Unsure - sell house, keep as a second home, etc
Discussion
Hi,
I'm reaching out to the masses for some opinions/advice/general feeling around my situation.
I currently have a mortgage on my own place (let's call it 'small place'). House is:-
-Valued at £230,000
-Outstanding Mortgage is £100,000 over 18 years.
-Equity in the place, loosely appears to be £130,000~
My girlfriend and I are looking to buy a property off a friend this year.
-New property value is £325,000
So it got me thinking all sorts of ideas about pulling some £ out of mine, and using to buy this new place together. Then keeping 'small place' on as a rental property.
However, since investigating, and speaking to friends, I've learnt some of the following:-
-I'll pay tax on the rental income, not the rental profit. Minus fees, deductions etc.
-The 3% uplift on the stamp duty is a proper kick in the nuts
-If I were to sell my 'small place' in the short to near future (4-6 years). I would be liable to 28% capital gains tax.
-The hassle of renting if you get bad tennants (first hand experiences in my discussions).
I'm not a 'property portfolio' kind of guy, and I'm not trying to make a quick buck etc. I'm just wanting to be financially sensible, whilst factoring in my bias towards being a 'convenience person'.
What would others do in this situation? In what scenario does it make sense to sell my 'small place', and what scenario does it make sense to keep it? Am I overlooking anything?
The overwhelming feeling I have, is that they have made it a lot harder for people to keep second homes on for an additional benefit to the owner.
Help.
I'm reaching out to the masses for some opinions/advice/general feeling around my situation.
I currently have a mortgage on my own place (let's call it 'small place'). House is:-
-Valued at £230,000
-Outstanding Mortgage is £100,000 over 18 years.
-Equity in the place, loosely appears to be £130,000~
My girlfriend and I are looking to buy a property off a friend this year.
-New property value is £325,000
So it got me thinking all sorts of ideas about pulling some £ out of mine, and using to buy this new place together. Then keeping 'small place' on as a rental property.
However, since investigating, and speaking to friends, I've learnt some of the following:-
-I'll pay tax on the rental income, not the rental profit. Minus fees, deductions etc.
-The 3% uplift on the stamp duty is a proper kick in the nuts
-If I were to sell my 'small place' in the short to near future (4-6 years). I would be liable to 28% capital gains tax.
-The hassle of renting if you get bad tennants (first hand experiences in my discussions).
I'm not a 'property portfolio' kind of guy, and I'm not trying to make a quick buck etc. I'm just wanting to be financially sensible, whilst factoring in my bias towards being a 'convenience person'.
What would others do in this situation? In what scenario does it make sense to sell my 'small place', and what scenario does it make sense to keep it? Am I overlooking anything?
The overwhelming feeling I have, is that they have made it a lot harder for people to keep second homes on for an additional benefit to the owner.
Help.
Your situation is very, very similar to my own - even down the values of the properties and the equity involved...
A couple of quick fire points....
1. - You won't be liable for the full whack of CGT on the small house upon disposal provided it was your main home (as it clearly seems to be) for some of the time. You'll be on a sliding scale which takes account of the time in which you lived in it as you primary / main residence.
2. I think there is some CGT allowance per year which would be relevant to you also...
3. The additional 3% SDLT is indeed, a shot in the plums, However, If you sell your main residence in order to buy another main residence, and sell the small place within (I think 36 months) you will be allowed to claim back the additional 3% you paid on the place you're buying off of your friend.
4. You might be best looking at a let to buy type mortgage, designed for specifically this purpose (releasing equity from small house to buy NEW primary residence, but this is not your only option; you may be able to flip existing small house mortgage onto "Permission to let" and get a new mortgage, or if there is no further kick in the nuts w.r.t. ERCs on the existing small house mortgage, take out a new BTL on that and a new residential on the new place.
Just be aware that you will be required to maintain at least 25% equity in the small house (unless you want your pants pulled down on the interest rate for the BTL mortgage...) and the rental income would need to be of the order of 140% of the BTL mortgage interest cost....
OK 4 points...
As I said, you situation is very similar to mine, and I am thinking of doing the same thing.
Money just cannot really get any cheaper to borrow than it presently is.
My view is that it might be a good time to buy as once Brexit is sorted you might get a double uplift in values of the two places....
I think my "small house" is about £30K off where it was 18 months ago.....
I think my "new place" is about £50K off where it was 18 months ago.....
That said, if it does all go to s
t, then to be doubled up on leveraged debt on a depreciating asset class wont be much fun, and you / we'd be left withiout much flexibility whilst riding it out and waiting for values to recover....Good news is that Reuter have for the last few minutes been reporting that TM has capitulated and ruled-out and no-deal scenario !! Woohoo.
keirik said:
-I'll pay tax on the rental income, not the rental profit. Minus fees, deductions etc.
Not sure what you mean by this as your rental profit IS your income minus fees and deuctions, that's the definition of profit.
He's talking about the new rules on tax / mortgage interest tax relief, as I think you're probably fully aware....Not sure what you mean by this as your rental profit IS your income minus fees and deuctions, that's the definition of profit.
garylythgoe said:
Has anyone been in a situation where they didn't know whether to keep a place on and what their overall outcome was?
A poster mentioned it above, but before you start thinking about whether this is a good idea financially, there’s a threshold question to answer of whether you can get the mortgages you need to own both properties. Sarnie or another broker could tell you in more detail, but the way to go about this is to figure out the rental income of the small property and what BTL mortgage that would support, then see if a (?) 5x multiple of your gross salary gets you to the total funding required including any additional savings you are going to throw in.
If you are short of cash on that metric then you don’t have a choice but to sell the small property.
garylythgoe said:
Thanks for the responses so far.
I'm aware I'm not entirely 'up to speed' on this stuff, and that I'm liable to saying the wrong thing, or misunderstanding.
Has anyone been in a situation where they didn't know whether to keep a place on and what their overall outcome was?
We have our main residence in Essex and a holiday home in north Wales but are in the process of moving north now my wife has taken early retirement. We did think about renting but after the fun we've had with a BTL flat (you'd think a copper as a tenant would be a good bet. But apparently not if it's a dodgy copper and his colleagues kick the door in to get to him ) weve decided to sell up and take the cash.I'm aware I'm not entirely 'up to speed' on this stuff, and that I'm liable to saying the wrong thing, or misunderstanding.
Has anyone been in a situation where they didn't know whether to keep a place on and what their overall outcome was?
Financially it would be better to rent it out as it's in an ideal location but can't be doing with the hassle
One thing to consider, depending on how long you have owned and lived in the property.
https://www.theguardian.com/money/2018/nov/03/budg...
https://www.theguardian.com/money/2018/nov/03/budg...
I thought about doing this 5yrs ago when I last moved. Houses were a lot slower at selling than they are now and I had the mortgage promise agreed with keeping the old house as a btl, basically it was a serious option.
In the end I just couldn’t be bothered with the hassle for the low gains. I got an acceptable offer for the house and was in a way relieved that it was done and decided.
We put the proceeds into my new home with a bigger deposit, which in turn got me a better ltv interest rate and I also kept a bit back (around 30k) which paid for a garden room extension which we otherwise wouldn’t have built.
I think everyone’s happy with how it went. My wife certainly was opposed to keeping the old house as a rental and was desperate for the cash release so we could instruct the builders to enhance the new home. The house I sold may now be worth another 20-25k or so but it may now need a kitchen/bathroom decorated etc etc after many years unloved as a rental. No one ever treats a rental as well as their own!
So It pretty much boiled down to I couldn’t be arsed with the hassle and the government doesn’t want it to be lucrative, so why bother.
Target mortgage free is well on the horizon for me now I don’t want any mortgage never mind 2! Only 9yrs to go.
In the end I just couldn’t be bothered with the hassle for the low gains. I got an acceptable offer for the house and was in a way relieved that it was done and decided.
We put the proceeds into my new home with a bigger deposit, which in turn got me a better ltv interest rate and I also kept a bit back (around 30k) which paid for a garden room extension which we otherwise wouldn’t have built.
I think everyone’s happy with how it went. My wife certainly was opposed to keeping the old house as a rental and was desperate for the cash release so we could instruct the builders to enhance the new home. The house I sold may now be worth another 20-25k or so but it may now need a kitchen/bathroom decorated etc etc after many years unloved as a rental. No one ever treats a rental as well as their own!
So It pretty much boiled down to I couldn’t be arsed with the hassle and the government doesn’t want it to be lucrative, so why bother.
Target mortgage free is well on the horizon for me now I don’t want any mortgage never mind 2! Only 9yrs to go.
Edited by Edible Roadkill on Wednesday 27th February 13:00
I think (and I do think about it often) if I was to do anything property related to make money it would have to be in buying somewhere needing done up that I could add value to and do it up myself with the intention to flip it straight away.
Or a self build on a plot, maybe with the view to sell my home and move in.
But I genuinely think the ship has sailed on both of these.
What I do know is that I am no landlord.
Or a self build on a plot, maybe with the view to sell my home and move in.
But I genuinely think the ship has sailed on both of these.
What I do know is that I am no landlord.
Edible Roadkill said:
Lot's of interesting and very valid stuff.
Hmm you make some very good points - I suppose answering for myself - I have little interest in keeping the small place long-term; it's only its fantastic location and the fact that I have some time to claim back the additional 3% SDLT that makes me consider keeping it at all.You're right that in the last three or four years, the government have taken many steps to disincentivise second home ownership for most of us; Taxed on the way in, taxed throughout, taxed on the way out....
I guess if you've been burned by renting to a scroat of a tenant, then that would be the last straw for many people too.
I've come to a similar conclusion, but I guess the only reason I would like to hold the small place temporarily is because I don't think now is a good time to sell - it's @ 2004 value at the moment !!!
Nick.
If you're a 20% tax payer, or can buy somewhere outright, than I think you can make an argument for it. At 40% or 45%, with a mortgage, and you have other uses for the money, not so sure.
IMO it looks a very good way to pay money to the Treasuries coffers;
Extra stamp duty when you buy it.
Income tax on the rent.
Less tax relief on interest payments from 2021.
CGT when you sell it.
You're relying on the capital gains making it worthwhile, which has worked well for the last 20 years, but its anyone's guess it that will continue.
IMO it looks a very good way to pay money to the Treasuries coffers;
Extra stamp duty when you buy it.
Income tax on the rent.
Less tax relief on interest payments from 2021.
CGT when you sell it.
You're relying on the capital gains making it worthwhile, which has worked well for the last 20 years, but its anyone's guess it that will continue.
NicoG said:
I've come to a similar conclusion, but I guess the only reason I would like to hold the small place temporarily is because I don't think now is a good time to sell - it's @ 2004 value at the moment !!!
Nick.
I get what your saying but I’m just not sure we’re ever going to see substantial growth in value certainly not in the same way our parents and grandparents did, not in our lifetime anyway. Nick.
Holding temporarily could easily turn into a long time for the right moment.
There absolutely has to be a glass roof on property value (outside of london / Russian billionaires) when wages are pretty much stagnant and while cost of living increases.
I am pretty resigned to the fact that my house will always be worth what I paid for it, possibly at most +\-20%. But I very much doubt I’ll move again and the house will be left to the kids so I can happily switch off and forget about it once it’s paid off.
garylythgoe said:
The overwhelming feeling I have, is that they have made it a lot harder for people to keep second homes on for an additional benefit to the owner.
The overriding policy objective is to professionalise the property rental sector.If you are a professional, you’ll get the benefits. So if you’re happy to have property in a limited company, meaning a real deposit and commercial lending rates apply, and you will want receipts for work done, and will account properly every year, you can claim loan interest as an expense.
If you risk becoming an accidental landlord, you’ll think twice, and may attempt to avoid it, given the implications of extra stamp/ costs/ impact on CGT elsewhere etc.
If you’re taking rent as cash, but have a mortgage, then as you can’t claim mortgage interest as a cost, you’ll be more tempted to pay that cash into a bank, where it’s traceable. Etc, etc.
By the sound of it you’d be best off keeping things simple. Especially as the requirement to sell within 3 years to get your extra stamp back relies on making a sale. Which in today’s market no one will guarantee. I think you probably know this...
This is all fantastic reading, and exactly what I hoped to get from it.
Just reading other peoples thoughts/opinions and things I missed etc.
The 'taxed on the way in, taxed on the way through, taxed on the way out' statement, is the lightbulb moment I had at the weekend, leading me to post this up.
Just for reference, I paid £147,500 inc my deposit in 2011 for this place. So in terms of growth, I've seen a bit already.
Short term, if I were to keep it in and rent it out, then in 5-10 years sell it to buy the 'forever home', then I will have not long broken even from the stamp duty costs of the first move, and then I'd be liable to the capital gains hit on it. It seems to only make sense to keep it to the end of the mortgage term and then take the income from it, of which it'll still be taxed etc.
Just reading other peoples thoughts/opinions and things I missed etc.
The 'taxed on the way in, taxed on the way through, taxed on the way out' statement, is the lightbulb moment I had at the weekend, leading me to post this up.
Just for reference, I paid £147,500 inc my deposit in 2011 for this place. So in terms of growth, I've seen a bit already.
Short term, if I were to keep it in and rent it out, then in 5-10 years sell it to buy the 'forever home', then I will have not long broken even from the stamp duty costs of the first move, and then I'd be liable to the capital gains hit on it. It seems to only make sense to keep it to the end of the mortgage term and then take the income from it, of which it'll still be taxed etc.
I wouldn't do it again....
I had 3 houses at one point, 2 rented out and my main house. I was very much the 'accidental landlord'.
I hung onto the 2 rentals hoping I could ride out the collapsing market - for four years.... Turned out I couldn't - lost quite a bit. Plus it's a nightmare having tenants.
If your finances are finely balanced and rely on having a tenant (mine were not) even more reason not to do it.
As above, keep it simple. One home.
I had 3 houses at one point, 2 rented out and my main house. I was very much the 'accidental landlord'.
I hung onto the 2 rentals hoping I could ride out the collapsing market - for four years.... Turned out I couldn't - lost quite a bit. Plus it's a nightmare having tenants.
If your finances are finely balanced and rely on having a tenant (mine were not) even more reason not to do it.
As above, keep it simple. One home.
We did it. Kept small house and bought big house. (we just missed the new stamp duty though by 3 weeks).
It did ok as a rental but did not enjoy the liability and basically being at the beck and call of tenants so when they moved on we decided not to put anyone else in it and sold it. As an experiment it was ok, but would not do it again. We probably made an extra £40k over the course of the 2 years we kept the small house, in rental income and increase in property value. I think its very much a diminishing return though as 2 years of tenants is like 10 years of owners so it was ready for new bathroom and realistically 2 years down the line new kitchen. Carpets were also looking a bit worn. So I think we were lucky in that we got the maximum return for no real investment. If we had done another 2 years I think we would have eaten into a lot of that profit we made. We also had a much smaller mortgage than you and it still was a worry, so in your situation the chance of profit might be even further reduced.
So my advice would be unless you really want to be a LL just sell up now and be done with it.
It did ok as a rental but did not enjoy the liability and basically being at the beck and call of tenants so when they moved on we decided not to put anyone else in it and sold it. As an experiment it was ok, but would not do it again. We probably made an extra £40k over the course of the 2 years we kept the small house, in rental income and increase in property value. I think its very much a diminishing return though as 2 years of tenants is like 10 years of owners so it was ready for new bathroom and realistically 2 years down the line new kitchen. Carpets were also looking a bit worn. So I think we were lucky in that we got the maximum return for no real investment. If we had done another 2 years I think we would have eaten into a lot of that profit we made. We also had a much smaller mortgage than you and it still was a worry, so in your situation the chance of profit might be even further reduced.
So my advice would be unless you really want to be a LL just sell up now and be done with it.
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