Financial benefits of renting out your home
As well as seeing out the downturn, there are other sound financial reasons to let your home as well.
The rates on residential mortgage deals are much lower than buy-to-let deals. And, as a former occupier of the property, some lenders -- such as Nationwide and HSBC -- will allow you to stay on your current, residential mortgage deal for as long as it lasts. Others, such as Santander, will charge you a nominal fee of around £100 a year (but will not increase the rate). Read Rent out your home as a buy-to-let for more help.
If you're currently a borrower with one of these lenders, your mortgage payments should be much cheaper than if you were a professional landlord. And you won't need to prove the rent can meet the mortgage payments, as you would with a buy-to-let mortgage.
Unfortunately, other lenders, such as Halifax, look at the matter on a case-by-case basis and may refuse to consent to let. This means you could be forced to remortgage to an expensive buy-to-let deal, potentially incurring penalties as well for redeeming your mortgage early.
To avoid this risk, you may be tempted not to tell your lender you are renting out the property.
Unfortunately, you are legally obliged to do so. You must ask for a 'consent to let' - if you do not inform them, you are in breach of the conditions of your mortgage contract, according to the Council of Mortgage Lenders, which claims lenders are "very likely to charge you retrospectively a higher rate of interest".
None of the lenders we spoke to (including Halifax) actually claimed they would do this - and certainly it would be difficult for a lender to know whether or not you are living in the property -- but the fact remains, it is illegal not to inform your lender.
And it is absolutely vital that you inform your buildings and contents insurance provider, as otherwise any loss or damage caused by the tenant to your property or to others' property may not be covered.
Capital Gains Tax
You normally have to pay Capital Gains Tax (CGT) -- now levied at a rate of 18% for basic rate taxpayers or 28% for higher rate taxpayers -- when you sell a property which is not your private residence.
However, you don't have to pay CGT on a property you have lived in, if you sell it within three years of moving out.
And, even if you sell it after those three years are up, you would qualify for Letting Relief on £40,000 of the gain, on top of your usual CGT Allowance (£10,600 for this tax year).
How do you work out 'the gain'? This is extremely complicated, but here's a simplified explanation:
1. Figure out the difference between the price you bought the property for and the price you sell it for. That is the overall gain.
2. Work out the proportion of time you have let it, in relation to the amount of time you have owned the property. Then divide the overall gain appropriately.
For example, let's say you have owned the property in your sole name for 20 years and let it for the final eight years. For the final three years it was let, the property was still classed as your private residence - so, for tax purposes, you can subtract these three years from the eight years you have let it.
That means, for tax purposes, you have actually only let the property for a quarter of the time you have owned it (in this case, five years out of the twenty). So you should divide the overall gain by four.
Confused? Here's a worked-out example. The property was worth £100,000 when you bought it 20 years ago and it is now worth £320,000. You lived in it for 12 years and rented it out for eight years. After your private residence relief is taken into account, the gain would be £55,000.
Your Letting Relief and CGT Allowance would come to £50,600 in this tax year and you're a basic rate taxpayer so you'd pay 18% CGT on the remaining £5,000 -- a total tax bill of £900 on a £220,000 gain. (Thanks to readers JonEBehr and Ray126 for all their help with this calculation!)
What's more, you wouldn't need to pay any CGT at all, if you could prove to the Inland Revenue that you couldn't occupy the property for any reason (for example, if you got a job abroad or in another part of the country).
There are complicated rules if you rent or buy another property, however, as you can only have one private residence at a time. So I would strongly advise you to seek the services of a chartered accountant.
He or she will also be able to advise you about the income tax expenses you can offset against your rental income. (Your accountants' fee being the first such expense.)
The drawbacks of renting out a property
Of course, there are drawbacks. Renting out a property instead of selling it will not be the best strategy for everyone.
For example, if you are planning to buy a new property, you need to be sure that:
- You don't need to sell your current home in order to put down a deposit on your new home. In the current climate, you could struggle to find a deal at a competitive rate without a 10% deposit.
- The money you receive in rent will cover the mortgage payments on at least one of the properties you will own; or you have enough surplus income to cover any shortfall.
Remember that you will have to pay income tax on your rental income at whatever rate you currently pay, and that you will need to be able to pay for repairs on the property, as well as keep up the mortgage payments when the property is empty between tenants.
Furthermore, as a landlord, you have to ensure the property complies with safety regulations and certain legal requirements. For example, you must:
- Fit smoke alarms and extractor fans
- Have gas appliances inspected by a CORGI-registered engineer
- Ensure upholstered furniture is fireproof
- Register with the Tenancy Deposit Scheme
- Find out whether you need a House In Multiple Occupation licence.
Still, despite all the hassle and drawbacks, if you are struggling to sell your home right now, you could find renting it out privately instead is just the solution you were looking for.
This is a classic lovemoney article that has been updated
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