Buying and letting a house to a relative

antilles

Hi

My brother is currently renting a house and needs to leave end of this year as the landlord is selling up. He's unable to get a mortgage due to some bad credit history with a previous partner and recently going self employed and having not enough income history.

I have a lot of savings sat in the bank not doing much and thought about buying a buy to let, renting it to him, charging enough to cover the mortgage, and he covers things like maintenance.

Once he's on his feet and his credit is sorted, consider selling it to him at a later date. Failing that I would rent it out to someone else or sell it on.

I have considered the implications of a family member not paying rent, the moral dilemma of not being able to evict them, etc. and am OK with that.

I guess taxation would work exactly the same way as if it wasn't a relative I was letting to, i.e. tax on profit after rental income.

In practice I have absolutely no idea whether this is a wise idea or not. Any thoughts?

Thanks!

P.S. I am thinking of repayment mortgages, not interest only - not sure if that changes anything.

00ec25

antilles wrote: »

I guess taxation would work exactly the same way as if it wasn't a relative I was letting too, i.e. tax on profit after rental income.

yes, tax on profit is the same, but how you calculate the profit has a technical quirk

where the let is at below market rate to a "connected person" then the costs you can claim against the rent to produce the taxable profit are restricted,

what this means is that the cost is limited to the amount of rent received, ie total costs cannot be more than income, so you cannot create a tax "loss". Of course that is somewhat academic since in reality you then have zero taxable profit as rent = cost, thus there is no tax to pay. Although of course if costs > rent then you have a cash loss in real terms, but that is not your objective since you want your brother to cover the costs to you anyway so the rent he pays will be set to ensure you don't have a cash negative position

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2220

when you sell it you will have to pay capital gains tax on the increase in value. If sold to brother (connected person rule) that gain will be based on what its then market value is, not what brother actually pays you (unless he pays full value of course) less what you paid to buy it less your CGT allowance.

Pixie5740

1) You will require a regulated BTL mortgage to let to family.

2) Only the interest portion of your mortgage is an expense so you could have a negative cash flow with a repayment mortgage.

3) You'll need to pay the higher rate of SDLT.

4) Just because you're letting to family that doesn't mean that you can pass your legal obligations on to the tenant. There are certain repairs that you, as a landlord, will be legally responsible for.

agrinnall

Lots of potential issues with a mortgage for this. Obviously you will need a buy to let mortgage, so you'll need a minimum 25% deposit.The lender is likely to want you to charge rent in the region of 125% of the mortgage repayment amount, so simply covering the repayment may not be good enough. And some lenders may be reluctant to lend if they are aware that the tenant is a family member. I'm assuming you are already a home owner, as that's usually a BTL requirement.

Even if you do get a mortgage I'd still doubt the wisdom of your plan, you have no clear way of coming out of second home ownership with a profit, and to be honest I could see a big loss unlesss there is a big rise in the property value between buying and selling.

antilles

Pixie5740 wrote: »

1) You will require a regulated BTL mortgage to let to family.

2) Only the interest portion of your mortgage is an expense so you could have a negative cash flow with a repayment mortgage.

3) You'll need to pay the higher rate of SDLT.

4) Just because you're letting to family that doesn't mean that you can pass your legal obligations on to the tenant. There are certain repairs that you, as a landlord, will be legally responsible for.

Thanks! Yes should have said sorry, I was going to do it through a proper BTL mortgage.I've
considered the SDLT as well. I was still planning to do certain repairs, but brother would have looked after the basic things that he can sort himself.

I hadn't considered the implications of the interest actually so I will have a look at that. Thank you.

Credit-Crunched

agrinnall wrote: »

Lots of potential issues with a mortgage for this. Obviously you will need a buy to let mortgage, so you'll need a minimum 25% deposit.The lender is likely to want you to charge rent in the region of 125% of the mortgage repayment amount, so simply covering the repayment may not be good enough. And some lenders may be reluctant to lend if they are aware that the tenant is a family member. I'm assuming you are already a home owner, as that's usually a BTL requirement.

Even if you do get a mortgage I'd still doubt the wisdom of your plan, you have no clear way of coming out of second home ownership with a profit, and to be honest I could see a big loss unlesss there is a big rise in the property value between buying and selling.

Lots of mortgage lenders on a regulated buy to let will assess it on affordability on the applicant, i.e on having two residential mortgages. Not rental.

antilles

agrinnall wrote: »

Lots of potential issues with a mortgage for this. Obviously you will need a buy to let mortgage, so you'll need a minimum 25% deposit.The lender is likely to want you to charge rent in the region of 125% of the mortgage repayment amount, so simply covering the repayment may not be good enough. And some lenders may be reluctant to lend if they are aware that the tenant is a family member. I'm assuming you are already a home owner, as that's usually a BTL requirement.

Even if you do get a mortgage I'd still doubt the wisdom of your plan, you have no clear way of coming out of second home ownership with a profit, and to be honest I could see a big loss unlesss there is a big rise in the property value between buying and selling.

Thanks - I'm definitely looking for the potential issues so thanks for pointing those out. I was planning on a BTL mortgage, but haven't considered the actual rent repayment amount. I'm already a homeowner. I want to help him through a difficult period but as the same time don't want to lose money at the same time.

Pixie5740

antilles wrote: »

Thanks! Yes should have said sorry, I was going to do it through a proper BTL mortgage.I've
considered the SDLT as well. I was still planning to do certain repairs, but brother would have looked after the basic things that he can sort himself.

I hadn't considered the implications of the interest actually so I will have a look at that. Thank you.

It's not just a BTL mortgage you'll require but specifically a regulated BTL mortgage because you'll be letting to family. Affordability for regulated BTL mortgages is calculated differently to unregulated BTL mortgages. One for a mortgage broker probably.

saajan_12

antilles wrote: »

Hi

My brother is currently renting a house and needs to leave end of this year as the landlord is selling up. He's unable to get a mortgage due to some bad credit history with a previous partner and recently going self employed and having not enough income history.

I have a lot of savings sat in the bank not doing much and thought about buying a buy to let, renting it to him, - your choice would be limited to regulated BTLs as you're renting to a connected person charging enough to cover the mortgage,- for tax purposes only the interest portion is a cost,
(even that has caveats if you're a higher rate tax payer) so you may still pay tax even if you don't make any cash profit as part of the mortgage pmts would go to equity and he covers things like maintenance- legally you're still liable for repairs etc. .

Once he's on his feet and his credit is sorted, consider selling it to him at a later date. Failing that I would rent it out to someone else or sell it on. - make sure you don't make anything sound like a promise.. just fuels the disagreement if plans change

I have considered the implications of a family member not paying rent, the moral dilemma of not being able to evict them, etc. and am OK with that.- okay, make sure you still get it in writing so there's less chance of a misunderstanding. Also, the Lender is less confident that you'll evict so you'd have to get a regulated BTL mortgage.

I guess taxation would work exactly the same way as if it wasn't a relative I was letting too, i.e. tax on profit after rental income.- as with a stranger, 'profit' is rent - non financing expenses (e.g. repairs, LL insurance etc). You pay tax on that and then get tax relief (gradually reducing from 35% to 20% if you're higher rate) on the mortgage interest only. Even if you don't make a profit in cash, you build equity so you pay tax on that. Also treating the interest as tax relief rather than an expense, you could get pushed into a higher band.

In practice I have absolutely no idea whether this is a wise idea or not. Any thoughts?

Thanks!

P.S. I am thinking of repayment mortgages, not interest only - not sure if that changes anything.- These are even more rare for BTL, and can mean quite high monthly payments to repay capital as well as the high BTL rates.
However no real difference.

Outlined tax position in line. Sounds like you're not looking at this as a long term investment since you might sell on to brother.. BTL works best over a longer term as the initial buying costs and stamp duty wipe out the profit for the first few years. When you sell you, brother will incur further stamp duty and legals. Also, you'll have the costs and legal responsibility of beign a landlord, which isn't to be taken lightly.

Instead:
Can you lend brother the money to buy his own place? Perhaps remortgage your house (paying residential interest rather than higher BTL interest) so brother needs no/tiny mortgage which should be easier to get. He can pay you interest as your profit instead of you getting a return on the house and instead of him paying rent.

antilles

Pixie5740 wrote: »

It's not just a BTL mortgage you'll require but specifically a regulated BTL mortgage because you'll be letting to family. Affordability for regulated BTL mortgages is calculated differently to unregulated BTL mortgages. One for a mortgage broker probably.

Ah OK got you now. More reading to do! Thanks.

Cheeky_Monkey

Is your brother claiming Housing Benefit for his current rental?

If he is, this will probably be considered a 'contrived tenancy'