Rent or not to Rent

pawprints

First off apologies for the very long message 

Myself and my fiance Ryan (not married yet so can't benefit from that, lol) bought a house together with a 5 year fixed rate mortgage. We are almost 3 years into this and now face a dilemma.

Ryan might have the chance to relocate to an area we are more than happy to move to. The placement would come with a rent free cottage, plus bills paid/part paid (we haven't finalised any details yet) and could be for 5 years.

At first we were very excited and answered yes, great opportunity as we will live in a lovely area and can rent out our house and hopefully that will cover part of the mortgage. Let's go for it kinda attitude.

However, people have thrown in plenty of spanners like, the rent will become your income which is split and you are taxed on that, it may push Ryan onto the higher tax bracket, if you ever sell you'll pay capital gains tax, you'll need to change your mortgage a buy to let mortgage or get a consent to rent agreement etc..

Our minds are now blown. Our bank does give us a consent to rent option on our mortgage which is for short term lettings, but they add 0.5% to our interest rate. This added 0.5% will last until the end of our fixed term and then added again when we renew our mortgage if tenants are still there, which they would be, because we only have 2 years left on the fixed rate and the job maybe for 5 years.


Anyway, questions are:

1. Is it worth renting for 5 years if we are going to be taxed, then 0.5% added to our interest rate and if we ever sell, capital gains tax aswell as Ryan might get pushed over to the higher tax bracket? Would we end up losing?

2. In the 3 years we've been here, our house has gone up so would our bank give HMRC the new valuation when we start renting so capital gains would go from that value, or do HMRC just go with the value you bought it at? 

3. If we do decide to rent, is it worth selling our 3 bed house that has a large high maintenance garden and downsizing to a smaller house with a manageable garden, so that:  1. We have a smaller mortgage which can be paid off faster?  2. Easy to manage with less maintenance for us and the tenants? 

Sorry for so many questions.

From a very confused couple.


😊

ReadySteadyPop

pawprints said:

First off apologies for the very long message 

Myself and my fiance Ryan (not married yet so can't benefit from that, lol) bought a house together with a 5 year fixed rate mortgage. We are almost 3 years into this and now face a dilemma.

Ryan might have the chance to relocate to an area we are more than happy to move to. The placement would come with a rent free cottage, plus bills paid/part paid (we haven't finalised any details yet) and could be for 5 years.

At first we were very excited and answered yes, great opportunity as we will live in a lovely area and can rent out our house and hopefully that will cover part of the mortgage. Let's go for it kinda attitude.

However, people have thrown in plenty of spanners like, the rent will become your income which is split and you are taxed on that, it may push Ryan onto the higher tax bracket, if you ever sell you'll pay capital gains tax, you'll need to change your mortgage a buy to let mortgage or get a consent to rent agreement etc..

Our minds are now blown. Our bank does give us a consent to rent option on our mortgage which is for short term lettings, but they add 0.5% to our interest rate. This added 0.5% will last until the end of our fixed term and then added again when we renew our mortgage if tenants are still there, which they would be, because we only have 2 years left on the fixed rate and the job maybe for 5 years.


Anyway, questions are:

1. Is it worth renting for 5 years if we are going to be taxed, then 0.5% added to our interest rate and if we ever sell, capital gains tax aswell as Ryan might get pushed over to the higher tax bracket? Would we end up losing?

2. In the 3 years we've been here, our house has gone up so would our bank give HMRC the new valuation when we start renting so capital gains would go from that value, or do HMRC just go with the value you bought it at? 

3. If we do decide to rent, is it worth selling our 3 bed house that has a large high maintenance garden and downsizing to a smaller house with a manageable garden, so that:  1. We have a smaller mortgage which can be paid off faster?  2. Easy to manage with less maintenance for us and the tenants? 

Sorry for so many questions.

From a very confused couple.


😊

What happens if the placement doesn`t work out and your tenants refuse to move out? 

kimwp

Just one point - being pushed into the higher tax bracket has two main implications:
1. Your tax increases - but only on the bit that's over the threshold. Your NI reduces, to 2% (on the bit over the threshold)
2. Some allowances may be affected. The one I am aware of is the personal savings allowance, which reduces to £500 from £1000 when you go over the higher tax threshold. 

You can increase pension contributions or charitable donations to bring you below the threshold. (Search litrg and adjusted net income). Litrg is a fantastic resource for understanding income and tax.

And maybe another little point - if you are paying capital gains tax, it's because you made money - you gained money and you have to pay a bit of that gain to hmrc.

ReadySteadyPop

kimwp said:

Just one point - being pushed into the higher tax bracket has two main implications:
1. Your tax increases - but only on the bit that's over the threshold. Your NI reduces, to 2% (on the bit over the threshold)
2. Some allowances may be affected. The one I am aware of is the personal savings allowance, which reduces to £500 from £1000 when you go over the higher tax threshold. 

You can increase pension contributions or charitable donations to bring you below the threshold. (Search litrg and adjusted net income). Litrg is a fantastic resource for understanding income and tax.

And maybe another little point - if you are paying capital gains tax, it's because you made money - you gained money and you have to pay a bit of that gain to hmrc.

Great advice.

FlorayG

"large high maintenance garden"...
...that's going to turn into a mess and a jungle if you rent; people who are renting short term just want a very basic, easy care garden because why should they bother?
Just a warning

Stubod

..you do not want to get into renting a property out. Over-hyped if you only have the one property,  lots of work, potential risks, do you undertand all the current and upcoming legislation regarding becoming a landlord??

kimwp

Have you considered keeping the house and not renting it out? If accommodation is going to be free, presumably you'll still be able to cover the mortgage etc.

Another option (I'm not sure where this stands legally) is to still officially live there and have a lodger - that would enable £7k a year from them tax free.

RipleyG

We have a 3 bed house with a large (quarter acre) high maintenance garden, and moved temporarily to work in Australia in 2017. We were away for 5 years, including a chunk of travel. 

We knew we'd return, so our choices were to leave it vacant or rent it. Both have risks. Our mortgage terms didn't allow the property to be uninhabited, and it's hard/expensive to find insurance for an empty house. There's possible damp/deterioration to an unlived in house, or vandalism/squatting. You'll still have council tax, plus electricity/gas/water standing charges if you want to leave those connected. 

We considered the risks of renting were damage that needed repair, or tenants not leaving and having to follow legal eviction procedures. Plus, now, there is the element of CGT which you'd have to pay. 

Ultimately we concluded that leaving it empty had possible risks, definite costs, but no benefits, whereas renting it had possible risks, possible costs, and definite benefits/income.

We did use a letting agent, which I'd definitely advise. We also paid for a gardener for 3 hours a fortnight to stop the garden getting too horrendous. I'd also suggest notionally earmarking at least a few thousand for repairs/refresh - you might not need it, but it helps to have mentally accepted/budgeted for it.

Our decision was influenced by our certainty about returning. If that wasn't the case, I'd have been weighing up renting versus selling it. I absolutely wouldn't leave it empty. 

For the record, it was absolutely worth it - memories of our adventures totally offset the wear and tear to the house.

Oh, and the suggestion of a lodger isn't a good one. HMRC have clear rules about what your 'main residence is', and if you're leaving elsewhere then you can't benefit from the rent-a-room allowance elsewhere! 

pawprints

Really appreciate the advice, thank you

Bigphil1474

If you do start renting it out, it might be worth getting it valued so that if you end up paying CGT in the future, you've got an accurate base line. The CGT is against the increase in value for when you were renting it out, not the increase in value from when you bought it to when you sold it. You also get an allowance.

My SIL has a house he owns which he hasn't lived in for 15 years due to moving around in the military. An agent looks after the maintenance of the property and every few years he pays a bit extra if there's a change of tenant. One year he had a £5k fixing up bill due to poor tenants. Either way, the net rent he receives covers his mortgage and any 'profit' goes into an account to cover those extra costs. Last time he mentioned it, he was breaking even, but he has got a house which is being paid off ready for when he leaves the military. It can be done for one property. Maybe see if any family members or friends fancy renting it out - family you like of course. 

saajan_12

pawprints said:

Anyway, questions are:

1. Is it worth renting for 5 years if we are going to be taxed, then 0.5% added to our interest rate and if we ever sell, capital gains tax aswell as Ryan might get pushed over to the higher tax bracket? Would we end up losing?

Depends on the numbers..
- what are average rents in the area? Deduct a bit for maintenance and insurance, then the net is taxed at your marginal tax rates, so what's that? 
- what is your mortgage rate (including the 0.5%)? You'd get 20% tax relief so the cost is effectively 80% of that. 
- capital repayment part of mortgage payments is effectively just storing money in your property instead, you'd get it back when you sell assuming values remain the same or higher). 

pawprints said:

2. In the 3 years we've been here, our house has gone up so would our bank give HMRC the new valuation when we start renting so capital gains would go from that value, or do HMRC just go with the value you bought it at? 

CGT is based on the original purchase price, but then you take a % for the years it wasn't your main residence. So if you lived there for 3 years and then let it for 5 then moved back in for 2 years and sold, then you'd pay for the 5 / 10 years you didn't live there, ie 50%. Note there's a nuance where if you lived there at some point then you also don't pay cgt on the last 9 months even if it was rented. So if you sold after the 5 years of renting, then instead of paying for 5/8 years = 62.5%, you instead pay for 4.25 / 8 = 53%

pawprints said:

3. If we do decide to rent, is it worth selling our 3 bed house that has a large high maintenance garden and downsizing to a smaller house with a manageable garden, so that:  1. We have a smaller mortgage which can be paid off faster?  2. Easy to manage with less maintenance for us and the tenants? 

Can do, that's just a specific investment property then.. if the numbers v effort stack up then great. It would mean paying stamp duty again, and involve at times onerous duties on a landlord, whereas other low touch investments can return about as much.