Updated: Questions about letting out a property

jonnydeppiwish!

Hi



Following all of your advice and a lot of research. We won’t rent the property out.

Instead, we want to get a mortgage on the current property to use a deposit on the new. We’ll then get a mortgage on the new property and spend 6 months or so renovating it (£25k budget).

Once it’s finished, we’ll then move in and sell the first property and claim back the 3% SDTL.

Can we use a BTL mortgage (so we just pay the interest only on the current property? Is there a better way of doing it as we don’t want to sell/buy at the same time.

Thanks again!

Just a few questions as we are hypothetical thinking about letting out our current property and buying a detached property as our home.

Rental income is taxed - if I was just into the higher tax bracket, would I have to pay 40% on all the rent (probably around £14k pa), part of it or none of it?

In order to purchase the new property, we’d need to get a smallish (£150k) BTL mortgage on the current  property which is mortgage free. When I’ve looked at rental yields, they only come in at 4% so would that look bad when applying? Current property is worth conservatively £400k.

As I said previously, this is all hypothetical, looking at all the options!

_Penny_Dreadful

You wouldn't be taxed on all the rental income as there are expenses incurred in the business of letting the property which you can claim e.g. insurance.  If you are a higher rate tax payer already then any rental profit you make would be taxed at the higher rate.

Have you factored the higher rate of SDLT for the purchase of your new home into your calculations? 

jonnydeppiwish!

_Penny_Dreadful said:

You wouldn't be taxed on all the rental income as there are expenses incurred in the business of letting the property which you can claim e.g. insurance.  If you are a higher rate tax payer already then any rental profit you make would be taxed at the higher rate.

Have you factored the higher rate of SDLT for the purchase of your new home into your calculations? 

Hi and thanks for the response. Yes we have included that, as well as maintenance, insurance as well as yearly checks etc. we’ve worked out that there will be around £600 pm after expenses etc.

LegallyLandlord

If you buy it through a company, you can set off the full mortgage interest, whereas it’s just a 20% tax credit if you buy it outside of a company. This is the so called section 24 tax problem gifted to landlords by George Osborne that effectively created a two tier system. 

Here’s a blog post on the pros and cons of companies for buy to lets: https://theindependentlandlord.com/is-a-limited-company-best-for-landlords/

jonnydeppiwish!

LegallyLandlord said:

If you buy it through a company, you can set off the full mortgage interest, whereas it’s just a 20% tax credit if you buy it outside of a company. This is the so called section 24 tax problem gifted to landlords by George Osborne that effectively created a two tier system. 

Here’s a blog post on the pros and cons of companies for buy to lets: https://theindependentlandlord.com/is-a-limited-company-best-for-landlords/

Many thanks - going to be a lot of reading to do!

dimbo61

The pros and cons of becoming a Landlord have changed alot over the last few years and even more so in the last 12 months !
BOE rate was 0.1% in December  2021 and is 3.5% now with more rises on the way.
Tax changes, regulations,  new laws and Landlord  bashing is all the rage ( think Shelter, councils and Michael Grove ) who have political  motives and HATE private and public landlords.
Maybe selling your mortgage free home and buying the new place with no or little borrowing  will help you sleep at night.
4% yield is rubbish and ties up £400,000

LegallyLandlord

dimbo61 said:

The pros and cons of becoming a Landlord have changed alot over the last few years and even more so in the last 12 months !
BOE rate was 0.1% in December  2021 and is 3.5% now with more rises on the way.
Tax changes, regulations,  new laws and Landlord  bashing is all the rage ( think Shelter, councils and Michael Grove ) who have political  motives and HATE private and public landlords.
Maybe selling your mortgage free home and buying the new place with no or little borrowing  will help you sleep at night.
4% yield is rubbish and ties up £400,000

Equally, rental demand has never been higher. For landlords who provide good quality, energy efficient housing, there is nothing to fear from the upcoming rental reforms. I say that as a landlord and a lawyer. 

I agree that a 4% yield isn’t good. It’s behind all of the averages for all the regions, even London at 4.9% according to the latest Rightmove data https://www.rightmove.co.uk/news/content/uploads/2022/10/Rental-Trends-Tracker-Q3-2022-Final.pdf

dimbo61

Does your current home make a good rental besides the poor yield ?
EPC band C ?
EICR?
Gas Safe Certificate?
Will you use a Lettings agent?
Condition, location, type of property ?
Garden, parking, Fit for habitation, decent homes standard ? 
Tax 20/40% 
Laws a Landlord must follow  and being on call 24/7 
It's not a picnic in the park 

jonnydeppiwish!

dimbo61 said:

Does your current home make a good rental besides the poor yield ?
EPC band C ?
EICR?
Gas Safe Certificate?
Will you use a Lettings agent?
Condition, location, type of property ?
Garden, parking, Fit for habitation, decent homes standard ? 
Tax 20/40% 
Laws a Landlord must follow  and being on call 24/7 
It's not a picnic in the park 

Hi and thanks
Very good rental, possibly a bit more than I initially thought.
EPC C
EICR present as with Gas
Probably organise it all myself - we’ll live 10 doors along
Just fully refurbished, with utility room etc 
private garden, not overlooked 
Tax would be 20% for half the income and 40% for the second half.

Lots of calculations to make, but looking at the long term.

lookstraightahead

I was a landlord 25 years ago. I could never be one now I would worry too much. I see it as a reasonably stressful job, so it depends how you handle stress to a certain degree. There's also a lot of learning to do to become proficient. It might be good to look at whether you have time for it first.

saajan_12

jonnydeppiwish! said:

Hi

Just a few questions as we are hypothetical thinking about letting out our current property and buying a detached property as our home.

Rental income is taxed - if I was just into the higher tax bracket, would I have to pay 40% on all the rent (probably around £14k pa), part of it or none of it? - first you deduct non financing costs (eg insurance, agent, repairs, etc). Then you pay income tax in the usual bracket system on top of your salary income (so eg if your salary is just below the higher rate threshold, then most of the rent will be at 40% anyway). You then get credit for 20% of the mortgage interest only - note this doesn't include capital repayments, doesn't bring you down a tier etc. 

In order to purchase the new property, we’d need to get a smallish (£150k) BTL mortgage on the current  property which is mortgage free. When I’ve looked at rental yields, they only come in at 4% so would that look bad when applying? Current property is worth conservatively £400k. - They'd usually just want your rental income to cover X % of the mortgage payment (often 125%), so if monthly rents are £1,333 (4% x 400k/12) and on an 3.5% interest only mortgage you're paying £365 a month, that'll usually be fine. 
However for you, is it a good investment for the risk and hassle?

As I said previously, this is all hypothetical, looking at all the options!

Mortgage approval aside, is this a good investment yield for you? Is the 4% a gross yield, or after costs? Whats the return on the actual 250k you're investing ?