Casual letting and tax question

trumpton

I have done a forum search for an answer to this, but I'm still a bit confused. Here's the situation:

We bought our current house without selling our first one. It is on the market, but a friend who is breaking up with her partner has asked about renting it short term.

The mortgage on the house (House A) is £5k. The mortgage on our new house (House is £175k. Both are in joint names.

I don't work but my OH is a higher rate tax payer. Any profit from the rent (after off-setting expenses etc) will also be taxed at the higher rate, I assume. If we want to help her out (we will rent it to her at below market value), how can we best do this without paying 40% tax?

Am I right in seeing these as our options?

-Put House 1 just in my name and use my tax allowance.
-Remortgage House 1 and offset tax against the much lower profit as
mortgage will be higher.
-Off-set profit against mortgage on House 2 - not sure if this is allowable.

Which would be best?

Our lender is okay with letting the house, and I am aware of the problems of renting to friends. We may well just end up letting her live there free for a bit, but I think you have to have a tenancy agreement to actually get housing benefit. We are reluctant landlords but it would be a way of helping her out for a few months until she can find somewhere more suitable.

Nosht

Trust no one, use a lawyer & do it legally or you might lose possession of your property. :eek:

And to answer your question, run it as a business & pay no tax.



Regards,


Nosht.

noh

If the property is in joint names half the profit would be taxed at 40% and the other half taxed at your rate of tax.
If only going to be short term rental the costs of remortgage will probably be greater than the tax saving.

anselld

I doubt you can move the house fully into your name without closing the joint mortgage.

However, you can register ownership as 99% to you 1% OH, (assuming there is mutual trust). However you need to do this properly via solicitor / land registry. Then you can lodge form 17 with HMRC to declare the split as 99-1

Rather than remortgaging you could ask your house 1 company to give you a further advance, but there will probably still be fees and these might outweigh the benefit.

You cannot offset house 2 mortgage because it was not taken wholy for the purpose of financing the let.

trumpton

Thanks noh and Anselld for the prompt advice. As I thought, it could be quite complicated and a fair amount of hassle to let the house. Interesting to note that if we had taken the 2nd mortgage just in order to finance a BTL, it would presumably be okay to offset the tax against it.

We don't want to go through a lot of expense and hassle for what may only be a few months, so it looks like letting the house is not the way to go. Thanks anyway.

silvercar

Thanks noh and Anselld for the prompt advice. As I thought, it could be quite complicated and a fair amount of hassle to let the house. Interesting to note that if we had taken the 2nd mortgage just in order to finance a BTL, it would presumably be okay to offset the tax against it.

I agree. You could try the arguement that if you had sold the first property, you wouldn't need a mortgage on the second, so the purpose of the mortgage was to retain the first property as a BTL. Then the mortgage interest, upto the value when first let, would be an allowable expense.

trumpton

Ah, there you ar Silvercar! I almost pm'ed you with my question instead of posting as I know you are very knowledgable about these kind of questions. Thanks for your comments.

The idea is to sell the first house and clear the mortgage on the second, but I couldn't honestly say we ever meant to keep it as a BTL. We have discussed renting it as a last resort - if it's not sold by November, I reckon it won't sell until after March. I can see I will need to do a lot of research and calculations before we comit to letting it out. Thanks for the input, guys.

theartfullodger

Do it all straight, reflecting the real situation, declare your income correctly to HMRC & get a tenancy agreement properly drawn up & make sure you comply with all relevant regs: eg Gas safety (!!) , EPC (can't even market it to your friend without one), and make sure you have Landlords insurance: Without LL insurance if friends wee kids/,mates stay over, there is a fire, someone 'orribly burnt & house burns down your insurance co. won't pay out for the property or personal injury & you could be bankrupt....(when damaged persons take you to court..)

Surely doing it right & proper is the British way??

Cheers!

Lodger