Advice on let to buy/second property

Ldneast

Bookworm105 said:

are you relying on the rental income to cover some of the mortgage on the 550k new house?
if yes, then your plan is extremely high risk as you could end up in great debt and losing both properties

would your joint income cover both mortgages if the rental income stops? Void periods, non paying tenant?

as for tax, I assume the rent will be split between both of you, so will it push either into a higher tax bracket?

Yes I think we would be but only partly. Our new mortgage would increase by approx £1000 plus. So any profit made would go towards the residential mortgage. It would also mean a higher term than what we are on currently. We have no other debts but the idea of us working so hard to chip away at our current mortgage ( Have 19 years left) and then have to increase in by 7 potentially 10 years is a hard pill to swallow.

I think if we were to go down the interest only route for the BTL we may just be able to cover it. With the costs involved I think it is a very risky move especially reading everyones responses and with two young children it could be a stretch too far for us.

Ldneast

Grumpy_chap said:

Albermarle said:

Would be worth reading the next thread along from yours.
The original question was a bit daft, but you should find some of the replies interesting.
buy to let properties, are they still worth it in 2024 and beyond? — MoneySavingExpert Forum

That thread has now been culled.

Ldneast said:

Hello all, 

We are a family of 4 (two kids under 10) and have outgrown our two bed house. One option I am exploring is converting our current mortgage to a let to buy and then purchasing a second property.

We bought our property for £340,000 and is now valued at £420,000. The new property we are looking at would be in the region on £550,000. I have never owned a second property and the idea of being a landlord doesn't fill me with excitement. We have spoken to a mortgage advisor who has said it is affordable for us to get the lending. The approx gross rental income we would get would be £1900 per month.

My main concern would be any tax implications and if it is actually financially worth following through. I understand there are a lot of financial costs such as insurance, maintenance, property management fees ( at 12% from some of the companies we have researched). We both work full time and the new mortgage would be stretching us compared to what we are paying now. It would also add more years to our term than what we are currently on but the income received from the Let to Buy should help us offset this.

Any thoughts, comments, ideas would be welcome from anyone whether they think this is a feasible idea especially from anyone that has done this themselves.

Thank you.

I have done (still do) this and I would do it again.

The financial calculation is one you need to do for your own situation. 

Yes, there are tax implications:

• You will incur SDLT second property surcharge on the purchase of the new home.
• You will incur CGT on the sale of the current home at whatever future point you sell.  Based on current rules, that is the total increase in value pro-rata for months of being your main home and months of being let out.  You can allow for the costs of purchase and sale.  You can allow for 9 months at the end for selling up.  CGT rules and rates may be changed but you can only assess the situation on the current rules and rates as there are no firm changes announced.  You have the benefit that you can probably consider any changes that are announced (or direction of travel indicated) at the Budget which is in October.
• You will incur income tax on the nett profit received (after allowable expenses are deducted).  The amount suffered will depend on your marginal tax rates and whether the ownership is sole name or joint name and what proportion that allows the income to be split.
• Having the asset will impact access to any means tested benefits.

Some non-tax considerations:

• BTL mortgage rates are usually higher than owner-occupier mortgage rates.
• You will require "consent to let" from the mortgage lender.
• Fully Managed Letting Agent fees are likely to be 12% - 18% PLUS VAT.
• You need to be able to afford both mortgages even if there is no tenant in place, or a non-paying tenant.
• Dealing with a non-paying tenant is slow and stressful.
• You need to be able to detach yourself from the asset as being your home / former home.  It is purely an investment asset.

Thank you for this. Lots of food for thought and thank you for sharing that you would be open to doing 'it again'.

What are your thoughts on setting up a LTD company to offset the income tax implications? Although im not a a high tax payer (would be if we went down this route), my partner already is.

Grumpy_chap

Ldneast said:

What are your thoughts on setting up a LTD company to offset the income tax implications? Although im not a a high tax payer (would be if we went down this route), my partner already is.

I have considered the Ltd route as the vehicle for owning a BTL.

It does not work for a property you already own (which our BTL used to be our home - same as you are considering) as you would have to sell the property from yourself to the Ltd Co, thus incurring SDLT straight away on the transfer.

Owning within a Ltd also does not work if you might ever think you'd wish to live in the property in the future.  For us, if we saw a bungalow now but not actually ready to downsize yet.

We did consider a BTL in 2019 and would have considered that through SPV (special purpose vehicle) Ltd Co. but there was no likelihood that we'd ever wish to move to that particular property.  Being Ltd Co incurs SDLT surcharge, but there is no CGT (treated as profit subject to corporation tax).  No VAT recoverable because the Ltd would not register for VAT.  It all became moot as things did not progress before COVID and then everything paused.

Bookworm105

Ldneast said:

I think if we were to go down the interest only route for the BTL we may just be able to cover it. With the costs involved I think it is a very risky move especially reading everyones responses and with two young children it could be a stretch too far for us.

wise to the crunch the numbers again allowing for both being higher rate taxpayers.

How much will you need to borrow for the 550k house? 
bear in mind the prospective BTL cannot be a 100% mortgage, typically a BTL mortgage requires at least 20% deposit, so the max you'd borrow on the 420k property is 336k, leaving the balance of 214k to be funded from whatever cash you have plus whatever mortgage you get on the 550k new main home.

With BTL interest rates around 5% that means 336k BTL interest only mortgage would cost around £1,400 per month
Mortgage Comparison UK | Compare Mortgage Rates & Deals | Tembo (tembomoney.com)
Your numbers start to look awful and heading in the danger area where, as higher rate taxpayers, you would end up paying out more money than you receive because of the way interest is treated for tax purposes

for illustration purposes I will ignore the other costs you have already identified (insurance, agency fees etc)
rental income £1,900
profit excluding mortgage (other costs ignored) 1,900
tax thereon @ 40% £760
tax credit (interest paid 1400 x 20% tax relief thereon)  280
net tax payable 760 - 280 = 480

In physical cash terms: received 1,900 less mortgage 1,400 payment less net tax 480 = £20 per month

having the BTL as HR taxpayers could easily mean you lose money every month, not make money to fund the other home with 
(and as others have already said, putting it in a Ltd Co would cost you a lot more in upfront costs meaning you would never break even when finally selling)

Ldneast

Bookworm105 said:

Ldneast said:

I think if we were to go down the interest only route for the BTL we may just be able to cover it. With the costs involved I think it is a very risky move especially reading everyones responses and with two young children it could be a stretch too far for us.

wise to the crunch the numbers again allowing for both being higher rate taxpayers.

How much will you need to borrow for the 550k house? 
bear in mind the prospective BTL cannot be a 100% mortgage, typically a BTL mortgage requires at least 20% deposit, so the max you'd borrow on the 420k property is 336k, leaving the balance of 214k to be funded from whatever cash you have plus whatever mortgage you get on the 550k new main home.

With BTL interest rates around 5% that means 336k BTL interest only mortgage would cost around £1,700 per month
Mortgage Comparison UK | Compare Mortgage Rates & Deals | Tembo (tembomoney.com)
Your numbers start to look awful and heading in the danger area where, as higher rate taxpayers, you would end up paying out more money than you receive because of the way interest is treated for tax purposes

for illustration purposes I will ignore the other costs you have already identified (insurance, agency fees etc)
rental income £1,900
profit excluding mortgage (other costs ignored) 1,900
tax thereon @ 40% £760
tax credit (interest paid 1700 x 20% tax relief thereon)  340
net tax payable 760 - 340 = 420

In physical cash terms: received 1,900 less mortgage 1,700 payment less net tax 420 = NEGATIVE £220 per month

having the BTL as HR taxpayers would actually mean you lose month every month not make money to fund the other home with 
(and as others have already said, putting it in a Ltd Co would cost you a lot more in upfront costs meaning you would never break even when finally selling)

Thank you so much for this. The way you have broke this down gives me a lot of more clarity and so useful. It seems pretty clear that this would not make sense to pursue as the numbers do not add up.