Advice on selling home that I am currently renting out

lala9

Hi all,

I have a house that I bought in 2006 with help from the HomeBuy scheme run by the local housing authority.

They gave 25% towards the purchase, and I own (mortgaged) the other 75%.

For the past 18 months I have been living with my partner, and have been renting my house out to a friend. Obviously we cut out all the middle men as we were friends and he simply sends me a standing order each month to cover the rent. He has his bills sent there and pays the council tax etc, and I've moved all my bills etc. to the house I now live in with my partner.

I am now thinking of selling my house, but am worried I am going to run into problems as it's all be done off the record so to speak.

Will I get caught out for not paying any tax, on my rental income? I haven't earned much at all really. The rent only just covers the mortgage plus I've put up a new fence and a new floor in the kitchen while he's been there. Also I obviously pay towards the bills in the house I'm living in as well.

If there is tax to pay that's not a problem, I just don't want to get into any trouble so thinking do I need to let someone know or will it all just come out during the process? Or as I've been renting to a friend will they even be able to find out?

I'm also aware that when selling a house that has been rented out, I will be liable for capital gains tax. How much is that and is there any way around it? I've heard about moving back in for 6 months (or at least making it appear like you've moved back in) so how does that work? Would I need to redirect all my bills again and start paying the council tax? Is it worth it? Or should I just bite the bullet.

Again, as its been rented to a friend off the record, how would anyone even know that I'm selling a rented property? Does it all go by council tax records?

Any advice on what to do or what you would do in my situation would be much appreciated. Or if anyone has done similar?

Thanks
lala

cakeforbrains

You have to self-declare to the tax man and fill in a Self Assessment. Although the rent you get only just covers the mortgage, yo only get tax relief on the interest on the mortgage. The rules have changed about it recently and I am not sure about the changes, to be honest. You can offset costs of maintaining the property.

The other thing to think about, though, is that you are supposed to inform/ask the mortgage company that you are letting the property and they usually increase your interest rate.

With regards to Capital Gains Tax, you only pay that on the increase in value of the property between when you bought it and when you sell it. If you lived there then you add up the number of months you lived there, add 18, and then divide by the amount of months you owned it. The fraction you're left with can be discounted from your capital gains bill. Since you only moved out 18 months ago if you sold it now there would be nothing to pay.

All that said, you obviously don't want to be declaring CGT if you've not declared rental income. You need to think carefully about what you are going to do. You shouldn't really be letting it out without declaring.

G_M

Time to regularise your affairs and stop fiddling the system (and tax-payers).

Get the acounts in order (rent received, allowable tax expenses etc) and contact HMRC. Speak to mortgage lender. Get gas certificate up to date.

Read:

* New landlords: advice, information & links

benjus

lala9 wrote: »

Will I get caught out for not paying any tax, on my rental income? I haven't earned much at all really. The rent only just covers the mortgage plus I've put up a new fence and a new floor in the kitchen while he's been there.

Nothing in the process of selling a house will be interested in your income tax records. But I'm not going to advise you to be a tax evader - you received income on the property, so pay your dues to the state. You can offset mortgage interest and maintenance expenses (and various other things) against income tax - plenty of information online. If you have any tax liability for the 2013/2014 tax year then you're over the deadline for submitting a return so you'll probably get a penalty. Or you could go via the Let Property Campaign ( https://www.gov.uk/let-property-campaign ).

lala9 wrote: »

Also I obviously pay towards the bills in the house I'm living in as well.

Not relevant.

lala9 wrote: »

If there is tax to pay that's not a problem, I just don't want to get into any trouble so thinking do I need to let someone know or will it all just come out during the process? Or as I've been renting to a friend will they even be able to find out?

See above - it won't come out during the process, but you should let HMRC know. If you don't, someone else might just tip them off, you never know.

lala9 wrote: »

I'm also aware that when selling a house that has been rented out, I will be liable for capital gains tax. How much is that and is there any way around it? I've heard about moving back in for 6 months (or at least making it appear like you've moved back in) so how does that work? Would I need to redirect all my bills again and start paying the council tax? Is it worth it? Or should I just bite the bullet.

Pretending that the property was your main residence throughout would also be tax evasion. Moving back in won't make any difference. But considering that the property was only rented out for 18 months it's quite possible that you won't have any CGT liability anyway, depending on how much you gain from the sale. Do the sums.

lala9 wrote: »

Again, as its been rented to a friend off the record, how would anyone even know that I'm selling a rented property? Does it all go by council tax records?

You seem to be in two minds whether to come clean and pay your taxes or commit tax evasion. As I said above, I'm not going to recommend the latter.

lala9

Any idea what kind of fine I'd be looking at for being late declaring to HMRC?

It sounds like the tax will be minimal and the CGT probably none existent so it makes sense not to take any risks, but I'm just worried about how much trouble i will get in by being 18 months late declaring it.

benjus

lala9 wrote: »

Any idea what kind of fine I'd be looking at for being late declaring to HMRC?

It sounds like the tax will be minimal and the CGT probably none existent so it makes sense not to take any risks, but I'm just worried about how much trouble i will get in by being 18 months late declaring it.

Maybe nothing at all if you're lucky, maybe a small penalty. It's impossible to know until you go ahead with it. But if you come clean voluntarily and the amount owed is small anyway, I'd say they are unlikely to be very harsh.

G_M

lala9 wrote: »

Any idea what kind of fine I'd be looking at for being late declaring to HMRC?

.

not much.

Whereas if you hide it, and they identify you........

See:

https://www.gov.uk/undeclared-income

lala9

Thanks for that link.

Just read this bit -

"You must report income from property rental on a Self Assessment tax return if it’s:

£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses
If it’s less than £2,500 a year, call the Self Assessment Helpline."

Is that £2,500 profit or total?

i.e if I am paying £400 a month for my mortgage and receiving £500 a month in rent I am only making £1,200 per year profit, (even less after expenses), so does that mean i don't have to declare it?

Or does the mortgage not matter and the income is actually £6,000, in which case I should fill out a self assessment form?

sammyjammy

As you've been told in a previous post its only the interest on your mortgage payment that's an allowable expense.

benjus

lala9 wrote: »

Thanks for that link.

Just read this bit -

"You must report income from property rental on a Self Assessment tax return if it’s:

£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses
If it’s less than £2,500 a year, call the Self Assessment Helpline."

Is that £2,500 profit or total?

i.e if I am paying £400 a month for my mortgage and receiving £500 a month in rent I am only making £1,200 per year profit, (even less after expenses), so does that mean i don't have to declare it?

Or does the mortgage not matter and the income is actually £6,000, in which case I should fill out a self assessment form?

"after allowable expenses" means profit (but remember that any part of the mortgage payment that goes towards capital repayment is counted as profit, as it's increasing your equity in the property).

"before allowable expenses" means the rent you receive.

Even if you don't have to file a tax return, you still have to notify HMRC about the rental income and pay the tax due - they will usually adjust your tax code to claim the tax you owe if you don't need to file a tax return.

Ozzuk

I could be wrong but I thought the homebuy scheme prevented you renting out the property? I'd be less worried about tax (though you still need to sort that) and more worried about them recalling the mortgage.

Taken from another thread:

"Subletting/2nd Home

Under the terms of the HBD loan you are not permitted to sublet your property. This is detailed in the buyer's charging document and mortgage deed. There are however some circumstances the Homes and Communities may consider. These do not include cases of financial hardship, but may include involuntary relocation with your current job or having to look after an ill relative who does not live within travelling distance. Please note that even in these cases it is at the discretion of the Homes and Communities Agency whether they will permit you to sublet and there are certain terms and conditions that must be adhered to.

As a rule, to sublet your property you must first of all repay your loan in full.

In addition the buyers’ charging document and mortgage deed prevent you from buying a second home. This also means that to purchase another property you must first of all repay your loan, either by staircasing or selling your HBD property."