Third House - Talk me through the tax mistakes we are about to make

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    Third House - Talk me through the tax mistakes we are about to make

    So, I'm going to share some "theoretical" figures.

    Wife and I are Joint Tenants in our Family home, which is worth about £200K and has no Mortgage. This is in North Merseyside.
    We also have a BTL, value £150K in North Merseyside, with a Mortgage of £81K (Interest is about £2K a year with 4 years left on a fixed rate)
    We are Overpaying by about the same as the profit. (about £5.5K a year)
    Owner as Tenants in Common with 10/90 % split in favour of wife.
    Her income from part time work is about the point where she pays a little tax. £1
    My understanding of the changes to taxation is that it doesn't really impact her. She'll pay 20% of the profit in tax.
    Correct me if I'm wrong.
    I earn £12K as the director of a ltd company and £30K dividend, so not quite in the 40% bracket yet.


    As explained in another post, I do 20K miles a year, and am away 3 nights a week, usually either a cheap hotel, BnB, or Digs (Spareroom.co.uk or newsagents window). Usually go home Tuesday night.

    Given that my work is aerospace based, it's been Derby, Stoke, or Wolverhampton for 10 years. (Telford, and Hemel Hempstead also feature for 6 months each)

    So we looked at our savings and decided to buy a house on the Border between Staffordshire and Derbyshire.

    This is for Us to live in during the week. Or rather I will live in it Sunday to Friday and Wife Sunday to Tuesday.

    Due to our age, we are taking on a repayment mortgage, and paying it off in 16 years, and not selling our family home, because of family "obligations".

    There is a vague idea about renting out one bedroom, with it's own bathroom, to someone like myself, who hates hotels. Preferably Monday to Friday, but spoke with lender and they are okay with a lodgers agreement. I'm assuming that there'd be no tax to pay on this income?

    There are a number of potential future options based on how life might change.

    1) Obtain Consent to let, and rent it out whole (If I get work closer to home - unlikely as I've tried to make this happen for 10 years, but there's always jobs coming up in Barrow at silly hourly rates, due to Clearances and distance from everywhere including Liverpool)
    2) Overpay and pay it off quicker. (At the point that both houses are paid off, I could retire into abject poverty, but early, it would make a good holiday let, but obviously we are miles away so MEH)


    Anyway, assuming option 1 might happen, it would seem that we should buy as Tenants in common again, and declare a 5/95% split.

    Profitability would be similar to the BTL we already have, so wife would pay tax at 20% on the £6K profit ? Correct me if I'm wrong.

    Obviously, the idea is mad, but we found this Victorian 3 storey terrace, which is beautiful, and have applied for the mortgage, and instructed a solicitor (don't do anything until after the survey please)

    I've had to get my head around seeing the repayment part of the mortgage as "pension payments" unfortunately not tax efficient pension payments.

    Were we buying to let, this probably wouldn't be the house we'd chose. It's £175K, it only has 2 beds, it has no off road parking, it would rent out at £800 max, and being VERY old it's bound to be a liability. (Although, with some moving about of bathroom fittings, it could be a 3 bed at very little cost)


    So investment decision made on a whim, and without too much analysis.

    What could possibly go wrong ?

    Talk me through the tax mistakes we are about to make





    #2
    You can't have two residences, so you'd need to elect which of the two places you live is your primary residence.
    You want to sit down with a good accountant, because there's a possibility that the properties might work more effectively if the properties were split or put into a trust.

    It's not usually a great idea to own properties as tenants in common with a defined split. It's usually more tax effective to manage the split with a trust, so you can vary the ownership as it suits.

    You might find is easier to mortgage your current home to buy the new property, because the new place may not turn out to be your main residence, which will make it harder (or simply more expensive) to borrow.

    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Thanks, sorry, I did contact my accountant, and had an interesting discussion, and various implications. Basically it's a 50:50 Split as Tenants in Common, initially. But he says that it's a 5 minute thing to change it anytime. The mortgage is going on this house, although that limits what we can do with it.

      Comment


        #4
        This may help you to understand::

        HMRC Helpsheet HS 223 Rent a Room Scheme ( 2017)


        This year the personal allowance ( tax free ) is £12,500

        The 20% tax band applies from £12,501 to £50.000

        Comment


          #5
          Originally posted by Logical.Lean View Post
          Basically it's a 50:50 Split as Tenants in Common, initially. But he says that it's a 5 minute thing to change it anytime.
          Ask him to explain what has to happen in that "5 minutes".

          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

          Comment


            #6
            Basically you are spending 3 nights a week staying in a cheap hotel and the hotel bill at say £150 is charged to your company.

            So now you want to transfer the hotel cost to an equivalent bill from this new property in Derbyshire ?

            Comment


              #7
              Originally posted by Gordon999 View Post
              Basically you are spending 3 nights a week staying in a cheap hotel and the hotel bill at say £150 is charged to your company.

              So now you want to transfer the hotel cost to an equivalent bill from this new property in Derbyshire ?
              Strange logic. But kind of. Yes.

              I tend to split interest and repayment into 2 mental buckets.

              cost and investment.

              basically
              the cost of running a 2nd house is the interest and bills.
              so about 700 quid a month.
              This will be reduced by renting out a room and not paying to rent a hotel or rent a room.

              so cost wise is zero.

              however I then need to find the repayments.

              600 a month.

              I'm seeing that as a savings plan over 16 years.

              the main advantage is that I'll actually see my wife every night.



              Comment

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