income from day one and only have to worry about several weeks without an income while refurbishing and marketing the home.

 If the tenant agrees to handle viewings, marketing should proceed as usual. From the outset, keep the tenant in the loop about what’s going on and give at least 24-hour notice of viewings. Allay the tenant of any concerns about transferring their deposit on a sale as a system is in place to deal with the money. 

If the deposit is with an insured deposit protection scheme, the seller passes the money to the buyer, who re-protects the cash. The buyer sets up a deposit protection account for custodial schemes, and the seller transfers the money into the new account. 

Cash flow is another factor to bear in mind. Selling a buy-to-let with a tenant in place means you do not have to fund the mortgage and other bills while the property stands empty, waiting for a buyer.

Completing the sale

Selling a buy-to-let with a sitting tenant should be simple with the legal process. The contract will specify the tenant's name, the monthly rent and the tenancy terms. 

The seller should ensure the rent is paid to the completion date and that any mandatory checks, like gas safety certificates, energy performance certificates and right-to-rent inspections, are valid. Dealing with the tenant after the keys have changed is down to the buyer.

…and don’t forget the tax

Any disposal of investment property comes with a tax bill. Landlords must report the deal within 30 days of the sale to HM Revenue & Customs and pay any capital gains tax due. 

Working out the tax bill can be complicated if you have lived in the property or shared ownership with one or more other investors. Generally, the chargeable gain is the sale price less the original purchase price and some allowable expenses, like estate agent and legal fees. 

Other adjustments may reduce the gain, like the annual exempt amount, capital losses offset against the gain and other taxpayer-specific reliefs. CGT is then paid 18% by basic rate taxpayers and 28% by higher and additional rate taxpayers. 

You can go to the HMRC website for more information.

Selling A Buy To Let With A Sitting Tenant FAQ

Most buy-to-let homes are sold with vacant possession, but some landlords may need to sell but can’t under COVID-19 emergency rules. The sale comes with some worries – how to value the property, keep tenants happy during the sales process and pay the tax bill due on the sale. 

To help ease some of these fears, here are some responses to the most asked questions about selling a buy-to-let with sitting tenants.

How much is a house worth with a sitting tenant?

First, the valuation depends on whether the house is subject to a protected or assured shorthold tenancy. 

A protected tenancy may mean a landlord can own a home for 80 years before taking possession. That’s based on the longevity of the current tenant and anyone who may inherit the tenancy. A protected tenancy can knock a property value down to at least half the open market price, if not more. 

Assured shorthold tenancies can impact the value of a property but less than a protected tenancy. 

Other factors like location, type and condition of the property also come into play, like any other house sale. The only way to settle on a fair selling price is to ask for professional valuations.

Where do I sell a buy-to-let with a sitting tenant?

You can try a local estate agent but will probably have better luck online with portals like Good Move or Prime Location.

Speaking to a specialist auctioneer might be worthwhile for homes with protected tenancies.

How do I work out the capital gains tax due?

Speak to an accountant or tax adviser to ensure you offset the correct reliefs and allowances, and don’t forget you have just 30 days from completion to work out the CGT bill and pay the tax.

Can I check out the tenants before buying?

Running checks on the renters in situ is necessary before buying a buy-to-let with sitting tenants. There’s always the chance the seller is pulling a fast one and trying to eliminate problem tenants. Reference the tenants before completion. 

Check they have paid the rent, no other bills are due, and the right to rent, gas safety certificates, and any other paperwork are up-to-date. However, you can’t sign a tenancy agreement until you own the property.

When should landlords tell tenants they are selling?

It is a good idea to keep tenants onside about plans to sell their homes from the start. They will naturally be worried that the buyer will evict them, so encourage the buyer to discuss their intentions with the tenants as well.

Can the new prospective landlord grant a new tenancy to the occupiers before completion?

The new prospective landlord can only grant a tenancy to the current occupiers once the sale is completed; they are not the landlord (you continue to be the landlord). Once the sale is completed, the new landlord can agree on new tenancy terms with their tenant or leave the existing tenancy in place.

Can the new prospective buyer serve a possession notice before completion?

No. Similar to being unable to grant a tenancy, only a “landlord” can serve a notice on a tenant.