Not quite buy-to-let - advice sought

It's a bit late to be jumping on the BTL bandwagon. Are you still anticipating substantial capital gains over the coming 15 years, and if so, have you considered that they might not be as big as you hoped, or might even be negative?

"Simply" sounds rather optimistic. If interest rates were to rise, it would stifle demand and make selling more difficult, or force you sell at a loss.

At 5x salary an ordinary mortgage loan might be difficult to get.

There is a variant of buy-to-let loans called let-to-buy, which essentially secure a loan on the existing property which will be rented out. This could perhaps be up to 80% of its value and would not count against your income multiples borrowing limit, since it would be financed from rental income (provided you can show that this is likely to be at least 130% of the interest paymnets). Then use this money as a deposit on the house you plan to buy, thereby reducing the size of the normal mortgage you will need for it, bringing the income multiples well down.

You can set all the expenses of the letting against the rental income, and you probably already know this. Interest on a loan taken for the purpose of buying the property being let qualifies as such an expense, but since, strictly speaking, you wouldn't be doing this, it used to be considered that in your case this would not be a qualifying loan.

But that is no longer the case, and you will be able to set at least part of the interest against your rental income, provided your rental business capital account is not overdrawn. Broadly speaking, this means that if the loan you need in order to buy your non-rental property exceeds the value of the rental property, then only the latter part will qualify.

For example, if the rental house is worth 200k, and the one you want to buy is worth 300k and you will need a 240k loan, then five sixths of the loan interest can be set against rental income, this being 200/240.

If this 240k borrowing is from a 160k LTB loan and an 80k normal loan, you could set all the interest from the former plus half the interest from the latter against your rental income.

Many thanks for your very useful advice, Ronald.

I'm not really regarding it as a normal buy-to-let scheme, so investment potential, though welcome, isn't the primary reason for doing it. Family reasons are quite high on the list, e.g. one of my children has expressed an interest in living in it for a few years (she'd pay rent!). Not having to sell it (at least not initially) would also put me in a better position to buy the other house.

Just checking the situation now with potential lenders.

Reg

Reg,

A quick observation - I'm sure your daughter is a perfectly lovely lady, but I personally would avoid mixing family and business.

What happens if she can no longer afford to pay the rent (or worse, if you fall out and/or she refuses to pay ?).

Would you go as far as evicting her and risk a life-long estragement ? Or would you eat the loss ?

At least with strangers you can be harsh if they muck you about...

Nick

Take your point, Nick. Although, as my kids have been bleeding me dry for as long as I can remember, at least I'm used to it. Cheers, Reg

I already do Buy2Let & as it happens will be moving from my current PPR (Principal Private Residence) to one of the other 2 houses I own. Before I do that I will re-mortgage my present PPR. Why? Well look at the Inland Revenue Self Assessment form and reporting property income bit (and the extensive notes). You can have as allowable costs against your rental income any interest charges on the property (there are restrictions) but get the mortgage before you buy the new one.. .

So get a big fat mortgage on your present house right now, ensure you can (after you move) have the "same" mortage as Buy2Let (interest rate my increase a bit) and get (assuming you are 40% taxpayer) a 40% discount on the interest costs. Ain't that Mr Brown nice!

You may need a more than usually intelligent mortgage man to help. (IMHO most so-called IFAs are as much use as a chocolate fire guard and about as independent as a Man U supporter..) ). You will of course be subject to paying CGT on the house you rent out as and when you sell it...

Also (stating the bleedin' obvious) having more property (mortaged or not) increases the chance of losing serious money when the next property price slump hits (it will, it will, they always do some time...)

It's a complex area but worth understanding!

Thanks for the advice. I'm assuming that CGT is only payable on the difference in value between that when I vacated (not when I bought it) and that when I sell it. The IR leaflets I've so far read are a bit ambiguous. Is this correct? If so, when I sell (which might be in

Reg

You don't. The total gain is pro rata-ed over the owned/let periods, though other reliefs will increase the amount that is demmed to be the 'owned' period

HTH

tim

No it isn't (and if you think the leaflets are ambiguous, you must have read the wrong ones). It's based on difference in value between when you bought and when you sell, with some adjustments for inflation.

This dispenses with the need for a valuation at each change of status to or from main residence.

It is then pretended that this difference (the gain) accrued linearly during the period of ownership, and those periods in which it was (or was treated as) your only or main home are disregarded (i.e. qualify for private residence relief). Lettings relief is also worth finding out about. And the 36-month rule.

Mostly if you let for 6-7 years no CGT will be payable, and if you let for 10-15, chances are there will be some, but not a huge amount. But the rules might change before then!