Advice on buying a house with self-contained flat

djdagz

Hello All

We're looking at buying a house, where they have converted the basement into a "self-contained garden flat". Briefly looking into it on the net, it looks a bit of a minefield! However renting it and using that money to help pay the mortgage sounds a great option. My questions are:

1) Does it count as a self-contained flat if the water tank is in the main house? I'm thinking could I rent it under the "rent-a-room" scheme for tax purposes?

2) Both properties have their own council tax. For any periods where we couldn't rent it, would we have to pay that council tax?

3) If we jointly owned the property, how would the tax work on the rented income? Would one of us declare it, or both declare half?

4) Would we just get a normal mortgage on the whole property, then be able to rent out the flat? Or would we need to get a BTL mortgage on the whole place? Or would you get 2 separate mortgages?

5) Related to above, if it is just one mortgage, how do you claim tax relief on your mortgage interest? Presumably its worked out pro-rata, rather than on the whole mortgage?

We would be living in the main house above.
Thanks in advance for your help

poppysarah

VOA by postcode and see if it's got sep council tax.

Could it easily be put back into the main property? Did they do it officially with building regs etc from the council?

djdagz

Yep the main house is Band C, the flat is Band A

Not sure if at a later date we could then sell the basement flat separately though. The water tank is defnitely shared, as is the garden, not sure about anything else.

They converted it 20 years ago. I see what you mean, I guess there were original stairs down there before, so presumably a new staircase could be put in (not sure quite where though!?). Not sure about the building regs back then.

lincroft1710

You should check if the flat can be let separately from the house, as sometimes the planning consent does not allow this. Council Tax would not be payable for up to 6 months if the property was unfurnished. I think you would only need one residential mortgage. If it has a separate CT band it is a separate dwelling for CT purposes. Many houses don't have water tanks, so I can't see the location of the tank having any bearing on the flat's status, it's a flat not just a room.

I think tax relief on mortgage interest was abolished a long time ago.

poppysarah

You get 6 months free if it's empty but I'd expect that to be limited/restricted but see your council's website for info. (sorry I had missed the bit you'd said it had sep council tax)

You'd have to have landlord insurance etc ... and pick your tenants very carefully as you live so close.

The mortgage might be an issue - most residential mortgages are just that.

Tax could be shared out but you'd be best seeking advice on that anyway.

djdagz

lincroft1710
Re: "I think tax relief on mortgage interest was abolished a long time ago"

The Direct Gov site lists one expense as "interest on property loans" - would this not cover mortgages?

lincroft1710

I inferred from your original post that you were looking to claim income tax relief on the mortgage. But in fact you would be looking to offset the tax on any profit from rent against the mortgage interest.

As you would probably only be able to get a single mortgage for the whole property (there's probably only one set of deeds and planning consent also probably forbids the sale of house and flat separately) then I don't know how this would work. Perhaps an apportionment of the interest payable would be allowed. I would suggest clarifying this with HMRC.

But as I said in my 1st post, check that planning actually allows you to let the flat out.

taxsaver

djdagz wrote: »

1) Does it count as a self-contained flat if the water tank is in the main house? I'm thinking could I rent it under the "rent-a-room" scheme for tax purposes?

2) Both properties have their own council tax. For any periods where we couldn't rent it, would we have to pay that council tax?

3) If we jointly owned the property, how would the tax work on the rented income? Would one of us declare it, or both declare half?

4) Would we just get a normal mortgage on the whole property, then be able to rent out the flat? Or would we need to get a BTL mortgage on the whole place? Or would you get 2 separate mortgages?

5) Related to above, if it is just one mortgage, how do you claim tax relief on your mortgage interest? Presumably its worked out pro-rata, rather than on the whole mortgage?

1) The water tank has no real bearing, other than if you want to sell it off separately (or if it's a HOT water tank and you are therefore paying for the flat's hotwater - in which casee you could probably work that into the rent that you charged).

2) Yes, but if unfurnished then you can usually have 6 months before it becomes payable.

3) HMRC will normally view it a 50% each in the case of joint owners, however this can be varied with a Deed of Declaration.

4) You can 'probably' get a normal mortgage for the whole thing (at least you could before the world went crazy!) but it might be more difficult now. Having said that, there are semi-commercial mortgages still available (often used for shops with o/o living space above/attached).

5) HMRC would probably 'try' to say it should be worked out pro-rata, however there is no reason at all that you cannot claim that the flat portion is 100% funded by mortgage (your own deposit being applied against the residential part only) which would maximise the interest off-set against your rental income. Clearly you would need to know what the valuation split is at the time of your purchase.

djdagz

Thank you taxsaver, really useful!!!

theartfullodger

(Assuming this is in Engerland..) There's an odd legal wrinkle.

Although self-contained and thus a separate dwelling, as it has been converted in the past the tenant would not get normal AST security but would have the same security of tenure as a lodger ("Occupier with basic protection") & you could evict them very promptly if there were "problems".

Chances are tenant/lodger, lender, council & any local letting agent would not understand this..

Check what I say here..

http://england.shelter.org.uk/get_advice/downloads_and_tools/tenancy_checker

Jaynne

Here in Scotland my Mum has a similar situation a house with a self contained flat attached. There is a door between the two but it's kept shut and locked usually.

Recently they essentially had the council put it as part of the main house for council tax purposes and so that she could benefit from the rent-a-room scheme. Now all the gas and electricity bills are in her name and they essentially get added to the tennants bills. The rent she charges is a little less now as there is a cap on what you can earn annually from the RaR scheme but it's more than made up for by the tax relief. Not only that but because the two parts are now one the tennant gets it council tax free which is a nice selling point.