Let to Buy + Second Purchase = Mindfield

Elphy

I have spent some time looking through some of the old threads to see if I can find a similar situation to mine - weirdly I found very few. If people would prefer to post links to pre-existing threads I will be more than happy to read through these!

My partner and I have been looking to buy a house together for a short while. I already own a flat in London and put it on the market in March, which has struggled to sell to date. I have already reduced twice and am in a position where the offers that I am receiving are not compelling enough for me to accept and mean that I make little to no profit in the 4 years since I bought it. The property market in London is struggling somewhat, but I don’t feel that there is a good enough offer for me to accept at this point.

The alternative that I have been toying with over the past couple of months is converting the flat to a Let to Buy mortgage to release a small amount of equity to put into the joint purchase of our second property. I’m aware of the additional stamp duty that we would have to pay and also the three year mark where a rebate would be possible.

Whilst I understand in principle the new rules that in effect/changing at present, I am finding it very difficult to understand all of the calculators available – with monthly tax varying from £230-£600! If someone could help me with some rough estimations it would be hugely helpful for me to make a decision on whether to take a hit on the sale of the flat or whether to keep it and try to ride out a dip in the marketing (I’ll leave the uncertainty of the market risk out of this for now!). Some key stats that are important:

• The rental income would be ~£1,400 per month (including bills)
• I am a 40% tax payer
• The monthly interest would be ~£360 (yet to be decided on interest only or repayment)
• Monthly expenses would be ~£200 in bills + £150 in service charge
• I expect to spend ~£300 prepping the flat for rental with new appliances

Thanks so much in advance.

00ec25

so your question is will someone work your income tax for you?

since we have no idea if you really know what is an allowable expense I make the following assumptions:
- "bills"+ svs chge = possible yes
- New appliances = definitive no
- calculation based on interest rules applicable from April 2020
- already 40% taxpayer

income 1400 deduct allowable expenses 350 = taxable profit = 1050

tax payable: 1050 x 40% = 420 add back tax credit on interest 360 x 20% = 72 = 348

Post tax profit in cash terms: 1050-420+72= £702 pm

Mutton_Geoff

Elphy wrote: »

£300 prepping the flat for rental with new appliances

I think you are grossly underestimating the costs. Being an accidental landlord in the current changing tax landscape is just going to complicate your life. Seriously consider further reductions on your sale and keep a clean slate.


Letting is a serious business and it is very hard to make money, especially as an amateur.

Elphy

Thank you for the input. The calculation is very useful to validate what I have already researched. My primary aim isn’t just to fob my calculations off to someone else, it’s to get advice and validation of my interpretation of something that is increasingly complex.

The other costs would involve a small number of new appliances which seem to fall under ‘Replacement of domestic items relief’ of a like-for-like replacement of what is currently there.

As the flat is already fully furnished and I would not be going through a letting agent, I would be interested to know what costs are commonly missed or that are being called out as underestimated? I already have fire doors and fixed fire alarms installed, but will need to go through the regulatory checklists again.

Given the current property market, there must be a number of people in a similar position to me who are looking for ways to ride the current property market lull in the mid-term. I am not looking to make profit on the rental income, that is not my objective, instead I will be taking a (massive!) gamble with the in/out of London markets in the hopes of a recovery on the flat price in a couple of years time.

heston2014

Elphy wrote: »

Thank you for the input. The calculation is very useful to validate what I have already researched. My primary aim isn’t just to fob my calculations off to someone else, it’s to get advice and validation of my interpretation of something that is increasingly complex.

The other costs would involve a small number of new appliances which seem to fall under ‘Replacement of domestic items relief’ of a like-for-like replacement of what is currently there.

As the flat is already fully furnished and I would not be going through a letting agent, I would be interested to know what costs are commonly missed or that are being called out as underestimated? I already have fire doors and fixed fire alarms installed, but will need to go through the regulatory checklists again.

Given the current property market, there must be a number of people in a similar position to me who are looking for ways to ride the current property market lull in the mid-term. I am not looking to make profit on the rental income, that is not my objective, instead I will be taking a (massive!) gamble with the in/out of London markets in the hopes of a recovery on the flat price in a couple of years time.

Hallelujah! Someone who is also in the same boat as me! :-)
This is exactly what we are hoping to achieve and currently in the process of it.

Background:
London ex-council flat, we put it up for sale in April but nothing happened. We decided against dropping our price, so took it off the market and decided to rent it out instead. We are awaiting the outcome of our LTB (unfortunately, being ex-council = limited lenders and other complexities), we are raising funds to put down as a deposit on the onward purchase. Rental value is between £1700-£1900 and looking to have it managed by our local estate agent who is already managing other flats in the block. We think our pre-tax profit would be around around £800 as would rather over-estimate on running costs with bills (service charges, utility, repairs) and agent fees.

muhandis

We let out our house in Redbridge (the commute was just too long once we had a child) and moved into a rental walking distance to work. So, while I can't advise on the mortgage part (as all we did was get a consent to let), happy to advise on the rest.

Is there any particular reason why you are planning to let it out with bills included?

Based on what you have provided, by my calculations you *could* expect about £600 profit after tax a month.

Annual rent received 16,800

Less service charge (1,800)
Less ground rent (assumed) (250)
Less Rent and legal expenses cover (approx) (100)
Less bills for property (2,400)
Less voids (say 5%) (840)
Less Maintenance costs (500)

Taxable rental profit £10,910

Tax on rental profit (at 40% of 10,910) £4,364Less tax allowance for mortgage interest (20% of the interest costs) (864)

Tax payable 3,500

Net profit after tax for the year £7,410

Net profit per month £618

Additional one time costs that might be needed -
- costs of getting a landlord license from the council (almost all London councils operate selective licensing schemes, costing between 500-750 for a 5 year license)
- costs of making any changes necessary to meet license conditions
- costs of finding tenants and letting it out (Openrent, inventory, reference checks, professional photos, floorplan, etc)
- costs of getting permission to let from freeholder/managing co.

Needless to say, there are very many assumptions in the above calculations and I might well have missed something.


Personally, I think you have the right idea and could well go for it.

Elphy wrote: »

I have spent some time looking through some of the old threads to see if I can find a similar situation to mine - weirdly I found very few.

• The rental income would be ~£1,400 per month (including bills)
• I am a 40% tax payer
• The monthly interest would be ~£360 (yet to be decided on interest only or repayment)
• Monthly expenses would be ~£200 in bills + £150 in service charge
• I expect to spend ~£300 prepping the flat for rental with new appliances

Thanks so much in advance.

G_M

** Tenancies in Eng/Wales: Guides for landlords and tenants This thread is intended to provide information to both landlords and tenants relating to Assured Shorthold Tenancies (ASTs) in England and Wales.

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steampowered

Your monthly interest figure sounds way, way too low to me. The interest rate on BTL mortgages is higher, especially if you are going interest only.

What is the rough value of the property and what size of mortgage are you looking at?

00ec25

Elphy wrote: »

The other costs would involve a small number of new appliances which seem to fall under ‘Replacement of domestic items relief’ of a like-for-like replacement of what is currently there.

no, the lettings business has not commenced, therefore you are not "replacing" anything. You are acquiring new items for use in the business when it starts. Your costs are capital expenditure, not revenue.

Elphy

muhandis wrote: »

Is there any particular reason why you are planning to let it out with bills included?

I already have a tenant in place under the rent a room scheme, who has agreed to stay on if I go down this route, meaning that there is already an established rental and an established bill amount. I already have some future tenants in the pipeline who are moving to the UK for shorter periods of time meaning that it would make it easiest to keep the bills established. Of course this could change in the future.

Thanks also for the outline of cost considerations, I’m relieved that most I have already covered/researched but of course there’s the odd surprise in there. It’s so useful to have them detailed in one place. Fortunately, my borough doesn’t require a landlord’s licence and I am on the residents’ association committee so I have regular contact with the freeholder and the property management company to obtain rental permission.

steampowered wrote: »

Your monthly interest figure sounds way, way too low to me. The interest rate on BTL mortgages is higher, especially if you are going interest only.

What is the rough value of the property and what size of mortgage are you looking at?

The amount given is what was quoted to me from a financial advisor appointment. I already own half of the property outright, resulting in the overall mortgage amount being less than the total value, this is also why I need to release some of the equity to continue with the second purchase. Property value is ~£340K and mortgage amount is ~£200K. The estimated monthly payment on a repayment basis would be £1100.


Thanks for the input all round, I’m delighted to see that I’m not alone. I agree totally that it’s a complex business and not one to enter into lightly. I’ll spend some time going through the links that have kindly been provided.

00ec25

Elphy wrote: »

I already have a tenant in place under the rent a room scheme, who has agreed to stay on if I go down this route, meaning that there is already an established rental and an established bill amount.

then claiming the purchase cost of new domestic appliances is expressly disallowed

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim3210

However, a deduction is not allowed if:

Rent-a-Room receipts have been received in respect of the dwelling-house in question and Rent-a-Room relief has been claimed in relation to those receipts.