Joint Mortgage Advice

Danjken

Hi there,

I’m in quite an unusual situation and can’t work out what to do. Your advice is much appreciated.

A long term friend and I want to buy a renovation project together. Neither of us has owned a house previously – but we’ve shared a rental property for years and have renovation experience.

We can each get a mortgage for the full asking price individually, so don’t technically need a joint mortgage.

The problem is that we’d both be investing considerable equity in the renovation itself, and plan to share any profit (or loss) resulting from the eventual sale of the property – which makes a joint mortgage almost necessary to ensure equal ownership.

I know what you’re thinking... just go for a joint mortgage for the sake of legality. However, if only one of us buys it (which is easily affordable) the other still retains the right to a First-Time-Buyer mortgage for a future property – and the attractive LTV rate and low APR would make that much easier.

Surely if we get a joint mortgage, even if it’s only based on one salary, that will count as the one and only FTB mortgage for both of us?

If one of us buys the property on a single mortgage, would a solicitor be able to draw up a contract stating that all profit/loss is shared, and that all equity investment is repaid upon sale?

Kind regards,

Daniel

Mortgage_Help_4

Forget the problem of losing your FTB status as FTB deals don't exit anymore and were almost 99% always a gimmick to fool people. If you buy in one name then a solicitor would be able to protect your deposit if any paid by a minute of agreement type document and backed up with a back to back agreement. However there would be additional legal costs. If you buy joint and then sell then you can both offset your capital gains allowance which you each have per tax year and therefore look to avoid any potential capital gains tax and if you buy in one name only then you may be caught with CGT on the resale which would make it unfair for one of you and I do not think a legal agreement can be made to cover someone eleses tax, etc.

In summary buy in joint names double your CGT exemption allowance and share the profits tax free 50/50 and don't give a damn about the FTB deals as they don't exist and are a scam and 999 times out fo 1000 homeowners and movers can get the same deals etc.

phlash

Mortgage adviser maybe, tax expert no.

CGT wouldn't come into the equation. You're renovating the house for profit on resale, this is a trade. You would both be taxed under the income tax rules.

Renovate a BTL property, and in the future you sell it, then it is under CGT rules and your allowances could be used. (The renovation was a cost to the BTL business, where the profit is sought in the rental income. This is technically different to the renovation being for the purpose of making a profit to be realised by the sale of the asset.)

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I am a ..... (let's just say I work in a tax related job)

getmore4less

Going down the 50:50 route for everything(deposit/mortgage/cost) keeps is clean.

It would certainly be possible to structure the purchase as 50:50 even if one of you actualy did the borrowing for the mortgage.

These days low LTV gets the best deals, FTB does little to get better rates might help borrow more but things have tightened.

One option to consider is an offset mortgage for more than you need, this will give you flexability, liquidity, and contingency ay fairly low cost and allow you to release funds as needed for the project.

CLAPTON

well worth carfully considering the tax situation
just some examples

-if you buy the property and live in the property. you renovate the property whilst living there and just happen to sell in a couple of years it's highly likely the the HMRC will treat this as simply owner occupation and no tax is payable.

- if you don't live there and renovate then it's likely that the HMRC will treat it as trade in which case you pay tax at your marginal rate.
Not knowing your income and current tax band, however if you own jointly the it's likely that less tax will be payable at 40%

-if you don't live there and intend to do it up to let, but then decide to sell you may be able to argue that it is a capital gain and if jointly owned then you gain two CGT allowances

there are other scenerios to do with the tax position... from what I can see jointly owning is very unlikely to be a tax drawback and owning jointly may save a lot of tax.

Mortgage_Help_4

Mortgage adviser maybe, tax expert no.????

Of course I am no tax expert as most finacial and mortgage advisers cannot offer tax advice under their terms of their PI cover!!! Are you ????

I was simply stating that there are better tax advantages going 50:50 as this would lessen the chance of CGT being charged or lessen what is charged. I have only come accross 2 people paying CGT for this sort of thing in the last 25 years!!! I think most people got my message about a yes vote for joint and I am sure they would still go ahead as if they have to pay CGT then they have made a very good profit from this transaction, you do the maths!

I do not call myself an expert as it is a stupid word as many people call themselves experts after a short while or with no experience or financial qualifications.. Just for the record I have been a financial director of 2 companies and have advised on mortgages for 25 years and I am chartered status but I do not hold myself out to be an expert as I learn something new everyday or try to. I have no PI for tax advice and therefoire I dont give it!!!

Danjken

Thanks for all the advice guys. It’s much appreciated.

We both plan on living in the property (which is legally habitable) whilst doing the renovation – so hopefully upon sale any profit will be exempt from CGT. Can someone confirm this – even if the project only takes 6 months?

There is the possibility we might let the property if the resale value doesn’t yield enough profit.

Either way, we need to be able to buy quickly upon completion, so that we have somewhere else to live. That means raising a second deposit from our own income – which is the main reason I thought it would be better to have a second FTB mortgage in reserve.

Are there any non-FTB mortgages about that offer comparable LTV rates? The investment mortgages I’ve looked at are around 75% - whereas the FTB is more like 92%.

If anyone can think of a better way of doing this I’d be really interested to know.

Kind regards,

Daniel

phlash

As stated previously. The danger here is that you will be taxed under income tax rules, in the same way you pay tax from your job.

Question: Why are you renovating?
Answer: To make a profit.
Result: This is a trade, in the same way you go to work to make money.

Question: Why are you renovating?
Answer: To improve my house so it is better for me.
Result: This is your principal private residence, you intend to live there and its purpose is not to make a profit, any profit made is as a consequence of the renovation.

Subtle, but different.

CGT will come into question if you are planning to let this house out.

Google, "badges of trade".

phlash

By the way ... to answer 'Mortgage Help' and his rude personal message.

I am in a tax related job, and am in a very familiar situation to the OP.

I have just completed on a purchase of a joint venture, that needs renovating etc. I am speaking from a position of similarity and familiarity.

My advice can be ignored, scrutinised or whatever you feel. I scrutinised your advice, as you began to talk about CGT, which distracts the OP. The real issue of course, is income tax.