Buying a second home - tax credits!!

stebiz

This is just a bit of advice for a friend really. He has 2 children and gets Tax Credits topped up on his income. He has no mortgage left though and has savings. He was thinking of buying another property to let out. The money received from the rent will barely cover the mortgage - so is this classed as no income.

I've told him this might cause him a problem with Tax Credits. Am I right??

Thanks

karenx

Am I the only one who would wonder why someone would get a mortgage to rent out a house to make a loss as rent wouldnt cover mortgage payments??????

stebiz

karenx wrote: »

Am I the only one who would wonder why someone would get a mortgage to rent out a house to make a loss as rent wouldnt cover mortgage payments??????

I said barely cover mortgage payments. That means he is looking to make nothing 'income' wise - but he will in the long term 'capital' wise!!

karenx

But ontop of covering the extra mortgage payments they would need to pay for any repairs and gas safety inspections etc. Theres alot more to renting out a house! Also what if a tenant doesnt pay the rent, or falls into arrears, or leaves and cant find another tenant.

nesco

I think in twenty years time it will be free of mortgage and will be nice investments for the kids.
If I were be able to get a mortgage I would do all the way.

For stebiz (I am not going into detail but overall)
Rent will be counted as income but they can deduct the mortgage interest from this rent and whatever is left will be counted as income.Also if they spent any money for the house(I am not going into detail but overall) they can deduct it as an expense and after than they have to pay tax on the rental income as well.
So they need to consider advantages and disadvantages.

alwaysonthego_2

Rental income is classed as income for TCO the first £300 is deducted

look at page 21

http://docs.google.com/viewer?a=v&q=cache:4dR8pKEKpkcJ:www.hmrc.gov.uk/leaflets/wtc2.pdf+tax+credits+second+home+rental+income+uk&hl=en&gl=uk&pid=bl&srcid=ADGEEShCeWjg83aybGcJLkWV8_cz72mudC7U46aUJ5nLn9vU5pKqbsIQ0hrnuRbihG-vKQK_vFBeTfRV15SPBjBmW-RJ1JXX2sCk7tdSNAzWon1hL4crnaHQAV2x0Cww9BvZRgfAcgXh&sig=AHIEtbTppECSHJsbvolKuzK-CRBGILX9dg

Can we please keep this on topic.

dmg24

nesco wrote: »

I think in twenty years time it will be free of mortgage and will be nice investments for the kids.
If I were be able to get a mortgage I would do all the way.

That is based on the 'bricks and mortar is always a good investment' theory. Recent years have shown us that is not always the case.

I would be very careful putting all of your savings into property at the moment. Remember that the next govt may (or may not) abolish tax credits, so they really cannot be taken as guaranteed income.

olivetti

nesco wrote: »

I think in twenty years time it will be free of mortgage and will be nice investments for the kids.
If I were be able to get a mortgage I would do all the way.

For stebiz
Rent will be counted as income but they can deduct the mortgage interest from this rent and whatever is left will be counted as income.Also if they spent any money for the house they can deduct it as an expense and after than they have to pay tax on the rental income as well.
So they need to consider advantages and disadvantages.

Not 100% correct. As you say only the interest part of the mortgage is allowable as a deduction against any income.

When it comes to spending money on the house it will depend if the expense is a revenue expense, repairs etc or a capital expense, improvements, stamp duty and purchase fees. Only revenue items are allowable to be set off against rental income. Capital expenses can be used to offset any possible capital gains tax in the future.

They will also need to inform HMRC that the have started to rent out a property and it may well affect (quite rightly)any tax credit claim.