Tax on letting

Cariad71

Hello, I am thinking about letting out my property and buying another. My husband and I have paid off the mortgage on the property we'd be letting. We would let to a friend for £600 a month (credit checked etc).

We would be taking out an interest only mortgage on the new house for £600 per month.
The idea is that it would be a pension for me.
So we would have an interest only mortgage for £175,000 on the new house which would cost £600 and our old house would generate £600 per month.
I only earn £500 a month, so would it be worth putting the old house in my name so that I pay the tax (hubbie pays 40%).
I'm not keen to sell the 'old house' at the moment as prices are so low. If we can rent for 10 years, the vale of the house should rise.
Or would I be better off getting a buy to let mortgage on the old property, which will probably cost a grand a month? Any ideas|views.
I am not doing this for a profit now, but for a profit in 10 years. Old house worth 180,000-200,000.
Thanks in advance!

real1314

Afaik, you can treat the interest paid on the mortgage (against the new house) as an expense against the rental income.
You'd need to get qualified advice on this to be certain, otherwise it would cause you a significant issue.

Have you also considered all the other costs of letting?

Landlord's insurance:- £200+ per annum
Gas Safety Check:- £75+ per annum
Repairs:- Regular £250 per annum
Major Repairs:- £5,000+ (Roof; Boiler ; Heating system ; Wall ties etc)
Are you happy to deal with sorting out repairs, issues etc? Do you have contacts that can carry out repairs within apropriate timescales?

You'll end up paying around £500 per annum on the hope that it's price will rise. You say its worth £180-200k now, but that prices are "low"; Do you mean that you couldn't sell it for £180k or that you *think* it's worth more than that?

It's worth what it's worth right now.

How old are you now? How many years until you retire? Do you expect prices to recover and ten increase sufficiently to cover both the mortgage, selling costs and the £500 per annum?

Would you "invest" £180k with someone who said you also have to pay £500 per annum fees; that you can't liquidate it without significant capital loss, and that its uncertain how much growth you will get (if any) over the next 10 years? I wouldn't. :cool:

00ec25

so the new marital home will be on an interest only mortgage - why? If you cannot afford a repayment mortgage now then it does not really help your financial situation in the long term that you are not building up any equity in the new place (and risk negative equity in the short term)

Anyway the interest on the new home is allowable against the rental income from the old home so £600 cancels out £600 and therefore there is no income tax to pay anyway. Also by the time you pay the other costs which you are required to meet as a legitimate LL (renting to friend or not) you are actually making a loss for tax purposes, but that loss cannot be used for anything other than carry it forward until you eventually make a profit on your rental income and can then offset the profit against the loss

as a married couple the income from the old house will go against each of you according to your ownership portions and you will declare it as such on your tax return. If it is currently jointly owned then that will be 50/50. If it is owned as TIC (eg. in unequal portions) you can make an election using Form 17 to have the income reflect the unequal shares and so favour the person with the lower tax rate - assuming the ownership portion favours that person.

http://www.hmrc.gov.uk/forms/form17.pdf

once you make the Form 17 election then the income distribution is fixed until you again alter the actual ownership portions which as a married couple you can do free of CGT as transfers between spouses are tax free.

jimjames

You may also find that an interest only mortgage is very difficult to get. From what I've read many providers have withdrawn from the market.

You do need to check that the interest on the new house can be offset against the rental income. I know that a loan taken out to buy a property can be used for that (even if not secured against the rental property) but not sure of the tax treatment of a loan for a new property when old one doesn't have any mortgage.

Cariad71

Thank you all for your replies!real1314, yes I've considered all of the other costs. My husband is a surveyor so can get work done quickly (has numerous building contacts). As for major repairs, we have just fitted new boiler, kitchen, replastered etc as we thought we were staying put. But yes, we will reserve £200 per month for everything.
It's worth 180-200k right now. But I figure if I can hold onto it, then in 10 or 20 years time I can sell it for 240 (hence a pension pot). I know that this is not guaranteed, but I've been buying since I was 18 and house prices generally go up over a 20 yr period?
I'm 41 now, and want to retire at 60 (so 20 years ish).
I understand what you are saying about investing the 180 but the best the banks can offer is 3%! But I haven't got the 180k to invest because if I sell the house, then I would not be able to afford the interest only on the new property (we do have some savings to cover not having a tenant).


00ec25, you are right, I can't afford a repayment without selling property one. But if I take out interest only ( my tenant will pay this) and then I'll be building equity in both houses?? Second house is worth 230k and we are paying 60k deposit. So there's already equity in that property. Property one is worth 180-200k and the mortgage will be 175k so there is a tiny amount of equity and this will grow as house prices rise??


What I'm envisioning happening is selling property one 10-20 years time) for approx 230-250 and having a lump sum after repaying the 175k?? Am I deluded?


Jimjam, HSBC are offering interest only mortgages with LTV of 80% so this is not a problem. I know that I need to check that the interest can be offset against the rent, that is exactly what I'm trying to establish, otherwise it's not viable.


Thank you again for your replies, plenty of food for thought.

Cariad71

I wonder if HMRC have a helpline/ advice line?

sequence

Can someone explain why the interest on the new home is an allowable expense for the letting business ? It doesn't make sense to me, since the new home has nothing to do with the rental business, but I'm not knowledgeable on these things.

Gonzo33

The interest on the mortgage for the rental property is tax deductable, not the interest on the mortgage for the residential.

Cariad71

So Gonzo33, are you saying I'd have to pay tax on the £600 rent? Ie that the previous posters are wrong?
I've been on the gov. Website but it just says 'interest on the mortgage is offset'. I think I may need to speak to an expert.

brit1234

Cariad71 wrote: »

I'm not keen to sell the 'old house' at the moment as prices are so low. If we can rent for 10 years, the vale of the house should rise.

House prices are not low they are high. They are being kept artificially high by low interest rates. The way things are going in the UK, Euro zone and US the cost of borrowing is set to shoot up and prices will start falling faster with the more repossessions and lack or finance.

In 10 years time both your properties will most likely be lower in price. All the UK stimulus is just kicking the can down the road and delaying the problem. So a recovery will most likely be further off.

You are better off selling now, buying the other house and starting a pension. You will not get tax relief on a residential property even with an interest only mortgage even if you can get one.

BitterAndTwisted

The income tax system was never set up so people could raise a mortgage on one proprty and offset the mortgage-interest on another.

I still don't understand how getting an interest-only mortgage could ever be considered someone's pension. Unless you believe that property-prices are going to soar in the next ten to twenty years. I suspect that they are not.

No-one has mentioned the potential danger when mixing running a business with friends or family in the picture as customers. I would warn you against doing this in the strongest possible terms. There have been far, far too many threads on this forum about what total misery can ensue.

Have a couple of local agents come round to view the property, so you have a good idea of what local rents are for similar properties. I can't see any reason for "mate's rates" when running a business. Unless you don't care about making a profit. The rent being at the same level as the mortgage repayments will mean running your busines at a loss once you've undertaken maintenance and repairs. This just leaves a substantial increase in property prices long-term as the only sensible reason for considering this. I wouldn't.