Buying a new house and renting my own. Confused

deewhite

I have a deposit of one hundred thousand and i want to buy a house worth nearly 2 hundred thousand. I own a house at the min and my repayments on the mortgage are £320 per month, ive been told i can get nearly £500 per month renting it. What would be the best thing to do in this situation ie do i change my current mortgage to a buy to let, and get a new mortgage for the new house? Any advice gratefully recieved. Thanks

Fire_Fox

You may not need a BTL mortgage you need consent to lease from your existing lender. Don't forget the £500 a month will be subject to all sorts of outgoings - letting agents, repairs and maintenance, landlord's insurance, tenants who don't pay, vacancies, tenants who trash the place, income tax and (when you sell) you may be liable for capital gains tax.

deewhite

Thanks, ive considered all the risks you mentioned apart from the capital gains tax, i dont even know what it is so i will look into that. thanks again

deewhite

I have looked into that a bit but dont completely understand it, if i sold my house in ten years for £200000 how much would they take off me assuming i was liable? The main reason i want to rent the house out is to let the value of my house rise a bit again before selling so i can pay my second mortgage off with the profit. If i thought that might not happen i might sell now instead. hope im not being too long winded.

nollag2006

CGT should be minimal on the sale.. 18% on the gain (less expenses of the sale and purchase cost), and you will also have a substantial personal Tax Free Allowance. In addition to this, you will only have a proportion of the gain that is taxable, as the taxman will not tax you on the period during which the house is your main home (your PPR), and for the final three years of ownership.

This weblink is useful:
http://www.thisismoney.co.uk/mortgages-and-homes/article.html?in_article_id=410130&in_page_id=8

Note that it states CGT at 40%, as it is written in 2006, rather than the current prevailing rate of 18%

nollag2006

deewhite wrote: »

I have looked into that a bit but dont completely understand it, if i sold my house in ten years for £200000 how much would they take off me assuming i was liable? The main reason i want to rent the house out is to let the value of my house rise a bit again before selling so i can pay my second mortgage off with the profit. If i thought that might not happen i might sell now instead. hope im not being too long winded.

Hi Dee

Some questions:

Which house do you intend to sell in the future: your current home (House A) or the house you intend to purchase in the future (house ?

How long do you intend to hold it for?

What do you assume house price inflation will be over that term?

How long have you owned your current home for?

deewhite

Hi nollag, I ve been in house A for 5 years its a basic 3 bed terreced house, as i have a big deposit i want to buy a better 4 bed detatched house (house b) i intend to stay in house b forever. I was lucky enough that i bought house A before the "boom" so its worth about £130000 now and i owe £110000 so im hopeing in the next 6 to 10 years the value of house A might rise so i will be able to pay off the mortgage on house B with whatever profit i make. Either way at a push i can afford both mortgages even if i dont have a tenent, but im told the area im in is popular for renters.

nollag2006

Hi Dee.

What did you pay for your house in 2005?

deewhite

i paid £98000 in 2005. At its peak similar houses in the area were selling for around £200000.

nollag2006

OK

Assuming that you hold House A for 10 years, and in 2020 it is worth £200,000 (or £195,000 after sales costs), this would give you a gross gain of £95,000 over the 15 years you will have owned the house. I am assuming purchase costs of approx £2k on your initial purchase price.

The period from 2005 to 2010 is not liable to CGT, as House A was your home (or Principal Primary Residence - PPR) during that time. The tax man will also usually give you an automatic CGT exemption for the final three years of ownership. In other words, if you sold house A within 3 years of buying House B, no CGT would be payable.

So if you hold House A for 15 years until 2020, then only 7 of those 15 years would be liable to CGT, in other words only £44,333 would be chargeable.

Against that you have an annual tax free allowance of £10,100 (which may change over time), so the net taxable gain would be approx £34,233 charged at 18%, which comes out at a tax charge of approx £6,160.

If you sell house A sooner, this charge would fall. Obviously if the sales price or tax rates change, so will your CGT bill.


Note that you should inform HMRC within two years of buying your new property, as to which property you elect to use as your Principal Primary Residence (PPR). This will reduce the CGT liability on either property when you come to sell them, as so many of our esteemed MPs have used to their own benefit in recent times.

If you are married you should ensure that house A is in joint names with your partner, as only half the gain would be chargeable to each person who can then apply their personal CGT exemption (currently £10,100) to their half of any taxable gain.

More details on directgov:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4020890

deewhite

Thats some great advice nollag thank you