Thoughts - my rental / development options
Discussion
Situation
I have a part repayment, part interest only mortgage on my main residence. It's a sizeable mortgage at £400k, the property I would say is worth £850k, current deal at 1.9% ends March 2024. I'm thinking about it now so that I can make sure I execute a strategy before the end of the current 5 year deal.
I have one rental at present (sold another to fund development on my own property 6 years ago), this was actually my father's place. No mortgage, worth c.£250k in current state, but it's ripe for development, I'd say a bigger kitchen / diner at £30k would easily have it clearing £300k. Currently in my wife's name so we legitimately pay no income tax, it's nets £9600 per annum, which I accept is a lowish yield, but its also been completely hassle free for 9 years.
So, I'm wrestling with whether I keep it, develop it, sell it etc...
Options I see are:
1) Do nothing, impact will be that I have to renew my main home mortgage at around twice the interest rate. If I go interest only, that's not a disaster, it'll be c. £1400 per month and I have other means to clear at least 70% of the total it in c. 5 years. In this scenario, I would just continue to let the other house, either at current rate, or develop it and rent for more with no mortgage on it. I'd estimate we could get net £13k per annum with say £25k spent on it.
2) I take a BTL mortgage on the rental and pull out say £180k, which I think is realistic if it values at £250k. This way I extract cash, don't pay any CGT, retain some net rental income after the mortgage (but only about £3k per year) and of course I get the value of future capital growth. The £180k I can then either use to reduce the main home mortgage, or put into another development, which is my next stage of career / business ambition. I am concerned that continuing to rent the property may become more problematic, it's 120 years old, in decent condition but I need to research the forthcoming rules on efficiency etc.... I also think that I have a fair amount of capital tied up for not a great yield. I suspect £1200 per month is tops for the area and property.
3) I sell the rental, either as is, or after some development, which I think will be in the £25k to £30k range in terms of cost. This grosses c.£300k and of course means I have a chunk of cash to either pay down the main home mortgage, or re-invest, or split across both approaches. The downsides I see on this are 1) I'm getting out of a rental that I already have and to go back in, I'll be subject to stamp duty, legal costs etc.... 2) I'll have to pay CGT, not on the full value, I assume it'll be the sale price less costs of significant development, less the assumed cost of transfer when it went from my fathers name (he's still alive and living with us) to the value now. I think this taxable element will be about £70k, hence the CGT allowance off the £70k, then the rate, dependent on whether we leave it in my wife's name, or move it into both of our names.
For simplicity, I'm leaning towards option 3, but I do wonder if option 2 is actually a better bet and it means I don't have to rush development this year as I have a lot on, on the main house. My own view / instinct says rental values are not going to go down, it's a decent house to rent i.e. 3 bed detached, decent garden, garage, big rooms, hence it's not like it has lots of competition like flat or small house.
I would like the comfort of reducing what is a fairly sizeable mortgage on my main home, so I probably won't go with the do nothing option 1 approach.
For context, I can see us being at the main home for say 5 to 7 years more, then bailing out. I think it'll be c. £1m with further work and some modest appreciation, so could be a decent nest egg, if we downsize to say £500k.
Any views appreciated.
I have a part repayment, part interest only mortgage on my main residence. It's a sizeable mortgage at £400k, the property I would say is worth £850k, current deal at 1.9% ends March 2024. I'm thinking about it now so that I can make sure I execute a strategy before the end of the current 5 year deal.
I have one rental at present (sold another to fund development on my own property 6 years ago), this was actually my father's place. No mortgage, worth c.£250k in current state, but it's ripe for development, I'd say a bigger kitchen / diner at £30k would easily have it clearing £300k. Currently in my wife's name so we legitimately pay no income tax, it's nets £9600 per annum, which I accept is a lowish yield, but its also been completely hassle free for 9 years.
So, I'm wrestling with whether I keep it, develop it, sell it etc...
Options I see are:
1) Do nothing, impact will be that I have to renew my main home mortgage at around twice the interest rate. If I go interest only, that's not a disaster, it'll be c. £1400 per month and I have other means to clear at least 70% of the total it in c. 5 years. In this scenario, I would just continue to let the other house, either at current rate, or develop it and rent for more with no mortgage on it. I'd estimate we could get net £13k per annum with say £25k spent on it.
2) I take a BTL mortgage on the rental and pull out say £180k, which I think is realistic if it values at £250k. This way I extract cash, don't pay any CGT, retain some net rental income after the mortgage (but only about £3k per year) and of course I get the value of future capital growth. The £180k I can then either use to reduce the main home mortgage, or put into another development, which is my next stage of career / business ambition. I am concerned that continuing to rent the property may become more problematic, it's 120 years old, in decent condition but I need to research the forthcoming rules on efficiency etc.... I also think that I have a fair amount of capital tied up for not a great yield. I suspect £1200 per month is tops for the area and property.
3) I sell the rental, either as is, or after some development, which I think will be in the £25k to £30k range in terms of cost. This grosses c.£300k and of course means I have a chunk of cash to either pay down the main home mortgage, or re-invest, or split across both approaches. The downsides I see on this are 1) I'm getting out of a rental that I already have and to go back in, I'll be subject to stamp duty, legal costs etc.... 2) I'll have to pay CGT, not on the full value, I assume it'll be the sale price less costs of significant development, less the assumed cost of transfer when it went from my fathers name (he's still alive and living with us) to the value now. I think this taxable element will be about £70k, hence the CGT allowance off the £70k, then the rate, dependent on whether we leave it in my wife's name, or move it into both of our names.
For simplicity, I'm leaning towards option 3, but I do wonder if option 2 is actually a better bet and it means I don't have to rush development this year as I have a lot on, on the main house. My own view / instinct says rental values are not going to go down, it's a decent house to rent i.e. 3 bed detached, decent garden, garage, big rooms, hence it's not like it has lots of competition like flat or small house.
I would like the comfort of reducing what is a fairly sizeable mortgage on my main home, so I probably won't go with the do nothing option 1 approach.
For context, I can see us being at the main home for say 5 to 7 years more, then bailing out. I think it'll be c. £1m with further work and some modest appreciation, so could be a decent nest egg, if we downsize to say £500k.
Any views appreciated.
Panamax said:
Well, without getting into too much detail,
Thanks for reply, a couple of points to your points though.- You're borrowing money you've already got, and
- Paying tax on the income stream.
Yes I have borrowings I could reduce, but the interest on the value I could repay is less than the income I get, at least at current rates, so I've never seen the point of busting a gut to pay it down.
Tax on the income stream - As mentioned in the post, the rental is in my wife's name, so we pay no tax legitimately
We have a similar situation, although longer to go with refinancing in both properties, so paying down mortgages is a little easier before getting hit with bigger rates.
The rental (my old flat and first home) is on a BTL mortgage. My wife works and thus assigning any property to her has no tax benefit to us.
A few thoughts I have started to have (and would love to be corrected on if necessary):
- having a mortgage on a rental property limits certain options, such as putting the thing into a company or LLP to shelter it from income tax (if leveraged heavily) or IHT.
- the capital efficiency of leveraging a BTL for yield has been eroded heavily by the limited ability to write down interest income against revenue. So leverage is no longer a useful way of getting high yield out of a property (unless of course you put it in a company, at which point it appears you need a new mortgage at a higher commercial rate, which eroded this advantage).
- unless the BTL is your main income, protecting the family home has to be the priority, so that mortgage is the priority.
- if you have had the rental for a long time, CGT on disposal will be an issue. It seems to me likely that the next govt will tie CGT rates to income tax rates, which if you are a higher earner is a major reason to get rid of the rental now, not later.
I'd like to hand the flat to my children whilst I am still alive as it is in London and as such may have double value as a financial gift and a functional place to live. I expect it to cover its costs in the meantime, but not to make me money. As a long stop, it would be good if it were an additional income stream in retirement, so paying down the BTL debt is a longer term goal that precedes the goal of giving it to the kids.
If it does go to the kids, it will have a small mortgage on it that they will be responsible for. Partially because they should learn that property comes with obligations.
Thus I will be busting a gut to pay down the main mortgage, as there is headroom on rental yield vs increased interest payments on the rental.
It's early days, and I have probably missed something massive in these thoughts...I have yet to take professional advice.
The rental (my old flat and first home) is on a BTL mortgage. My wife works and thus assigning any property to her has no tax benefit to us.
A few thoughts I have started to have (and would love to be corrected on if necessary):
- having a mortgage on a rental property limits certain options, such as putting the thing into a company or LLP to shelter it from income tax (if leveraged heavily) or IHT.
- the capital efficiency of leveraging a BTL for yield has been eroded heavily by the limited ability to write down interest income against revenue. So leverage is no longer a useful way of getting high yield out of a property (unless of course you put it in a company, at which point it appears you need a new mortgage at a higher commercial rate, which eroded this advantage).
- unless the BTL is your main income, protecting the family home has to be the priority, so that mortgage is the priority.
- if you have had the rental for a long time, CGT on disposal will be an issue. It seems to me likely that the next govt will tie CGT rates to income tax rates, which if you are a higher earner is a major reason to get rid of the rental now, not later.
I'd like to hand the flat to my children whilst I am still alive as it is in London and as such may have double value as a financial gift and a functional place to live. I expect it to cover its costs in the meantime, but not to make me money. As a long stop, it would be good if it were an additional income stream in retirement, so paying down the BTL debt is a longer term goal that precedes the goal of giving it to the kids.
If it does go to the kids, it will have a small mortgage on it that they will be responsible for. Partially because they should learn that property comes with obligations.
Thus I will be busting a gut to pay down the main mortgage, as there is headroom on rental yield vs increased interest payments on the rental.
It's early days, and I have probably missed something massive in these thoughts...I have yet to take professional advice.
I think it’s ‘form 17’ that allows you to assign ‘benefit’ to your wife whilst retaining 50% ownership of the house. So you’ll still pay 50% CGT but your wife can get 100% of the income at her (presumably) lower tax rate (as you’ve indicated)
https://www.gov.uk/government/publications/income-...
Seems too easy. Makes BTL far more appealing to me if this is the case as 40% tax for me makes it a pointless exercise.
I suspect you’ll need a separate bank account and your wife will genuinely need to manage by herself. I’m not qualified to advise though
Eric have you come across this before, any thoughts?
https://www.gov.uk/government/publications/income-...
Seems too easy. Makes BTL far more appealing to me if this is the case as 40% tax for me makes it a pointless exercise.
I suspect you’ll need a separate bank account and your wife will genuinely need to manage by herself. I’m not qualified to advise though
Eric have you come across this before, any thoughts?
Panamax said:
Your new mortgage will apparently be around 3.8% and that looks exactly the same % as your wife's net rental return from the BTL. I'd just sell the BTL and pay down some debt, avoiding any future hassle with tenants, new legislation etc.
Yes, that's a fair point, I will increase the yield if I refurb so I may win slightly Vs the interest rate, really (and I know only I can make this decision !) it comes down to whether I'll trade some pressure / hassle for say 5 years for the possibility of more capital growth on the rental. I don't think house values will tank, more like steady this year and then into modest growth....iphonedyou said:
I'd only add that £30k right now won't buy you the extension unless you're doing the vast majority of the work yourself. So maybe factor that in to any decision.
Blend of labour from me, low cost (but compliant obviously) build, easy to access site and strong relationship with a good builder that has pretty much costed a plan....Eric Mc said:
Is the actual rental property owned by your wife or are you just allocating the rent to her?
If the latter, how has that been arranged.
Eric, thanks for input, always love your posts !If the latter, how has that been arranged.
Property was transferred to my wife via land reg around 6 years ago. She has minimal income from a part time job, hence the rest of her income tax allowance meant no tax on the rent. If it was with me, or split, I'd be paying top rate, so this has been a legitimate benefit for us.
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