Keeping the current house and buying a bigger one to live in

JohnTng

What do you think makes more sense : keeping the house that I own and renting it out after I get a bigger place, or selling the one I own and buying a rental property after I purchased the bigger one to live in?

Things I'm considering are:

- CGT implications; if I sell the current one I pay no tax on the increase in value over the last 10 years,

- As I'm on an above average salary, I'd probably need to incorporate to avoid paying 40% tax on the income from the property, so would need to sell it to the to-be-established Ltd. 

- The current house is finished to a reasonably nice standard, so more appeal for buyers rather than tenants.

- Keeping the house makes me no-chain buyer, so hopefully some premium associated with this.

Thanks

p00hsticks

If in England, you also need to factor in the extra SDLT for either the bigger home or the later property to rent out.
 
Any particular reasons why you have decided on BTL as the best investment in your situation ?
The topic arises frequently on these boards and the general consensus seems to be that the ever increasing legal requirements around BTLs don't generally make them the best investment opportunity for many....

JohnTng

The main reason for (considering!) BTL was that I'd become a chain free buyer so a better chance of my low ball offer being accepted. But it can be argued that I can simply buy the new one and then sell the current one, claiming back the SDLT. Or even not bother with breaking the chain if this doesn't give me significant price reduction.
The other reason for BTL is to diversify - I'd like part of my portfolio to be in tangible assets. 

_Penny_Dreadful

JohnTng said:

What do you think makes more sense : keeping the house that I own and renting it out after I get a bigger place, or selling the one I own and buying a rental property after I purchased the bigger one to live in?

Things I'm considering are:

- CGT implications; if I sell the current one I pay no tax on the increase in value over the last 10 years,

- As I'm on an above average salary, I'd probably need to incorporate to avoid paying 40% tax on the income from the property, so would need to sell it to the to-be-established Ltd. 

- The current house is finished to a reasonably nice standard, so more appeal for buyers rather than tenants.

- Keeping the house makes me no-chain buyer, so hopefully some premium associated with this.

Thanks

That’s not how CGT works. The gain is calculated over the whole period of ownership not just from when it became a rental property. Under the current CGT rules you would get PPR relief for 129 months of ownership but who knows what the rules will be if/when you come to sell. Should you decide to transfer the property to a limited company of which you are a director then there would be no CGT to pay on the transfer due to the PPR relief but you definitely won’t get any PPR relief if/when the limited company sells the property. The company will have to pay the higher rate of SDLT when it purchases the property from you. Unless you own the property outright you’ll need to look into financing for the limited company which is often a bit more expensive. 

Do you not think tenants also want homes that are finished to a nice standard? In my experience as a landlord though you need a property that is easier to maintain for tenants. For example, laminate worktops in a kitchen rather than say wood or they’ll get wrecked due to incorrect care. 

What sort of premium are you hoping to achieve as a buyer without a chain? 

JohnTng

_Penny_Dreadful said:

JohnTng said:

What do you think makes more sense : keeping the house that I own and renting it out after I get a bigger place, or selling the one I own and buying a rental property after I purchased the bigger one to live in?

Things I'm considering are:

- CGT implications; if I sell the current one I pay no tax on the increase in value over the last 10 years,

- As I'm on an above average salary, I'd probably need to incorporate to avoid paying 40% tax on the income from the property, so would need to sell it to the to-be-established Ltd. 

- The current house is finished to a reasonably nice standard, so more appeal for buyers rather than tenants.

- Keeping the house makes me no-chain buyer, so hopefully some premium associated with this.

Thanks

That’s not how CGT works. The gain is calculated over the whole period of ownership not just from when it became a rental property. Under the current CGT rules you would get PPR relief for 129 months of ownership but who knows what the rules will be if/when you come to sell. Should you decide to transfer the property to a limited company of which you are a director then there would be no CGT to pay on the transfer due to the PPR relief but you definitely won’t get any PPR relief if/when the limited company sells the property. The company will have to pay the higher rate of SDLT when it purchases the property from you. Unless you own the property outright you’ll need to look into financing for the limited company which is often a bit more expensive. 

Do you not think tenants also want homes that are finished to a nice standard? In my experience as a landlord though you need a property that is easier to maintain for tenants. For example, laminate worktops in a kitchen rather than say wood or they’ll get wrecked due to incorrect care. 

What sort of premium are you hoping to achieve as a buyer without a chain? 

Thanks, I didn't appreciate how the CGT would work in this case. The existing house is paid off, so that should make things slightly more straightforward. 
Regarding the premium, I was hoping for 5-10% below the asking price on a house that was sitting on the market for 6 months now. 

Emmia

As is often pointed out on the boards, are you familiar with all the legal requirements around being a landlord e.g. safety inspections, deposit protection etc.? Even if you use a management company, it is still your legal responsibility to ensure they're done.

BarelySentientAI

Become a single property landlord, perhaps temporarily, in the hope of getting a 5% discount?

Seems like a lot of effort and risk for basically no reward to me.

eddddy

JohnTng said:

Regarding the premium, I was hoping for 5-10% below the asking price on a house that was sitting on the market for 6 months now. 

If you decided to sell your current house (instead of renting it out), would you accept an offer that was 5% or 10% lower - simply because the buyer had no chain?

For example, if your house was on the market for £300k...

• You'd insist on an offer of £300k if your buyer has a chain below them

• But you'd accept an offer of £285k or even £270k, simply because the buyer has no chain below them

I'm not sure that many sellers would think that way.

Especially as many sellers will eventually have a chain above them anyway, so a chain free buyer has limited benefit.


(If a house has been on the market for 6 months, perhaps a seller would consider an offer of 5% or 10% below asking price - maybe because they realise it's overpriced. But probably not just because a buyer is chain free.)

Albermarle

 As I'm on an above average salary, I'd probably need to incorporate to avoid paying 40% tax on the income from the property, so would need to sell it to the to-be-established Ltd. 

Would seem to be a lot less stress and hassle just to increase contributions to a pension and get 40% tax relief. 

FlorayG

Are you going to need to mortgage the new house? I think you're much more likely to get a reduction for being a cash buyer than for being not in a chain. If the choice was you;no chain;5% off or MrX; chain of 4; full price I'm pretty sure most people would choose MrX unless they have a reason to need to sell really quickly - in which case the house is going to be for sale for less than full market value in the first place.
I actually thought about doing the same thing when I moved two years ago and the complications and hassle made me decide to sell instead and I bought a rental later

AlexMac

For me, a major consideration would be whether the existing house is an ideal Rental or (assuming you really want to be a landlord) whether there would be a better Buy To Let  property out there;

- ideally located in an area of high rental demand near transport/commuter links, work/study opportunities, shops & services…

- low maintenance or at least easy to maintain, and equally important, 

- high rents / good ROI ( also ideally with the potential for future capital gains, although that’s far harder to predict). 

There’s also the consideration of whether you’d be too emotionally invested on a home you’d lived in (and maybe refurbished, designed and fitted out to your own needs) rather than viewing it merely as a business asset?

I’m a lower rate taxpayer (unlike you) with two BTL flats, the first of which I bought 25 years ago and which, more by luck than judgement exactly fits this spec;
- a 2-bedroom job in a popular (London Zone 3) area whic “came up” (so amazing Capital growth)
- low rise ex-Council leasehold of traditional brick and tile construction (no cladding, lifts, flat or fancy Sedum roofs…), so
- very low Service Charges and maintenance costs, and
- never a void period nor defaulting tenant. 

Not every rental is so successful. A 3-bedroom seaside place in a low-income region, initially bought for fun and on which I lavished attention as a refurb/DIY project, earned only a modest rent when we realised we couldn’t afford a second home. So we flogged it, spent the proceeds on another identical BTL ex-Council flat in London and almost doubled our ROI. 

That was 12 years ago; dunno if I’d bother now that prices have risen and you can get 5-6% on cash savings and ISAs?