Buy to let mortages

Shamish

Can anybody explain how these work please?

We've been trying to buy for a long time and my parents neighbours are going to be selling soon very cheap they are thinking of buying they've paid off there current mortage on there house and were thinking of renting it out to us so that our rent will pay the mortage. We get housing benefit for the moment while at college then once we leave college we would buy the house from them.

Would they have to pay any tax on our rent? could they get a buy to let and rent it to us? does anybody know what sort of costs would be involved would they have to pay a deposit or could they get 100% buy to let?

Thanks very much

Shamish PS we're in scotland so scottish law

dunstonh

Would they have to pay any tax on our rent?

It is a taxable income but you can deduct normal business expenses and allowances. There is also capital gains tax and potentially inheritance tax that come into play as well.

could they get a buy to let and rent it to us?

Most lenders are a bit fussy on lending on BTL where family or those on benefits are involved.

would they have to pay a deposit or could they get 100% buy to let?

Typically a 15% deposit although a greater amount may be required in your case as you fall under two of the "dislikes" for lenders.

Shamish

dunstonh wrote:

It is a taxable income but you can deduct normal business expenses and allowances. There is also capital gains tax and potentially inheritance tax that come into play as well.



Most lenders are a bit fussy on lending on BTL where family or those on benefits are involved.



Typically a 15% deposit although a greater amount may be required in your case as you fall under two of the "dislikes" for lenders.

Thanks do you have to tell the mortage provider who will be staying there?

lesleydejager

Hi Shamish, I bought a flat in Aberdeen last year on a buy to let mortgage. Generally you need 15% deposit and the interest rate will be slightly higher than a normal mortgage. Whether the landlord will have to pay tax depends on whether they are making any profit...on my flat the rent covers the mortage with about £40 a month left over, but after I've paid for insurance, landlord license and maintenance costs I am actually making a 'loss' as far as the taxman is concerned, but the property is appreciating in value and the mortgage is being paid off for me. When I sell the flat I will be liable for capital gains tax on the profit I make from the sale i.e sale price minus original purchase price.
Other costs for your parents to consider:
1.they will have to insure the building and any contents which belong to them (ie if they lease it to you furnished)...landlords insurance is a bit pricier than normal homeowners insurance as it covers things like malicious damage by tenants etc. For example, my property is insured for a buildings value of £92.5k and contents £3.5k and the premium is just over £167 pa.
2. there may be a requirement for a landlord license in your area, in Aberdeen it is £66.
3. if there is any gas in the property they will need to have it inspected annually by a CORGI registered gas plumber and it certified safe. I think this cost about £60-70 when I had it done last Febuary.
4. maintenance and repairs - the older the property the higher these costs are likely to be.

If a landlord uses a factoring agent to take care of collecting rent, organising repairs etc they will generally charge 7-10% of the rent, but as they will be renting to you not to strangers (and you'll be next door to them!) they presumably would do this themselves.

lesleydejager

forgot to say, the landlord will also have to do a self-assessment tax return every year where they declare income and expenditure on the property. If they work in a PAYE job, this means their deductions will all be at basic rate and they will probably have to claim back overpayments at end of tax year...a pain in the rear.

lesleydejager

you don't have to necessarily tell the mortgage provider who you will be renting to, but some lenders and insurers will only consider 'professional' tenants, hence why you see so many adverts specifying 'no students or DSS' :-(

MarkyMarkD

lesleydejager wrote:

forgot to say, the landlord will also have to do a self-assessment tax return every year where they declare income and expenditure on the property. If they work in a PAYE job, this means their deductions will all be at basic rate and they will probably have to claim back overpayments at end of tax year...a pain in the rear.

That doesn't have to happen. Just like with any other untaxed investment income, an estimated amount can be deduced from your tax code at the start of the tax year and you can pay tax under PAYE in the usual way.

Taxing earned income at basic rate (with no allowances) should only happen if either you don't provide a useful estimate of your net rental income, or if your net rental income will use up your allowances - in which case you haven't lost out in any case.

lesleydejager

MarkyMarkD wrote:

That doesn't have to happen. Just like with any other untaxed investment income, an estimated amount can be deduced from your tax code at the start of the tax year and you can pay tax under PAYE in the usual way.

Taxing earned income at basic rate (with no allowances) should only happen if either you don't provide a useful estimate of your net rental income, or if your net rental income will use up your allowances - in which case you haven't lost out in any case.

great, I wish someone from the inland revenue had told me this! i'll be sure to speak to them about it in April. Thanks MarkyMarkD

MarkyMarkD

The Inland Revenue genuinely try to set the right tax code for an individual's circumstances, and they certainly accept best estimates for untaxed income rather than taking the harsh approach of setting a "BR" tax code meaning everything is taxed at basic rate with no allowances. Definitely worth talking to them about it.