Renting a house we own outright
Discussion
As above, we have a house that's been on the market for a year, and empty for 5 months. I'm paying Council Tax, Gas, Electricity, Water Rates and Insurance on it, but no mortgage as we own it outright.
We're thinking about renting it out, and are wondering what the best options are: ie, do we just go for it as is, or take out a mortgage for say 75% (approx £80k), and use the resulting cash to pay down part of the mortgage on our residence.
It strikes me that by getting a BTL mortgage on it, I'd be paying out more in interest than I'd save in offsetting that interest against tax (paying £100 to save £20), which doesn't make sense. Am I looking at it incorrectly?
House would rent for £525 - £550 PCM gross, less fees etc. I'm a lower rate taxpayer, although the OH is in the 40% bracket, so we're thinking keeping the income in my name would be better.
Basically, I'm asking whether or not we should borrow on the property.
We're thinking about renting it out, and are wondering what the best options are: ie, do we just go for it as is, or take out a mortgage for say 75% (approx £80k), and use the resulting cash to pay down part of the mortgage on our residence.
It strikes me that by getting a BTL mortgage on it, I'd be paying out more in interest than I'd save in offsetting that interest against tax (paying £100 to save £20), which doesn't make sense. Am I looking at it incorrectly?
House would rent for £525 - £550 PCM gross, less fees etc. I'm a lower rate taxpayer, although the OH is in the 40% bracket, so we're thinking keeping the income in my name would be better.
Basically, I'm asking whether or not we should borrow on the property.
I'm not so sure you would need a BTL mortgage, since you're not buying the property in order to let it, but putting a loan charge against a property you already own.
I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
If you take out a mortgage using the rental property as collateral - but use that loan to buy your main residence - the interest on that loan CANNOT be offset against the income from the rental property.
The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
although the OH is less than impressed with that idea.5potTurbo said:
I'm not so sure you would need a BTL mortgage, since you're not buying the property in order to let it, but putting a loan charge against a property you already own.
I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
Wrong.I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
The OP would need a BTL mortgage as the property would not be where he was living and he is intending to let it out.
Your scenario with Halifax and them allowing you 'Consent to Lease' is a different scenario all together.
Eric Mc said:
If you take out a mortgage using the rental property as collateral - but use that loan to buy your main residence - the interest on that loan CANNOT be offset against the income from the rental property.
The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
Presumably though, if we were to use the equity released from the house as deposits for a couple of other houses, we'd be able to offset the interest of those two properties? The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
This isn't what we'd planned on doing, we have no great desire to become amateur landlords, but are just looking at the options.
Yes - the PURPOSE of the loan determines whether the interest is offsetable against the rental income.
If you take out one loan to fund (say)
one main residence and two buy to lets (I've seen it done), the tricky thing is apportioning the annual interest charge on that loan between the (disallowable )main residence and the (allowanble) rental properties.
And because the two rental properties will have (probably) cost differing amounts to buy, the interest would be allocated in proportion to each set of rental income and expenditure accounts.
It's the type of exercise I have to carry out every now and then.
If you take out one loan to fund (say)
one main residence and two buy to lets (I've seen it done), the tricky thing is apportioning the annual interest charge on that loan between the (disallowable )main residence and the (allowanble) rental properties.
And because the two rental properties will have (probably) cost differing amounts to buy, the interest would be allocated in proportion to each set of rental income and expenditure accounts.
It's the type of exercise I have to carry out every now and then.
Just to add, there could be complications with regards to the lenders criteria also. Some lenders will classify what you are doing as 'Debt Consolidation' and will limit the borrowing, some won't do it all.
Some won't lend to FTL's (First Time Landlord's).......the BTL arena is pretty complex with criteria varying vastly from lender to lender....
Some won't lend to FTL's (First Time Landlord's).......the BTL arena is pretty complex with criteria varying vastly from lender to lender....
Edited by Sarnie on Wednesday 18th July 14:36
Sarnie said:
5potTurbo said:
I'm not so sure you would need a BTL mortgage, since you're not buying the property in order to let it, but putting a loan charge against a property you already own.
I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
Wrong.I had a mortgage on a property in the UK and moved abroad. I simply asked Halifax if they would permit me to let the property and they quickly agreed to it.
It's worth asking a prospective lender as a 'CYA' measure before taking out the loan.
The OP would need a BTL mortgage as the property would not be where he was living and he is intending to let it out.
Your scenario with Halifax and them allowing you 'Consent to Lease' is a different scenario all together.
...but I sit corrected
Eric Mc said:
If you take out a mortgage using the rental property as collateral - but use that loan to buy your main residence - the interest on that loan CANNOT be offset against the income from the rental property.
The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
I think you'll find that HMRC guidance states that you can borrow money from a rental property to buy your main residence as long as the total amount borrowed does not exceed the market value of the rental property. http://www.hmrc.gov.uk/manuals/bimmanual/bim45700....The key to allowability of loan interest is the PURPOSE for which the loan is obtained. If the loan was to actually BUY the rental property, then the interest would be allowable.
manitou said:
OP youve been paying council tax on an empty property? you dont pay council tax on an empty property for the 1st six months & then its at a reduced rate iirc
No, I haven't (perhaps that was a little misleading), but the 6 months are up very soon, and I was paying on both properties (albeit at a reduced rate on one) for the first 5 months of us owning both. The reduction depends on your local council. Some let you get away with only paying 50%, others make you pay 90%. I need to give the council where my empty house is standing a call to find out what's what.
keith333 said:
I think you'll find that HMRC guidance states that you can borrow money from a rental property to buy your main residence as long as the total amount borrowed does not exceed the market value of the rental property. http://www.hmrc.gov.uk/manuals/bimmanual/bim45700....
Agreed, although you may have a hard time getting this point across here - I tried and failed...Key point is market value at time the property was introduced to the rental business though, rather than whatever the current market value may be when looking at moving finances around.
There is no law saying you can't use borrowings which uses one property as collateral to fund the purchase of another property.
The question is, under what circumstances would tax relief be available against the rental income generated by the rented out property?
I read through those examples highlighted and they seem to refer to business related borrowings and whether the proprieter's personal capital account in that business is "overdrawn" or not.
I have yet to see a set of rental income accounts which feature a balance sheet, drawings and a proprietor's capital account with which to show whether the proprietor's (or landlord's in this caser) capital account is overdrawn or not,
I have performed many tax calculations - generally in respect of sole traders/partnerships and a set of business accounts - over the years where an overdrawn proprietor's overdrawn capital account has resulted in the tax relief on interest charges being restricted because it is deemed that some of the borrowings had been incurred to fund non-business costs (i.e. personal drawings).
If there is no balance sheet showing such a Capital Account and what state it is in, how can you ascertain the extent to which the tax relief on the interest charge can be restricted or blocked?
The question is, under what circumstances would tax relief be available against the rental income generated by the rented out property?
I read through those examples highlighted and they seem to refer to business related borrowings and whether the proprieter's personal capital account in that business is "overdrawn" or not.
I have yet to see a set of rental income accounts which feature a balance sheet, drawings and a proprietor's capital account with which to show whether the proprietor's (or landlord's in this caser) capital account is overdrawn or not,
I have performed many tax calculations - generally in respect of sole traders/partnerships and a set of business accounts - over the years where an overdrawn proprietor's overdrawn capital account has resulted in the tax relief on interest charges being restricted because it is deemed that some of the borrowings had been incurred to fund non-business costs (i.e. personal drawings).
If there is no balance sheet showing such a Capital Account and what state it is in, how can you ascertain the extent to which the tax relief on the interest charge can be restricted or blocked?
I'm not saying anything about an overdrawn account. This is just a case of withdrawing your personal funds from your rental business.
It is quite simple really:
House rental begins on x date. House is worth £200k with no mortgage.
Taxpayer decides he needs additional funds for personal use (house purchase etc) so takes out a mortgage on the property for £150k. House now has a market value of £300k.
All of the interest is allowable as it is funding a property being used in the rental business and the amount 'withdrawn' from the business is less than the amount originally invested. Without the loan the house would have needed to be sold.
If the loan was instead for £250k, only the first £200k would be allowable as this is the amount originally invested in the business by the taxpayer.
The issue of what he/she does with the money given to them by the bank is not relevant as it is essentially their money from when they put the property into the business. No doubt you would not kick up a fuss if they mortgaged the property before the rental began, so what is the difference?
It is quite simple really:
House rental begins on x date. House is worth £200k with no mortgage.
Taxpayer decides he needs additional funds for personal use (house purchase etc) so takes out a mortgage on the property for £150k. House now has a market value of £300k.
All of the interest is allowable as it is funding a property being used in the rental business and the amount 'withdrawn' from the business is less than the amount originally invested. Without the loan the house would have needed to be sold.
If the loan was instead for £250k, only the first £200k would be allowable as this is the amount originally invested in the business by the taxpayer.
The issue of what he/she does with the money given to them by the bank is not relevant as it is essentially their money from when they put the property into the business. No doubt you would not kick up a fuss if they mortgaged the property before the rental began, so what is the difference?
Toro Rosso said:
Taxpayer decides he needs additional funds for personal use
All of the interest is allowable as it is funding a property being used in the rental business
If it is "personal use" how is it in "in the rental business"?All of the interest is allowable as it is funding a property being used in the rental business
Have you made successfuil claims on this basis and have HMRC ever queried the methodology and been satisfied with your explanation?
Eric Mc said:
Toro Rosso said:
Taxpayer decides he needs additional funds for personal use
All of the interest is allowable as it is funding a property being used in the rental business
If it is "personal use" how is it in "in the rental business"?All of the interest is allowable as it is funding a property being used in the rental business
Have you made successfuil claims on this basis and have HMRC ever queried the methodology and been satisfied with your explanation?
One taxpayer has a fully owned house and no cash - he gets taxed on the rent with no interest to deduct.
Another has a similar house and £200k cash but the house is 100% mortgaged - he gets taxed on the rent after offset of the interest. Fair? No.
Therefore if the first taxpayer wants to mortgage the property to be in the same position why should he not? The loan is being used to fund the property which is used within the business and as a consequnce allows him to release his personal funds. The loan is for a business purpose, it just allows him to withdraw some of his own money for personal use.
Nothing has ever been queried by HMRC but I would be happily able to defend this position.
Neither would the second gent if he paid off the mortgage with his £200k cash.
I can't really type it any plainer than in my example above, so we will have to agree to disagree. You are entitled to claim relief on finance used for a business, whether or not you have sufficient funds outside of the business to fund this yourself. Therefore, as long as the mortgage is for less than the original amount invested their should be no problem.
I can't really type it any plainer than in my example above, so we will have to agree to disagree. You are entitled to claim relief on finance used for a business, whether or not you have sufficient funds outside of the business to fund this yourself. Therefore, as long as the mortgage is for less than the original amount invested their should be no problem.
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