Second home tax, mortgage etc options

CDB199 wrote: »

Recently paid off mortgage on home and thinking of purchasing second property and using rental income on first place to pay towards new mortgage.

Firstly, will lenders accept this rent as an income so I can potentially borrow more? (value 400k ish, rental 1300+ pcm)

no, most (not all) lenders will totally ignore any rental income when considering how much you can borrow for the purchase of a main house.

a rental property is viewed as a self contained entity that wipes its face, not as a supplement to your income, since rent can be turned off on a whim, whereas salary from a job can't ... (in theory!)

CDB199 wrote: »

(value 400k ish, rental 1300+ pcm)

as an investment you are looking at a gross yield of 3.9%

that is low (6% is fair, 10% is good but comes with other compromises)

what else does this house have going for it which makes it worthwhile retaining given it is now mortgage free and thus represents £400k locked up in it?

CDB199 wrote: »

With changes in stamp to buy second property, what options do I have long term? Was discussing this with someone recently and they suggested I may be able to call this new property my main residence, and when selling offset any capital gains against the stamp duty paid? or am I muddling up here?.

yes you are muddled

for tax efficiency purposes you should look to mortgage the rental property to the hilt (ie to 75% LTV max allowed) under a "Let to Buy" mortgage so that the interest on that mortgage is allowable against the rental income.

The money borrowed on the LTB property (ie 400 x 0.75 = £300k) can then be spent as a lump sum on buying your new house.

if your new main home will cost more than 300k you can of course supplement that by taking out a mortgage on the new residential home, but none of that latter loan's interest will be tax deductible against your rental profits income tax liability.

the residential property loan would of course be based purely on your salary income multiple (ie. the usual affordability calculation), without any account taken of the rental income.

as you intend to keep the rental property (your ex main home) there is no way to avoid paying the higher rate SDLT on purchase of the new residence since you are not "replacing" your old home with a new home, you are instead increasing your property empire by +1.

if you sell the rental/ex home within 3 years of buying the new residence you could claim a refund of the SDLT higher rate. If sold after 3 years you cannot

when you do finally sell the rental/ex home you will be liable to CGT as it is no longer your main residence. Implications of that are:
- because it was once your main home you will be able to claim private residence relief and letting relief against the gain on the old home
- obviously the gain will also be after you deduct the legal and estate agents fees associated with its original purchase and its sale. If you paid SDLT on the original purchase of that ex home you can also deduct that from the gain
- You cannot offset the higher rate SDLT you paid on purchasing the new home against the CGT due on the old one

typically, CGT relief for an ex home means it is unlikely you will pay any CGT unless the property has massively increased in value and/or you lived in it for a short time as main home and let it out for a long time

CDB199 wrote: »

Hoping to achieve at least £1300 pcm on current property, use this as source of income to borrow more. But sounds as if this isn’t viable?
Not planning on a btl mortgage for new place, as this will now be my primary residence..

you do not seem to have understood what I wrote (or have decided to ignore it?)

you release the max amount of cash you can from the let property as a lump sum of cash by taking a let to buy mortgage on that, and top that up (if needed) with a (smaller) mortgage on the new home

the "normal" rules for LTB would be the rent has to be at least 130% - 140% of the interest payable on the loan using a 6% interest rate. If you meet those criteria then the property is wiping its face and your income is not a factor in deciding how much you can borrow. Patently 1,300 pm potentially gives you up to 200k of borrowings, which is well within the 75% LTV limit on a 400K house but does reflect the fact its rental yield is low. All of that annual interest charge of £12k per year will then be allowable against the rental profits.

so with a cash deposit of 200k on the new main residence you would then need an income based "normal" mortgage to top you up to whatever is the price of the new home.

if you don't have a mortgage on the rental property you will be paying more tax on the rental income than you need to whilst at the same time having a 200k larger normal mortgage on the main home. none of which is tax deductible.

drilleruk01 wrote: »

the "normal" rules for LTB would be the rent has to be at least 130% - 140% of the interest payable on the loan using a 6% interest rate. If you meet those criteria then the property is wiping its face and your income is not a factor in deciding how much you can borrow. Patently 1,300 pm potentially gives you up to 200k of borrowings, which is well within the 75% LTV limit on a 400K house but does reflect the fact its rental yield is low. All of that annual interest charge of £12k per year will then be allowable against the rental profits.

Be careful - the annual interest is taxable under new rules depending on whether you are a basic/higher/additional rate tax payer. Historically this was true, but there are new taxation rules filtering in over a four year period, starting from April of this year until April 2021.

you will note I said allowable. I did not say deductible

eligibility of interest has not been altered. The new rules relate to the calculation method, not the principle.

the issue I am illustrating is that having a mortgage on the let property is significantly more tax efficient than paying tax on the full rental income and then spending that net income on a residential property mortgage upon which no interest is eligible. The rule is to do with "withdrawing capital from a business"