Becoming a Landlord...
Discussion
Afternoon, firstly i appreciate that this is simply a forum and financial advice should always be taken from a qualified professional... but P'Heads are usually a friendly bunch and I just want to set out a situation for any pointers from anyone with similar experience.
Background
I am considering letting my current property and buying second home with the fiance.
The current residential property i solely own outright without any mortgage.
In terms of tax - i loosely understand that i will pay income tax on the full rental amount (as there is no mortgage to pay it is all profit) I can still deduct things like agents fees, utility bills and gardening costs etc but the main lump of rental income will be taxed - correct?
I will be getting a joint mortgage for the second property - neither of us currently have a mortgage however as i am the sole owner of the current property i am unsure if this will affect stamp duty when we come to buy? Essentially this will be my second property but my fiance's only property so would i incur a higher proportion of stamp duty?
Any insights are well received!
Background
I am considering letting my current property and buying second home with the fiance.
The current residential property i solely own outright without any mortgage.
In terms of tax - i loosely understand that i will pay income tax on the full rental amount (as there is no mortgage to pay it is all profit) I can still deduct things like agents fees, utility bills and gardening costs etc but the main lump of rental income will be taxed - correct?
I will be getting a joint mortgage for the second property - neither of us currently have a mortgage however as i am the sole owner of the current property i am unsure if this will affect stamp duty when we come to buy? Essentially this will be my second property but my fiance's only property so would i incur a higher proportion of stamp duty?
Any insights are well received!
Edited by ST270 on Monday 4th June 17:42
ST270 said:
The current residential property i solely own outright without any mortgage.
In terms of tax - i loosely understand that i will pay income tax on the full rental amount (as there is no mortgage to pay it is all profit) I can still deduct things like agents fees, utility bills and gardening costs etc but the main lump of rental income will be taxed - correct?
Correct.
I will be getting a joint mortgage for the second property - neither of us currently have a mortgage however as i am the sole owner of the current property i am unsure if this will affect stamp duty when we come to buy? Essentially this will be my second property but my fiance's only property so would i incur a higher proportion of stamp duty?
Yes, you would pay the higher rate of SDLT. It is based on the whole property, not just your 'half'.
In terms of tax - i loosely understand that i will pay income tax on the full rental amount (as there is no mortgage to pay it is all profit) I can still deduct things like agents fees, utility bills and gardening costs etc but the main lump of rental income will be taxed - correct?
Correct.
I will be getting a joint mortgage for the second property - neither of us currently have a mortgage however as i am the sole owner of the current property i am unsure if this will affect stamp duty when we come to buy? Essentially this will be my second property but my fiance's only property so would i incur a higher proportion of stamp duty?
Yes, you would pay the higher rate of SDLT. It is based on the whole property, not just your 'half'.
Edited by ST270 on Monday 4th June 17:42
I did the same as you about 2 years ago.
So far doing ok. Just in the process of swapping over to a new tenant now so will see how that goes.
You probably know but you need to get gas / electrical inspection done at least every 12 months.
On initial inspection we were every 6 months because inspector wanted flue location changing.
We also service the boiler every 12 months.
We inspect the property every 3 months.
Renew Landlord insurance once a year.
So it can take up a bit of diary space and time to sort that.
We have a friend who is a handy man so any issues with the property like leaks or fuses etc we send him round as he is cheap and knows the house.
In the 2 years only had him in twice.
Gardens wise we have no grass so its easy to keep tidy because there is basically nothing to do.
We are considering an agent to run it at some point but looking at 10% of the rent so not sure if its worth it.
The next new thing I need to sort is their deposit as they are moving on and any repairs (there are a few minor things).
At some point its going to need new carpets and repainting.
I would say, all in all the property has taken maybe 5 days per year of my time. Hand on heart am not 100% sure its worth it but when you look at the bigger picture of the property price going up (for now) and the tenants so far have been decent its ok but if we had bad tenants in who trashed the place it would just not be worth it.
So far doing ok. Just in the process of swapping over to a new tenant now so will see how that goes.
You probably know but you need to get gas / electrical inspection done at least every 12 months.
On initial inspection we were every 6 months because inspector wanted flue location changing.
We also service the boiler every 12 months.
We inspect the property every 3 months.
Renew Landlord insurance once a year.
So it can take up a bit of diary space and time to sort that.
We have a friend who is a handy man so any issues with the property like leaks or fuses etc we send him round as he is cheap and knows the house.
In the 2 years only had him in twice.
Gardens wise we have no grass so its easy to keep tidy because there is basically nothing to do.
We are considering an agent to run it at some point but looking at 10% of the rent so not sure if its worth it.
The next new thing I need to sort is their deposit as they are moving on and any repairs (there are a few minor things).
At some point its going to need new carpets and repainting.
I would say, all in all the property has taken maybe 5 days per year of my time. Hand on heart am not 100% sure its worth it but when you look at the bigger picture of the property price going up (for now) and the tenants so far have been decent its ok but if we had bad tenants in who trashed the place it would just not be worth it.
red_slr said:
I did the same as you about 2 years ago.
So far doing ok. Just in the process of swapping over to a new tenant now so will see how that goes.
You probably know but you need to get gas / electrical inspection done at least every 12 months.
On initial inspection we were every 6 months because inspector wanted flue location changing.
We also service the boiler every 12 months.
We inspect the property every 3 months.
Renew Landlord insurance once a year.
So it can take up a bit of diary space and time to sort that.
We have a friend who is a handy man so any issues with the property like leaks or fuses etc we send him round as he is cheap and knows the house.
In the 2 years only had him in twice.
Gardens wise we have no grass so its easy to keep tidy because there is basically nothing to do.
We are considering an agent to run it at some point but looking at 10% of the rent so not sure if its worth it.
The next new thing I need to sort is their deposit as they are moving on and any repairs (there are a few minor things).
At some point its going to need new carpets and repainting.
I would say, all in all the property has taken maybe 5 days per year of my time. Hand on heart am not 100% sure its worth it but when you look at the bigger picture of the property price going up (for now) and the tenants so far have been decent its ok but if we had bad tenants in who trashed the place it would just not be worth it.
A few points on this which is generally sound advice. So far doing ok. Just in the process of swapping over to a new tenant now so will see how that goes.
You probably know but you need to get gas / electrical inspection done at least every 12 months.
On initial inspection we were every 6 months because inspector wanted flue location changing.
We also service the boiler every 12 months.
We inspect the property every 3 months.
Renew Landlord insurance once a year.
So it can take up a bit of diary space and time to sort that.
We have a friend who is a handy man so any issues with the property like leaks or fuses etc we send him round as he is cheap and knows the house.
In the 2 years only had him in twice.
Gardens wise we have no grass so its easy to keep tidy because there is basically nothing to do.
We are considering an agent to run it at some point but looking at 10% of the rent so not sure if its worth it.
The next new thing I need to sort is their deposit as they are moving on and any repairs (there are a few minor things).
At some point its going to need new carpets and repainting.
I would say, all in all the property has taken maybe 5 days per year of my time. Hand on heart am not 100% sure its worth it but when you look at the bigger picture of the property price going up (for now) and the tenants so far have been decent its ok but if we had bad tenants in who trashed the place it would just not be worth it.
- Electrical inspection is only required on an HMO (but for the minimal cost it can give good peace of mind).
- I don't inspect properties. As a recent renter myself, the indignity of having my landlord come and look at how I live was always on my mind. I meet the tenants personally to make a judgement myself and ensure the deposit covers any likely damage. If they're going to trash it, you're not going to find out until after the fact either way. By all means, carry out inspections if you prefer, but just know that it is definitely something which irks tenants.
- I have never seen the value of an agent for a single property, or even for two. It can be worth finding an agent to do the tenant-find service as they will carry out all legal right-to-rent checks if you're not sure of them, but make sure they don't take a renewal fee from you. Also ask them what they are going to charge the tenant. I don't charge the tenant anything more than the cost of the reference check (usually about £30).
Also with pets, most landlords/agents deny pets in the property but this means those with a pet struggle to find a home. Allowing them in yours will again provide you with a longer-term tenant. I take 1.5x deposit to cover any additional damage (unfurnished property means it's only going to be carpet damage really, or scratched woodwork) and ensure that the tenancy states they need to professionally clean carpets at the end of the term to ensure any future renters with allergies are unaffected.
Why would you let an un-mortgaged property and then get a mortgage on another property to live in?
Doesn't it work out better to mortgage the property you are going to let? I know the interest rate will be slightly higher, but I'd still expect the tax relief on the interest payments to compensate for that.
Doesn't it work out better to mortgage the property you are going to let? I know the interest rate will be slightly higher, but I'd still expect the tax relief on the interest payments to compensate for that.
Saleen836 said:
Utility bills need to put in the name of the tenant, if you keep them in your name thinkg to include a little extra in the rent....don't!
Agree x 100%. And call the council and advise them of the new tenant - Some tenants conveniently "forget" to register for council tax.The only exception is where the utilities are included in the service charge for a flat.
ST270 said:
I am considering letting my current property and buying second home with the fiance.
Don't forget your current property may then become subject to Capital Gains Tax although there are various exemptions and reliefs.https://www.theguardian.com/money/2017/jun/22/will...
Very much appreciate the feedback on this - i have since spoken with my Financial adviser and given that i would be paying 40% tax on the full rental income (with very little tax relief) the long term returns do not seem viable to keep the property.
When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
ST270 said:
Very much appreciate the feedback on this - i have since spoken with my Financial adviser and given that i would be paying 40% tax on the full rental income (with very little tax relief) the long term returns do not seem viable to keep the property.
When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
Why not put your figures here and we can help work them out as a double check. What was your property worth say 10 years ago and whats its worth now? for a possible growth factor.When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
Whats the rent you anticipate etc
40% tax then on the rental but that would apply to any where else you put the money would it not unless you paid off your new place. I imagin the reason you don't want to pay off new place is because its now shared with new partner. Having your own place rented gives you a backstop if the relationship doesn't work as well.
Letting isn't that a problem and certainly should not be if you use a good letting agent.
So lots of factors. Im all for and all in with renting out properties - still the best option for us as far as I can see.
Edited by superlightr on Wednesday 6th June 12:05
superlightr said:
ST270 said:
Very much appreciate the feedback on this - i have since spoken with my Financial adviser and given that i would be paying 40% tax on the full rental income (with very little tax relief) the long term returns do not seem viable to keep the property.
When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
Why not put your figures here and we can help work them out as a double check. What was your property worth say 10 years ago and whats its worth now? for a possible growth factor.When one has factored in any potential issues with tennants, damage and upkeep to the house i would get a better return investing elsewhere (plus theres no management time or headaches) The property isn't in a particularly high growth area so i wouldn't expect the value of the house to sharply rise (an unknown still though)
Lastly if i continue to own this property then the additional stamp duty costs on a second home are horrendous!
Whats the rent you anticipate etc
40% tax then on the rental but that would apply to any where else you put the money would it not unless you paid off your new place. I imagin the reason you don't want to pay off new place is because its now shared with new partner. Having your own place rented gives you a backstop if the relationship doesn't work as well.
Letting isn't that a problem and certainly should not be if you use a good letting agent.
So lots of factors. Im all for and all in with renting out properties - still the best option for us as far as I can see.
Edited by superlightr on Wednesday 6th June 12:05
Neither houses are overly expensive;
Current property - was purchased for £145k in 2013 - now worth £180-£185k
Potential rental income = £700-£750 per month
Letting agents fee = 10% - £75 per month
Home insurance = £35 per month
So top end - £750 - £75 - £35 = £640 taxed @ 40% = £256.00
Nett = £494.00 per month
There is also the point that tennants are not guaranteed for 12 months - so if i estimate on 10 months income = £4940
Second property is worth £190k - and if my partner bought it alone the SDLT would be low - circa £1300, however if as planned we had a joint mortgage & I retained the current property then the SDLT would be much higher - circa £7000! So this equates to the first 10-12 months rental income being wiped out by the stamp duty. Then if there any repairs etc needed in the first 12 months this is additional "core" expense to me.
I could save some by not appointing a letting agent but then the tax bill would rise too.
If i invested the £180k in low / medium risk stocks / pension / bonds the yield potentially could be higher / tax free and consistent - hopefully equating to around £500-£600 per month. This might be lower than the value of the house increasing year on year but there are no additional repair or maintenance costs involved.
I am new to all this so any further thoughts and corrections are well received!
ST270 said:
Initially wanted to retain the property as income and the fact that it is owned outright - next property would be paid with a mortgage.
Neither houses are overly expensive;
Current property - was purchased for £145k in 2013 - now worth £180-£185k
Potential rental income = £700-£750 per month
Letting agents fee = 10% - £75 per month
Home insurance = £35 per month
So top end - £750 - £75 - £35 = £640 taxed @ 40% = £256.00
Nett = £494.00 per month
There is also the point that tennants are not guaranteed for 12 months - so if i estimate on 10 months income = £4940
Second property is worth £190k - and if my partner bought it alone the SDLT would be low - circa £1300, however if as planned we had a joint mortgage & I retained the current property then the SDLT would be much higher - circa £7000! So this equates to the first 10-12 months rental income being wiped out by the stamp duty. Then if there any repairs etc needed in the first 12 months this is additional "core" expense to me.
I could save some by not appointing a letting agent but then the tax bill would rise too.
If i invested the £180k in low / medium risk stocks / pension / bonds the yield potentially could be higher / tax free and consistent - hopefully equating to around £500-£600 per month. This might be lower than the value of the house increasing year on year but there are no additional repair or maintenance costs involved.
I am new to all this so any further thoughts and corrections are well received!
Your IFA makes no money if you keep the property...Neither houses are overly expensive;
Current property - was purchased for £145k in 2013 - now worth £180-£185k
Potential rental income = £700-£750 per month
Letting agents fee = 10% - £75 per month
Home insurance = £35 per month
So top end - £750 - £75 - £35 = £640 taxed @ 40% = £256.00
Nett = £494.00 per month
There is also the point that tennants are not guaranteed for 12 months - so if i estimate on 10 months income = £4940
Second property is worth £190k - and if my partner bought it alone the SDLT would be low - circa £1300, however if as planned we had a joint mortgage & I retained the current property then the SDLT would be much higher - circa £7000! So this equates to the first 10-12 months rental income being wiped out by the stamp duty. Then if there any repairs etc needed in the first 12 months this is additional "core" expense to me.
I could save some by not appointing a letting agent but then the tax bill would rise too.
If i invested the £180k in low / medium risk stocks / pension / bonds the yield potentially could be higher / tax free and consistent - hopefully equating to around £500-£600 per month. This might be lower than the value of the house increasing year on year but there are no additional repair or maintenance costs involved.
I am new to all this so any further thoughts and corrections are well received!
Not sure where you are in the country, but round here (Southsea) finding tenants is not a problem, you would have no problem at all having tenants in a decent property within 24 hours of the last lot vacating.
I might allow for 2 months void in 5 years, not per year and that is to allow for decorations etc aprox every 3 years.
I think your figures are roughly correct but my understanding is any investment would still attract 40% tax. The Pension route is as I understand then locked away until 65/70/150 and then may still liable for tax depending on what you draw down at the end.
As a letting agent we recommend to LL's to work on 10 out of 12 months let. If is more then that's a bonus. But inevitable there will be gaps between tenants. Saying that often for nice houses you will get a tenant in for 12mths then keep renewing for 2-4 years so no gaps. its the smaller flats that have a higher turnover/gaps.
The agents fee will attract vat unless it was 8%+vat to get your 10%. Use an agent - its a minefield if you don't know what you are doing and a good agent will help ensure you have few hassles and market rents etc and make it as safe as possible.
So with the investments it sounds like you will be on par with the rental income. With the property the capital increase over x years + ability to move back in/fall back -v- against cost of maintenance of the property over 8 years and the issue of being a landlord.
My view is that letting is good for my circumstances.
I do it and have put my money there . Income will be about the same as invested elsewhere but its the capital increase that's the winner. I also like having control over my money/property rather then pensions as Ive seen my pension age increase without my consent.
As a letting agent we recommend to LL's to work on 10 out of 12 months let. If is more then that's a bonus. But inevitable there will be gaps between tenants. Saying that often for nice houses you will get a tenant in for 12mths then keep renewing for 2-4 years so no gaps. its the smaller flats that have a higher turnover/gaps.
The agents fee will attract vat unless it was 8%+vat to get your 10%. Use an agent - its a minefield if you don't know what you are doing and a good agent will help ensure you have few hassles and market rents etc and make it as safe as possible.
So with the investments it sounds like you will be on par with the rental income. With the property the capital increase over x years + ability to move back in/fall back -v- against cost of maintenance of the property over 8 years and the issue of being a landlord.
My view is that letting is good for my circumstances.
I do it and have put my money there . Income will be about the same as invested elsewhere but its the capital increase that's the winner. I also like having control over my money/property rather then pensions as Ive seen my pension age increase without my consent.
Edited by superlightr on Wednesday 6th June 16:21
Deesee said:
Find a friendly solicitor.
"Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
Not sure. Company would most likely pay enhanced rate sdlt and Corp tax would apply to rental income. "Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
Jockman said:
Deesee said:
Find a friendly solicitor.
"Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
Not sure. Company would most likely pay enhanced rate sdlt and Corp tax would apply to rental income. "Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
No problem offsetting the entire mortgage interest against income too; the biggest disadvantage is how you get your money out of the company in the future. I’d say it is likely to work quite well if you are going to hold indefinitely.
Jobbo said:
Jockman said:
Deesee said:
Find a friendly solicitor.
"Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
Not sure. Company would most likely pay enhanced rate sdlt and Corp tax would apply to rental income. "Sell/transfer" it to LTD company at full market value.
Company pays Stamp Duty.
Create a directors loan for the value of the property, and any associated costs.
Withdraw the rent as repayment of directors loan & pay no tax until directors loan is zero.
No problem offsetting the entire mortgage interest against income too; the biggest disadvantage is how you get your money out of the company in the future. I’d say it is likely to work quite well if you are going to hold indefinitely.
Corp tax would be payable on net profits as such.
Yes the company would pay stamp duty at the prevailing rate +3% company charge at present.
Any capital gain/ increase in value (apon sale, assuming sale of asset) would be at the prevailing corporation tax rate (currently 19%).
The directors loan could also be zero interest or could be chargeable.
If sold payment net proceeds would be paying back directors loan, to extract the remaining funds you would need to take a dividend.
The op has added that he expects a net figure of circa 5k pa.
So roughly 1k Corp tax.
2.5k dividend tax free
1.5k repayment of directors loan (which would take a while to pay back).
If property was jointly owned they could both take the 2.5k dividend each (if profit allowed) wasand the directors loan could remain as purchase price.
Jobbo said:
he company would definitely pay the enhanced SDLT rate, but that’s an outgoing you can offset against income - as are all the other transaction costs on acquisition.
No problem offsetting the entire mortgage interest against income too; the biggest disadvantage is how you get your money out of the company in the future. I’d say it is likely to work quite well if you are going to hold indefinitely.
Unless HMRC decides it is an "artificial tax avoidance construct" and blocks it on those grounds.No problem offsetting the entire mortgage interest against income too; the biggest disadvantage is how you get your money out of the company in the future. I’d say it is likely to work quite well if you are going to hold indefinitely.
Getting personal money out of the limited company is always the issue. There is also the possibility of a double hit on Capital Gains Tax when the property is disposed of.
Tax free dividend is now only £2,000 (and likely to become Zero in my opinion - before too long).
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