Selling or renting out following a split

Shula61

I am not a regular contributor here, but I hope you could give me some advice.

My son and his (now ex) girlfriend own a two bedroomed flat in London. His ex has moved out, and my son has remained living there, renting out the second bedroom to a lodger, with the income of that going to his ex which covers her share of the mortgage, etc.

They have a fixed rate mortgage which ends early next year, and are looking to either sell at that time, or if the market isn't good, rent out in full (and my son will rent elsewhere). Selling would be simplest, but (although we don't know what the market will be like next year) it seems unlikely they'd walk away with much of a profit, which doesn't bother my son, but I don't think his ex would agree.

So, assuming they rent the place out for a while, what needs to be considered? These are the initial thoughts that have popped into my head:

1. Contacting the mortgage company to change the mortgage type to allow this.
   
2. Tax implications on rental income profit.
3. Landlord responsibilities such as safety certificates (although it's an electric only flat, no gas).
4. When they do eventually sell after renting out for (say) a couple of years, would they then be liable for capital gains tax on any sales profit?

Any responses would be welcome, as I'm effectively acting as mediator to help them decide. My son's ex completely trusts me and knows I will do everything I can to help them both.

MaryNB

He'd need to have about 25% equity in the flat to get a BTL mortgage (or have sufficient savings to get down to an LTV of about 75%). The expected rent would have to be 125% of the mortgage repayments.
He could get a consent to let to start with but they're only for a fixed amount of time, after which he'd have to switch to a BTL or get the tenants to move out. Some lenders will only grant a BTL to someone who already has a residential mortgage, I'm not sure how that works if he ends up swapping his residential mortgage for a BTL.

If he goes to buy a property while retaining the BTL flat, he'll have to pay the +3% stamp duty for additional properties. 

Would he be able to afford the repayments if the tenants stop paying? 

Will he be getting a letting agency? Will they'll be doing the basics or will it be a fully managed let?

Is he fully aware of all his legal responsibilities? He can get the letting agent to do the work but he cannot assign them the legal responsibilities. He's still legally liable if they mess up.

From the sticky at the top of this forum
Post 7: New landlords (1):advice & information :see links in next post
Post 8: New landlords (2): Essential links for further information

Pixie5740

Shula61 said:

I am not a regular contributor here, but I hope you could give me some advice.

My son and his (now ex) girlfriend own a two bedroomed flat in London. His ex has moved out, and my son has remained living there, renting out the second bedroom to a lodger, with the income of that going to his ex which covers her share of the mortgage, etc.

They have a fixed rate mortgage which ends early next year, and are looking to either sell at that time, or if the market isn't good, rent out in full (and my son will rent elsewhere). Selling would be simplest, but (although we don't know what the market will be like next year) it seems unlikely they'd walk away with much of a profit, which doesn't bother my son, but I don't think his ex would agree.

So, assuming they rent the place out for a while, what needs to be considered? These are the initial thoughts that have popped into my head:

1. Contacting the mortgage company to change the mortgage type to allow this.
   
2. Tax implications on rental income profit.
3. Landlord responsibilities such as safety certificates (although it's an electric only flat, no gas).
4. When they do eventually sell after renting out for (say) a couple of years, would they then be liable for capital gains tax on any sales profit?

Any responses would be welcome, as I'm effectively acting as mediator to help them decide. My son's ex completely trusts me and knows I will do everything I can to help them both.

Was the flat purchased using HTB?

Who is the lodger’s contract with? Your son or the ex? To whom does the lodger pay the rent? 

Personally I would sell. Make a clean break and move on. 

saajan_12

Shula61 said:

I am not a regular contributor here, but I hope you could give me some advice.

My son and his (now ex) girlfriend own a two bedroomed flat in London. His ex has moved out, and my son has remained living there, renting out the second bedroom to a lodger, with the income of that going to his ex which covers her share of the mortgage, etc.- all sounds very sensible. Does the rent exceed £7.5k, as then son would have to start paying income tax. 

They have a fixed rate mortgage which ends early next year, and are looking to either sell at that time, or if the market isn't good, rent out in full (and my son will rent elsewhere). Selling would be simplest, but (although we don't know what the market will be like next year) it seems unlikely they'd walk away with much of a profit, which doesn't bother my son, but I don't think his ex would agree. - well remember the value next year is the value next year, regardless of whether thats at a loss, break even or profit. Aside from frictional costs eg solicitors, stamp duty etc, if they make any profit thereafter, that could theoretically be made by selling and investing elsewhere too (eg in stocks & shares / new property / whatever). There's no sense in waiting to 'catch up'. 

So, assuming they rent the place out for a while, what needs to be considered? These are the initial thoughts that have popped into my head: - there are lots of responsibilities in being a LL, eg attending to repairs, finding tenants, etc. Especially with a couple that don't get on, who will do the leg work? What if one doesn't agree with the other's choice of tradesperson / tenant etc. There's scope for many more disagreements at each step. 

1. Contacting the mortgage company to change the mortgage type to allow this. - yes, as a min they'll need 25% equity and rental income covering the interest. 
   
2. Tax implications on rental income profit. - that should be easier, if they split everything in a set %, then they just individually declare their share of rental income - non financing expenses  and then 20% relief on mortgage interest. 
3. Landlord responsibilities such as safety certificates (although it's an electric only flat, no gas). - so EICR, EPC, deposit protection, inventory, repairs, check in, check out
4. When they do eventually sell after renting out for (say) a couple of years, would they then be liable for capital gains tax on any sales profit? - yes, would have to agree the % split of sales proceeds net of mortgage. Then they each get PPR relief on the % time they lived there, plus ~12k allowance, and pay CGT on the rest at 18% or 28% (note these tax rates could increase)

Any responses would be welcome, as I'm effectively acting as mediator to help them decide. My son's ex completely trusts me and knows I will do everything I can to help them both.

Letting to a lodger seems very sensible in the first instance, as it means the mortgage is covered and the ownership can stay at 50/50 without someone paying double. 
However it would be best to cut ties as soon as possible, before any civility runs out. With letting to a tenant, there's a lot more landlord responsibilities (legal requirements, arms length relationship needs more attention to fix problems etc. That comes with decisions to make and penalties if you miss things. That sounds 100x harder for 2 people who aren't on the same page, and I assume you don't want a 2nd job forever. 

Shula61

Thank you all so much! Lots for them (and me) to think about.

MaryBN, I will get him to read through those links and make sure they both consider their legal responsibilities and the risks involved.

He definitely won't be in a position to buy another property for a good while, so the extra stamp duty needn't be a consideration.

He'd struggle to pay the repayments should the tenants default, but could probably just about manage. His ex is a high earner so I think would be fine but wouldn't be happy!

I suspect they'd just get a letting agency to do the basics.

Shula61

Pixie5740, the flat wasn't purchased using HTB.

The lodger's contract is jointly with both of them, but the rent goes to my son's ex.

I absolutely hope they make the decision to sell, even at a loss! My son would go for it, not so much his ex, but she's not the one living there with what are now all bad memories.

Thrugelmir

Best to cut ties. Life moves on. Numerous threads from posters where this same issue wasn't addressed at the time. 

Shula61

ssagan_12, that's all good information.

The lodger arrangement has definitely been a good one, and has ensured my son's ex hasn't been out of pocket while not living there.

And I agree cutting ties by selling would be best. Civility has already got a little tricky, and yes, I'd rather not have this second job forever!

I am wondering if putting all this in front of my son's ex might make her reconsider the risks of renting out. Fortunately they don't need to make a decision just yet.

Shula61

Sorry, saajan_12, I misspelled your username (or autocorrect had a blip!).

saajan_12

Shula61 said:

Pixie5740, the flat wasn't purchased using HTB.

The lodger's contract is jointly with both of them, but the rent goes to my son's ex.

I absolutely hope they make the decision to sell, even at a loss! My son would go for it, not so much his ex, but she's not the one living there with what are now all bad memories.

The lodger contract needs to be with son, as he's a resident landlord, with the reduced responsibilities involved and rent-a-room scheme 7.5k tax allowance. Son can then share the income or use it to pay the ex's share of mortgage or whatever they both agree.

However with the current setup, the ex would be a non resident landlord, ie potential tenant rights (vs lower rights of a lodger), higher tax and higher legal responsibilities. 

Shula61

Ah, thank you for that additional information. Actually, having just checked with my son, the income does go to him, and then he forwards an appropriate amount to his ex. However, the agreement is currently under both names, but they can change that.