UC - 2nd Property in Negative Equity, Questions About Renting It Out?

cigarsmokingchimp

Hi all, I am on UC. I had to move from a 1 bedroom flat (which I own) into a rented flat due to overcrowding as I have two children. I am now left with the empty owned flat which has been disregarded by UC as capital because it's in a large amount of negative equity. Due to the negative equity it cannot be sold.

(I'm aware to rent it out I need to register as a landlord with the council, the flat needs to be compliant with legislation, and I need to pay HMRC their cut of any rent received).

Once I pay HMRC their cut any rent received will cover less than the mortgage, so there will be no profit made, but I'd rather get a small amount to put towards the mortgage than just leaving the flat empty.

I've read that rental income is classed as capital for UC purposes, not income. Is this definitely true? If so will the monthly rental income not affect my claim until I have £6k in capital? My savings are currently way under this and there's no way renting out the flat is going to build up my savings.

It's a weird situation for someone on UC but basically I'm just checking - if I go ahead and rent the flat out by the book, the rent will seen as capital and I can just report to the DWP if my total capital approaches £6k at any time, and that would be me doing everything correctly? 

huckster

Yes rental income is counted as capital for UC purposes.

For capital over £6000 UC applies deduction of £4.35 for each £250 above £6000. 

You would have to inform UC that you were renting out 2nd property and a Decision Maker would work out based on information provided how much your capital was increasing month by month. And taking this into account with any other money, savings and investments amounts you declared.

cigarsmokingchimp

huckster said:

Yes rental income is counted as capital for UC purposes.

For capital over £6000 UC applies deduction of £4.35 for each £250 above £6000. 

You would have to inform UC that you were renting out 2nd property and a Decision Maker would work out based on information provided how much your capital was increasing month by month. And taking this into account with any other money, savings and investments amounts you declared.

Ok thanks, I wasn't aware it would work like that - so rather than me just declaring it when it gets near 6k I'd instead need to let UC know how much the flat was being rented out for and they would then set something up to add it to the capital each month on the claim? Or would it be a note to check bank statements at a future date? 

The thing is the rent received will definitely be spent by the end of the assessment period I receive it in, because it will be spent entirely on the mortgage, so I'm not sure it'd be correct for them to add it as capital each month, as my actual capital left over at the end of the assessment period won't increase from the level it's at now.

HillStreetBlues

I would have thought the only importance was the value of equity in the 2nd property.
As the rental income is capital, then I would have thought it should reported like any other capital, so if in out the same AP there isn't anything to actually report.

cigarsmokingchimp

HillStreetBlues said:

I would have thought the only importance was the value of equity in the 2nd property.
As the rental income is capital, then I would have thought it should reported like any other capital, so if in out the same AP there isn't anything to actually report.

That's what I thought too. But I know UC rules aren't always straightforward and I have unusual circumstances. I reported a change of capital under £6k once before in the early days of my claim when I got a Help to Save Bonus of £500, and it resulted in me needing to upload tons of unrelated statements, then having to take time off work to go into the jobcentre to bring in physical copies of the same evidence (nightmare to get it all), only to be told it wasn't necessary under £6k (they apologised for the inconvenience and didn't even scan the evidence when I went in, they just put a note on the account saying I don't have near £6k). It took a while for the payments to be unfrozen too and I had to use credit cards to pay bills. The idea of needing to report under £6k and going through all that again every month puts me off the idea of renting the flat out altogether - not to mention I wouldn't get time off work to do it every month!

Spoonie_Turtle

In terms of capital you simply do not need to report any changes unless it goes above £6,000, as anything under that doesn't affect your UC payment.

huckster

From what I have seen, rental income counted as capital is declared.  A Decision Maker works out how much if anything capital increases.

I think this is because a Decision Maker has already agreed to ignore any equity in this 2nd property as there is apparently no equity available.  And now the property is to be rented out, which might drive some capital to be created. 

With all of the Universal Credit reviews taking place, I would suggest being cautious about this and declaring this in the journal to see if it something for a Decision Maker to look at.  If they say it is not necessary, then at least there will be a record of you having declared this.

Grumpy_chap

cigarsmokingchimp said:

The thing is the rent received will definitely be spent by the end of the assessment period I receive it in, because it will be spent entirely on the mortgage, so I'm not sure it'd be correct for them to add it as capital each month, as my actual capital left over at the end of the assessment period won't increase from the level it's at now.

HillStreetBlues said:

I would have thought the only importance was the value of equity in the 2nd property.
As the rental income is capital, then I would have thought it should reported like any other capital, so if in out the same AP there isn't anything to actually report.

Well, let's suppose the negative equity on the property is £20k. (Plucked from thin air.)
Let's also suppose that the rent received is £1k.  (Also plucked from thin air.)
There are costs associated with receiving the rent, let's suppose £200.  (Yes, thin air.)
That means £800 that can go towards the mortgage.
Of that £800, let's suppose £600 is interest.  (More thin air.)
That leaves £200 which has reduced the negative equity to £19,800.
Each month, the rent is progressively reducing the negative equity by a small amount, which is the same as increasing the capital by a small amount, albeit the "capital" is a negative value here.

I suppose a possible challenge is to establish whether the negative equity on the property is a genuine situation or has been contrived by re-mortgaging and the re-mortgage funds used elsewhere.  Property has been increasing in value so far as I am aware for the past few year, unless there is a specific factor at play (for example cladding issues).

HillStreetBlues

Grumpy_chap said:

cigarsmokingchimp said:

The thing is the rent received will definitely be spent by the end of the assessment period I receive it in, because it will be spent entirely on the mortgage, so I'm not sure it'd be correct for them to add it as capital each month, as my actual capital left over at the end of the assessment period won't increase from the level it's at now.

HillStreetBlues said:

I would have thought the only importance was the value of equity in the 2nd property.
As the rental income is capital, then I would have thought it should reported like any other capital, so if in out the same AP there isn't anything to actually report.

Well, let's suppose the negative equity on the property is £20k. (Plucked from thin air.)
Let's also suppose that the rent received is £1k.  (Also plucked from thin air.)
There are costs associated with receiving the rent, let's suppose £200.  (Yes, thin air.)
That means £800 that can go towards the mortgage.
Of that £800, let's suppose £600 is interest.  (More thin air.)
That leaves £200 which has reduced the negative equity to £19,800.
Each month, the rent is progressively reducing the negative equity by a small amount, which is the same as increasing the capital by a small amount, albeit the "capital" is a negative value here.

I suppose a possible challenge is to establish whether the negative equity on the property is a genuine situation or has been contrived by re-mortgaging and the re-mortgage funds used elsewhere.  Property has been increasing in value so far as I am aware for the past few year, unless there is a specific factor at play (for example cladding issues).

Costs aren't allowed, If OP gets £1k a month rent then that £1k is capital. The OP can put whatever they want towards the mortgage as far as UC is concerned.
It doesn't matter if the negative is £10k or £100K it has no bearing on the UC award, but the £10k will no doubt be rechecked sooner than £100k.

The OP should show a  DM that the property has no capital.

HillStreetBlues

huckster said:

From what I have seen, rental income counted as capital is declared.  A Decision Maker works out how much if anything capital increases.

I think this is because a Decision Maker has already agreed to ignore any equity in this 2nd property as there is apparently no equity available.  And now the property is to be rented out, which might drive some capital to be created. 

With all of the Universal Credit reviews taking place, I would suggest being cautious about this and declaring this in the journal to see if it something for a Decision Maker to look at.  If they say it is not necessary, then at least there will be a record of you having declared this.

I do disagree on how to handle it (I think that's what's good about a forum, you can have a range of opinions).
In my view capital is capital and needs to be report (or not) in the usual way, keeping good records.
I wouldn't be to concerned about a UC review as the OP stated capital won't be build up, the one issue could be reviewer tried to claim the rental money was income and needing to deal with that. A reviewer won't overrule a DM about the property.

Reporting it every month you then need to hope the the person reading it understands it, they could also think it's income or are totally unsure and refer it to a DM that risks issues every month, rather than just when a review happens.

If all staff that read messages were fully trained on all issues then my view might be different, but I treat it as a need to know, and only inform that what is legally required (but if unsure better to declare).

silvercar

Winding back one step, do you have permission from the mortgage lender to let out the property? If the lender does give you consent to let, will they increase the mortgage rate as a consequence? Some add 1% to the interest rate.

How are you going to fund the insurance, gas safety certificate, agent fees etc?