Buy to Let

saint2012

Hello

Me and my partner are looking to buy a house. Although due to stupid mistakes in our early 20s we are unable to obtain a mortgage and my partner's income is made up of a lot of overtime, bonuses, call out fees, etc. This is effecting how much they will lend us and they are not classing it as gauranteed income.

Anyway we have a 25% deposit saved and my parents have offered to obtain a buy to let mortgage which we pay every month.

I know there are tax implications for them. But just wanted to firstly clarify what these are? I have read that you can offset expenses aginst the rental income to work out tax, but can I clarify if this is the whole mortgage payment monthly or just the interest on the mortgage (the mortgage will be on a repyament term). Also, I am assuming buildings insurance is also offset?

Can anyone advise if there are any other tax implications?

Our plan was to seek our own mortgage in about 10 years and buy the property off them? The only problem with that is our deposit is the equity tied up in the property? How does this work when applying for a mortgage? Can we buy it off them for the value of the balance on the mortgage and save a 10% deposit on that value or would we need to buy it off them for what they paid for it and somehow say the equity is our deposit?

Hope that makes sense.

Ps I know that it they sell the property at more than what they paid for then its liable for capital gains tax.

Many thanks

Mrs_Z

Yes, you can deduct certain expenses from the BTL income - see Government's website for further info:http://www.direct.gov.uk/en/moneytaxandbenefits/taxes/taxonpropertyandrentalincome/dg_4017814Please note that most BTL lenders have restrictions on renting out the property to family members.

kingstreet

Only the mortgage interest can be offset against the rental income for income tax purposes.

You can see other allowable expenses here;-

http://www.direct.gov.uk/en/moneytaxandbenefits/taxes/taxonpropertyandrentalincome/dg_10014027

When you come to buy the property from them, you can use a process known as "purchase at undervalue from family member" where you buy the property for less than its market value and use the difference as your deposit.

saint2012

Thanks for the advice.

Does anyone know if mortgage works allows tenants to be family?

Kynthia

This sounds like a complicated way a going about things. Your parents may reduce their tax liability with the allowable expenses but they will still have to payout the expenses along with some tax. They will have to provide annual gas safety certificates, protect your deposit, fill in annual self assessment forms and be subject to capital gains tax in the future. Also BTL interest rates are often higher.

Can't you look at them being a guarantor on your residential mortgage or perhaps buying the property with them so one of them is a joint owner? You could then have a Deed of Trust that shows the property is yours.

saint2012

We have looked at gaurantor mortgages but the mortgage term would only be less than 20 years.

We would pay for all expesnses involved. Its either that or pay a quarter more each month than we would to them in rent.

00ec25

saint2012 wrote: »

Ps I know that it they sell the property at more than what they paid for then its liable for capital gains tax.

in principle - see below

kingstreet wrote: »

When you come to buy the property from them, you can use a process known as "purchase at undervalue from family member" where you buy the property for less than its market value and use the difference as your deposit.

this will have implcations for the CGT calculation
you and the parents are legally known as “connected persons” .

they can sell it to you for any amount you and they agree but for the tax calculation its “sales” value will be the full open market value not the discounted amount you paid them.

Of course the significance of this depends on how much the property has increased (or not!) in value by the time they sell up but the gain will be with reference to the market value not what you pay them for it

saint2012

So is there another way we can avoid CGT by using our deposit (the equity) to buy another way?

Kynthia

I know you said you can't do guarantor but did you look at buying with them? I know someone who bought their first flat with their dad. He was on the deeds and mortgage with her but it was residential as she was an owner living there.

Have you talked to an ideoendant mortgage advisor about possible options?