renting my house out and tax

wildfrog

Hello,

We currently have a 2 bedroom house which as a family we have out grown. We are struggling to get together a big enough deposit to buy somewhere a bit bigger to suit out needs so we were intending on waiting until our fix period on our mortgage ended and then sell the house and rent somewhere more suitable while we saved a bigger deposit.

My Dad has suggested to us renting our house out and renting somewhere else so we staying on the housing ladder, which until now we had dismissed as I thought the tax we would be paying on the rental income would make it impossible.

My Dad then said you only pay tax on the rental income minus the mortgage interest payment and maintenance costs. As we expect the house to rent for around £500pm and our minimum mortgage payments are about £580, of which about £490 is interest, this suddenly looks alot more possible for us as the rent minus the mortgage interest is £10! we can afford to pay tax on £10 a month!

Can anyone confirm that this information is accurate? It seems too good to be true!
What would our next steps be? We know we need to contact our lender to ask permission and to see what they would charge us/ if they would put our rate up. But assuming they would be happy what would we need to do next? We think we could probably find a tenant fairly easily without using a letting agent, but would want everything above board and protected for the tentants and our sakes.

Thanks in advance, all suggestions welcome!:)

MrsManda

There are certain allowable expenses which you substract from your rental income before being taxed.
Details of how it works can be found on direct.gov.uk: tax on rental income:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017814

A list of allowable expenses can be found here:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10014027

I think you need to talk to your mortgage lender to get consent. Details on the basics of what you need to do in order to let out your house and what your responsibilities are can also be found on the direct.gov.uk website:

http://www.direct.gov.uk/en/HomeAndCommunity/Privaterenting/RentingOutYourProperty/DG_189124

clutton_2

if your mortgage repayments are higher than the rent you will receive i doubt very much if the lender will agree to give you consent to let

Jowo_2

As well as seeking mortgage lender permission, you have to consider the impact of worse case scenarios, such as long voids or non-paying tenant, and significant repair costs. It can take many months to legally evict a non-paying tenant.

Can you afford rent on a new property and pay your existing mortgage, plus make anyhead way on savings when you have 3 moving costs coming up, too (out of existing property, into rental and then back into new property)? And realistically, how much more can you afford to save if you are moving to a new rental property that is bigger and could be more expensive than your mortgage?

The other issue is how you can time the sale of this property with ending the tenancy of your proposed tenant and purchase of a new one? A tenant is entitled to quiet enjoyment of the property and doesn't have to consent to viewings, and a new buyer is generally deterred by tenants as there can be issues with getting vacant possession if the tenant decides not to leave. We get a lot of posts on here from tenants who have issues arising from the fact it is an 'accidental' one from an inexperienced landlord who is merely just marking time until they can sell it.

How bad is your overcrowding for you to warrant entertaining this risk?

Terrysdelight

Are you saying you don't have enough equity in your property to act as a deposit?

Is your mortgage portable? Even if you are on a fixed rate, many mortgages are portable and so long as you have enough equity in your current house - that will be used for your deposit.

theartfullodger

Think you are only considering income tax...

There are I think at least 7 taxes a landlord may be liable to pay, not least CGT. Suggest you consider the whole, "big picture" scenario before deciding on your future action based on saving money on just one of the taxes...

But, yes, you only pay tax on income less allowable expenses:

However, (I've said it before, sorry..) ONLY rent out property is you have the emotional & financial reserves to cope with e.g. the "tenant from hell" who pays no rent for (say) 7 months, you keep paying the mortgage PLUS legal fees to get him out then he 'phones you 10:37pm Saturday evening "toilet's leakin' innit".. "oh, sorry to hear that my dear sir, for how long??" ... "Dunno, 3, maybe 4, weeks, 'orrible mess of the living room ceiling & sofa below: carpet's minging..." "OK, I'll have my maintenance man call you Monday morning..." .. "Nah, nah, you gorra fix it noww!!!!".. and you know you must repair the problem or that nice Judge at the possession hearing may decide you've been harassing your poor defenceless tenant & allows him to stay even longer.. (Or the roof needs replacing.. or any other manner of problems...).

It does not sound like you have significant financial reserves..

Hope it works out...

wildfrog

Jowo wrote: »

As well as seeking mortgage lender permission, you have to consider the impact of worse case scenarios, such as long voids or non-paying tenant, and significant repair costs. It can take many months to legally evict a non-paying tenant.

Can you afford rent on a new property and pay your existing mortgage, plus make anyhead way on savings when you have 3 moving costs coming up, too (out of existing property, into rental and then back into new property)? And realistically, how much more can you afford to save if you are moving to a new rental property that is bigger and could be more expensive than your mortgage?

The other issue is how you can time the sale of this property with ending the tenancy of your proposed tenant and purchase of a new one? A tenant is entitled to quiet enjoyment of the property and doesn't have to consent to viewings, and a new buyer is generally deterred by tenants as there can be issues with getting vacant possession if the tenant decides not to leave. We get a lot of posts on here from tenants who have issues arising from the fact it is an 'accidental' one from an inexperienced landlord who is merely just marking time until they can sell it.

How bad is your overcrowding for you to warrant entertaining this risk?

All good questions, let me try to give you a bit more infor on our finances. At present I am on maternity leave on SMP only, we are currently overpaying the mortgage by £140pm. I return to work in January. Where I have budgeted that we can overpay the mortgage by £320pm. (900pm total)

Looking at local rents, I anticipate that house we would rent would be £600-£700pm. So our rent £650 + mortgage £580 - house rent £500 = £730. This leaves us with £170pm free. We would then use this excess to continue overpaying the mortgage. ( I haven't included here the fact bills will rise slightly when we move, we suspect our gas and elec will be about the same as our house is joined to a currently empty house, it's an old cottage that is expensive to heat. but council tax and water rates will certainly increase. I think I can account for these in other areas of the budget, such as fuel budget as we would move a bit closer to my work)

Obviously we would make a much bigger dent in the mortgage staying put for a while (I forcast that we could move in just under 2 years based on this rate of op and our mortgage rate staying the same and house prices remaining constant. Alot of assumptions I know!) But we really feel this is not an option, hence if we do not rent the house out we will just sell it and come off the market for a while, either way we would encure the 3 fold moving costs

We currently have £4300 in savings, so this is the pot we would us to pay the mortgage if we had periods of it being empty and repairs required. If we did decide to rent it our I think we would want to increase this pot a bit to give us some breathing room.

When it comes to selling to buy a new house I don't know! As far as I see we have 3 options
1) leave the house empty and be paying the mortgage with no income coming in to cover it. Not a thought I like.

2) Move back in temporarily until it sells.

3) come to an agreement with our tenants. Could we lower their rent for the inconvience of views etc? I would prefer for a far lower rent to be coming in than nothing at all! Is there a way of drawing up agreements for them to leave once the property is sold?

Not sure at all on this bit!

Anyway, there is a bit more info and I welcome any input, please point out any flaws you see, or ideas for improvement. Particularly around the selling/buying bit!

wildfrog

Artfulodger - we cross posted!

No time to respond now, being shouted out to go out, but I will come and reply more fully later.

WFx

wildfrog

theartfullodger wrote: »

Think you are only considering income tax...

There are I think at least 7 taxes a landlord may be liable to pay, not least CGT. Suggest you consider the whole, "big picture" scenario before deciding on your future action based on saving money on just one of the taxes...

But, yes, you only pay tax on income less allowable expenses:

However, (I've said it before, sorry..) ONLY rent out property is you have the emotional & financial reserves to cope with e.g. the "tenant from hell" who pays no rent for (say) 7 months, you keep paying the mortgage PLUS legal fees to get him out then he 'phones you 10:37pm Saturday evening "toilet's leakin' innit".. "oh, sorry to hear that my dear sir, for how long??" ... "Dunno, 3, maybe 4, weeks, 'orrible mess of the living room ceiling & sofa below: carpet's minging..." "OK, I'll have my maintenance man call you Monday morning..." .. "Nah, nah, you gorra fix it noww!!!!".. and you know you must repair the problem or that nice Judge at the possession hearing may decide you've been harassing your poor defenceless tenant & allows him to stay even longer.. (Or the roof needs replacing.. or any other manner of problems...).

It does not sound like you have significant financial reserves..

Hope it works out...

Phew, back in the warm now.

This is not a pretty picture is it? Has this happened to you?You're right I would be losing sleep and freting about it massively in these circumstances.

Our intentions would be to rent to people we know. We have several close friends who has often said if we wanted to rent the cottage to let them know as they would love to rlive here. We love our friends and I can not imagine them messing us around. However I guess if it did go tits up in some way it would be further complicated due to the friendship.............

Hmmm lots to think about.

theartfullodger

My scenario above did not happen to me but I've had "interesting experiences" with tenants: So far I've recovered over £6.5k rent arrears from ex-tenants through the courts to give you an idea.. (typical rents were £400/month..)

I happen/happened to have sufficient financial reserves and am quite relaxed about things going wrong - for a bit.. Think the main issue is do you / your family have the right sort of personality to cope with things going 'orribly wrong.

Two interesting things that happened to me...

- Tenant departed, had paid etc, but he let a young portugese couple & their 18-month old stay in the place. I went round and had to ask them to leave (they left!!!) but tears etc. etc. etc.. That made me feel the worst ever about being a LL... I'd already taken advice from my solicitor & thus pre-warned the Police & council housing dept and both were entirely sympathetic to me, council saying in those circumstances they would be unable to help the family.

- A couple (who had not been paying me rent, were subletting for more than the rent & (he was) boasting about it round the town) - eventually I got the right paperwork to get them out. They left, but very unhappy, and removed ALL the carpets and in doing so wrenched the storage-rads off the walls. As it happened I wasnae bothered as the place needed a refurb/rewire/re-carpet but these things do happen. (Mrs was Mum of a previous tenant at a different property and the daughter had been fine, I'm still on good terms with daughter..)

Also

- I heard the wonderfully amusing (well it made me smile) story of tenants selling off the house furniture at a car-boot.

IMHO never rent to "friends" or relos.. Always if possible do so with people you don't (particularly) know. Golden rule (no 2..) : ONLY rent to someone if you are prepared to go through the courts, with all the publicity in your area, and evict, possibly up to & including bailiffs carrying them out. Otherwise you are writing a VERY VERY large blank cheque..

Cheers!

Artful

(Most years I make money from lettings: But not every year....)

clutton_2

artful always exagerates..... !