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

Rubyroobs

I'm honestly surprised this is allowed to happen. Do you get help with the rent in your new property too ? So getting rent to pay off your mortgage and getting help with rent on another property?

silvercar

Rubyroobs said:

I'm honestly surprised this is allowed to happen. Do you get help with the rent in your new property too ? So getting rent to pay off your mortgage and getting help with rent on another property?

What do you suggest should happen? With negative equity OP can’t sell. So it’s either leave it empty, not be able to pay the mortgage and wait for the lender to repossess or rent it out. 

NedS

Rubyroobs said:

I'm honestly surprised this is allowed to happen. Do you get help with the rent in your new property too ? So getting rent to pay off your mortgage and getting help with rent on another property?

It's treated no differently to any other asset. The asset is valued, and if the capital value (combined with any other assets/capital) are more than £16k, then the claim closes.

The difference here is there is negative (or little) equity in the property. The property should be independently valued and any outstanding mortgage debt deducted from the value to give the amount of capital in the asset. If the claimant's combined capital value is less than £16K, the claimant is entitled to claim UC.

As with any other capital asset, any income derived from that capital asset (interest from a bank or savings account, or rent from a rental property) is treated as capital, not income. So any rental income from the property is treated as capital. Again, as per normal UC rules, paying off debt is never deprivation of capital, so the claimant can use the rental income to pay the mortgage.

Presumably, the capital value will increase as each month the outstanding mortgage deficit is reduced (or property values rise) until such point as there is £16k of value in the property and the UC claim will then close.

Newcad

As already noted letting out a property is not something to be entered into lightly.

It might seem like a good idea, but once you realuse just what it entails then that soon wanes.

To start with there is an initial cost to get the property up to a standard to enable letting, gas safety certificate, electrical installation condition report, etc. etc. all cost money and even more if work is needed to get the certificates needed.

Pontential problems include a tenant who stops paying rent, you can't just evict a tenant it's a lo......ng legal process that can take over a year (and cost a lot).

Don't expect any letting agent to sort out much more than finding a tenant (who may be unsuitable) and charging you annual fees for doing little else 

If you are thinking of going down the rental route then I suggest that you consider it very carefully. I would also spend some time on landlord fora where actual landlords post, it can be an eye opener.

(While not a landlord myself I used to be a regular contributor on Landlordzone forum which despite the name was for both LL's and tenants. I left after they changed the forum software to a horrible one to use, as did many of the regulars).

I'm not saying that you couldn't make it work for you, just that you should do your research very carefully  - because things could go horribly wrong and leave you with a lot worse problems than negative equity.

Grumpy_chap

I am just wondering here whether the normal situation of income from a rental being immediately capital applies in exactly the same way as would ordinarily be the case?

Let's consider that an individual has a property that they rent out.
That property has an assessed capital (after mortgage) of £10k. 
That results in a reduction of UC based on the sliding scale.
The actual rental receipt is ignored (and immediately becomes capital) because to count it as income would be a double-whammy.

But in this case, the property has negative equity, so let's consider an assessed capital (after mortgage) of negative £10k.
Is that still treated as capital in UC terms?

Yamor

There are two different issues here, which shouldn't be conflated.

Firstly, UC (unlike legacy benefits) provides for a closed list of types of income which count as 'unearned income'. Income from property, and from any assets in general, are not on the list.

There is a completely separate rule, which has much less relevance than people might think, which states that income from capital is capital immediately.
The only thing this changes is that it is capital immediately, and not only from the following AP.

HillStreetBlues

Grumpy_chap said:

I am just wondering here whether the normal situation of income from a rental being immediately capital applies in exactly the same way as would ordinarily be the case?

Let's consider that an individual has a property that they rent out.
That property has an assessed capital (after mortgage) of £10k. 
That results in a reduction of UC based on the sliding scale.
The actual rental receipt is ignored (and immediately becomes capital) because to count it as income would be a double-whammy.

But in this case, the property has negative equity, so let's consider an assessed capital (after mortgage) of negative £10k.
Is that still treated as capital in UC terms?

For UC any money received for the rental isn't income, it's just capital it doesn't matter what equity is in the property.
It's actually very simple once the equity in the property has been decided, as there are no costs to be deducted from the money received from the rental. any outgoing  money ( to do with the rental) would be deducted from the capital. ( I suppose the money could be deducted from income (eg the UC payment) but nearly always it works better having the deduction from capital and leaving income untouched remembering the "income" is not from the rental.

EDIT: Think of rental income the same as interest from the bank, as soon as it's paid it's capital.

Grumpy_chap

HillStreetBlues said:

EDIT: Think of rental income the same as interest from the bank, as soon as it's paid it's capital.

Yes, that is how I tried to think of it and I was (and am) struggling to get my head around it.
I think it is because, in this case, the OP would have a negative bank balance that is generating an income (interest).  I do not believe it is possible to have an overdrawn bank and gain interest income.

I suspect the OP has a very edge case of a property with negative equity and letting that out and living in a different location.

HillStreetBlues

Grumpy_chap said:

HillStreetBlues said:

EDIT: Think of rental income the same as interest from the bank, as soon as it's paid it's capital.

Yes, that is how I tried to think of it and I was (and am) struggling to get my head around it.
I think it is because, in this case, the OP would have a negative bank balance that is generating an income (interest).  I do not believe it is possible to have an overdrawn bank and gain interest income.

I suspect the OP has a very edge case of a property with negative equity and letting that out and living in a different location.

Think it as having two bank accounts, one overdrawn, one in credit. You own on the first account but can again interest (capital)  on the second account.

Spoonie_Turtle

Grumpy_chap said:

HillStreetBlues said:

EDIT: Think of rental income the same as interest from the bank, as soon as it's paid it's capital.

Yes, that is how I tried to think of it and I was (and am) struggling to get my head around it.
I think it is because, in this case, the OP would have a negative bank balance that is generating an income (interest).  I do not believe it is possible to have an overdrawn bank and gain interest income.

I suspect the OP has a very edge case of a property with negative equity and letting that out and living in a different location.

They won't have -10k for UC payment purposes though, they'll just start off with £0 (or however much they actually have in savings).  You can't use debt to offset savings/capital actually held, other than by paying the money towards that debt and then you no longer have that money anyway.

The rent paid for the flat they are letting out will increase their capital by the amount received (e.g. £1,000 as someone else plucked out of thin air) if they keep hold of it.  But after paying HMRC and the mortgage each month it sounds like they won't have anything left of that e.g. 1k, so all that's happened is they've paid off a little of the mortgage (debt).  Their capital for UC payment purposes won't have increased, unti/unless the mortgage is paid off enough to then have some equity in the flat.  And once that increases to £6k it will affect their UC payment, and once it gets to £16k they'll no longer be eligible for UC unless they put the flat up for sale (or move back into it).