Sell or Rent 2nd Property

Mr_AVB

Hi,

Wondering if anyone can provide me some thoughts on a House Purchase situation and some tax queries we have.

Details as follows:

• My partner and I both own 1 bedroom flats in our own names (Propery A - Me): 270k, Property B (Partner): 300k)
• I have owned Property A since Jan 2014, and it has been vacant since May 2017 where I moved into my Partner's property.
• She has owned Property B since September 2015 and we both live there currently.
• We are purchasing a 3 bed family home, Property C: 600k in both of our names.
• Property A is being sold to fund deposit for Property C
• We understand we will have to pay Stamp Duty Land Tax Surchage on the Purchase of Property C

This is where things get a little more confusing for us.

Our plan was to rent Property B, on a capital and interest basis by converting the existing mortgage to consent to lease.

However, the BTL Tax laws are proving difficult to follow, and we are now starting to consider whether it will be worth us holding onto Property B in the long term once SDLT (which we're paying on Property C which is 600k) and long term Capital Gains Tax costs when Property B is eventually sold are taken into account.

Some figures about Property B:

• Estimated Rental Income on Property B would be 12000 per annum
• Annual Mortgage Payments would total 10,700, of which interest is ~ 4300.
• Accounting for agency fees and insurance, we would just about break even on Income vs Expenditure, but can't understand whether we pay additional taxes on Rental Income

Overall, just quite confused about the whole situation.

Wondering if anyone has any similar experiences, or other things we should be considering.

I think the likelihood is we need to get some professional advice, so particularly interested in which profession we should be seeking out.

Thanks in advance for any suggestions or thoughts

getmore4less

Property B (Partner): 300k)
Estimated Rental Income on Property B would be 12000 per annum

gross yield 4%

Annual Mortgage Payments would total 10,700, of which interest is ~ 4300.

you say break even after expenses so we have

net £6,400 20% or 40%?
lets go with 20% £1,280.

free cash on interest only basis £5,120,

what's the mortgage?

on those numbers(£892pm, £358pm interest) how about a guess of £215k @ 2% over 25 years

Free equity £85k net cashflow £5,120 ROI 6%

but then you have that killer extra SDLT so the investment is closer to £103k now just under 5% ROI.

Depending on the real numbers there won't be enough free cash flow to cover the capital payments but they are really savings/investment

Mr_AVB

Thanks getmore. We came to similar conclusions on the Capital and Interest side (i.e we'd probably have to put in a bit ourselves per month, but it is paying down the mortgage). We're both 40% taxpayers too.

One thing im not so clear on are what are the pros cons of capital and Interest vs just interest only. Is it the aim of getting a 'income' out of the proerty. We both work so thats less important to us, but at the same time are we foolish not to be considering it.

getmore4less

We're both 40% taxpayers too.


AIUI you(will soon) get taxed on revenue and tax relief @20% on the interest
£12k less expenses £10700@40% - £4300@20% = £4280 - £860 = £3420 net tax

dimbo61

£20,000 stamp duty without the extra 3%
£38,000 stamp duty if you keep one or both of your existing properties
Ouch!!

MoneySavingMission

the penalty stamp duty alone would make me sell both properties.

becoming a fully approved landlord and keeping on top of regulations in all aspects of the property is hard work - are you prepared to take on the expense for making the property suitable for rental market?

getmore4less

The £18k extra SDLT takes the gross yield on the investment from 4% down to 3.77%

After the tax, interest and expenses down to 0.95%

less than the interest on the loan on their new place.

IT's geared HPI play not a rental business.

Thrugelmir

What's your mortgage exposure on property C going to be if you follow your current plan?

Mr_AVB

Hi Thurge,

Exposure on C is a 605k purchase price and 20% deposit, so mortgage is £484,000

Getmore, looking at your figures where you say ‘net tax’ is that extra tax we would have to pay each year basically? So add that to my costs column alonside agent fees, insurance etc. (And the simple sum is Total income minus 40% total mortgage payment- 20% interest payment?)

Comes quite clear quite quickly its something we’d need to subsidise if keeping it on capital and interest. Although we would get a repaid mortgage at the end of it (minus 20k land tax surcharge, capital gains tax and sale costs). Moving to IO gives us a better chance of a return each month, but obviosuly then completely reliant on house prices rising for a long term return.

I think there’s a likelihood we rent it for a year now and then take a look at it then as we’d still have 2 years to refund the surcharge and decide if the money is better used elsewhere (or for a rainy day)

If we wanted to get some professional advice, would a investments financial manager be my best bet?

getmore4less

You can do the research on the rental business costs and tax yourself.

You still have not said what equity is in place B and the real mortgage size and rate.

with 80% LTV you have to factor a potential lower rate if you use the equity in B to reduce the LTV. every £30k knocks off 5% and their is £18k of the first £30k covered by the SDLT so £42k equity gives you 10%

With Nationwide 2y fix that's a drop from 1.44% to 1.34%.


You should also be able to structure this so you tax relieve is on borrowings up to the full value when first let that will help a bit.

remember these numbers are based on a full 12 months, get a void of one month you lose £1k of income, lets not even consider a slightly bad tenant so you have some refurb work before sale, and then the empty period while trying to sell...

Mr_AVB

Mortgage details for Property B as follows:

Valuation: 270k im now told, not 300
Purchase price: 235k
Remaining mortgage: 160k
Rate: 2.4% but would expect them to add another percentage for converting existing residential to let.
Term: Payed off in 2036, so 18 years say.