Can't sell - rent out instead?

ScottishDunc

Hi.

My (new) wife and I relocated to near Manchester 6 months ago for work reasons, leaving behind a 2 bed flat in London which has since been on the market but with very little interest, and with current market conditions, the prospect of it selling in the near future isn't likely!

We've been renting since we've been up here but the place we moved into was just for the short term - not particularly great, and we were just dead keen on buying a place up here. But that's not really going anywhere at the moment because of the London flat.

I've been looking at finances and we can get a tennant in paying a few hundred quid more than the mortgage, which seems attractive and then we could either move into a better rental place or remortgage the London place to get some equity out and buy somewhere up here (preferred option).

Having never rented a place out before, and certainly never had a second home, I'm unsure about the ins and outs of this prospect and wondered if someone may be able to advise me on the prudence of this plan, particularly in current conditions.

1) Apparently rental properties are flying off the shelves - but applying a pragmatic approach, what would be a sensible expectation for the occupancy of the rental property? 6 months from 12?
2) What upfront costs should one expect when renting a place out? And what level of expense would be sensible to allow for over the course of a year?
3) Am I better going through an agency as a first time landlord?
4) What are the tax implications? And what about CGT when I do (assuming I do) sell the rental property, do I only pay that on the difference in price between starting rent and selling, or from the time I bought it regardless of when I lived there?
5) Will a mortgage company frown on me / lend me less for a mortgage on a new place given I have a potential liability in the form of the rental property?

Sorry for all the (probably difficult to answer!) questions - I'm trying to get my head round the implications of this decision. I'm normally quite a stress averse person so didn't really want to entertain the idea of multiple properties originally, but feel like it really is the best solution to our "living in the twilight zone" and getting on with our new life in a nice and permanent home.

I'd really appreciate any advice or thoughts from someone to help me work out the best course of action, and make sure I've done my sums right and covered all the angles (so we don't do it and realise I've mucked things up when something unexpected comes up!).

tbs624

If you a do a search of the forum you'll find some similar posts to your own, the answers to which you may find helpful.

Websites to look at are http://www.direct.gov.uk/en/HomeAndCommunity/BuyingAndSellingYourHome/index.htm
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013435
http://www.landlordzone.co.uk/guide_to_letting.htm
http://www.hse.gov.uk/gas/domestic/faqlandlord.htm

Check ouy the HMRC on tax issues - Land and Property pages SA105 plus SA105 guidance notes will help you with regard to rental income.

There are specific rules relating to CGT when the property has been your own home- see here: http://www.landlordzone.co.uk/tax/capital-gains-tax.htm

You do need to take the time to do your research properly - join one of the LLs associations for valuable support & guidance, and you'll need to let your mortgage lender know and get landlords insurance cover. Even if you use an agent, it best to familiarise yourself with the legal implications of property rental, so you know what should be happening, rather than relying on a LA who may turn out to be inexperienced and incompetent. Good luck.

taxdoctor

Hi SD,

I'll attempt to throw some light on the tax implications for you:

As you rightly point out they are split into 2 main categories:

Income tax & Capital Gains Tax (CGT)

Income tax:

You will both need to register with HM Revenue so that they can send you tax returns to inform them of your income from land and property.

You will be assesed on the "profit" you have made from renting out your house. This profit will be the income less any expenses incurred, the main one being Mortgage interest (not payments, you only get tax relief on the interest element). The other expenses would be any repairs made on the property, agents commissions etc etc.

As the property is in joint names you would need to split the income between yourself and your wife.

This profit is then assesed for tax taking into account your other income.

CGT

Roughly speaking your idea about only being taxed on the gain since you rented the property is quite close to the mark, although it doesn't quite work like this.

You will be given Place of Prime residence relief which will exempt part of the gain which relates to the time you lived in the property, the last 3 years is also exempt and there is a further relief available if the property has been let out (letting relief) All these reliefs USUALLY add up to reduce any liability greatly.

This is however a reasonably complex and specialist area of tax. It's always worth going through your case specifics with an expert.

The above should be taken as a rough guide only!

Hope it helps though!

ScottishDunc

Thanks for your help guys.

I had hoped that it would fairly straightforward, but knew there would be a lot of things to think about so I'd best go away to do my research. Ultimately I think it's our only option in the current climate, so I just need to make sure I don't make a mess of it!

Thanks again.