Own a House and buying a second with Partner.

[Dan2012]

Hello.
I bought my current house nearly 3 years ago with money from inheritance and own it outright. (sole owner)

Me and my partner have just had an offer accepted on buying a house together (50/50) and we'll be getting a mortgage together.

I will then rent my current house for roughly £750 a month.

I am in the lower bracket for income tax.

What are the tax implications of this scenario and can i offset my mortgage against rental tax?

Also is it wise doing it this way? (bearing in mind my partner wants to go 50/50 on a house together)

Thanks in advance for your answers and suggestions.

[section 44]

Profits from the letting business will be liable to income tax. Interest paid on the mortgage for the second property will not be deductible in calculating the profits of your letting business.

[pqtaxation]

I am in the lower bracket for income tax.
What are the tax implications of this scenario and can I offset my mortgage against rental tax (sic) income?
Also is it wise doing it this way? (bearing in mind my partner wants to go 50/50 on a house together)

The income tax aspects will be as Section 44 described – net rental income taxable on you with no relief for mortgage interest on new house as there is no connection between it and the financing of rental house business.

You do have the alternative of mortgaging (re-financing) rental house. In that case that mortgage interest becomes deductible (see BIM 45700 example 2-- http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm)

But doing that alternative would mean you would incur set up fees on two rather than one mortgage but possibly get a lower interest rate of mortgage on new home as a result of lower loan/value if you use the capital to be released from rental house business. But as interest rate on the re-financed buy-to-let mortgage may be some 20% higher than the rate on owner-occupied new house there may be no such savings, even net of tax relief. You have to model the mortgage costs – fees and interest rates- of the two alternatives to see if there might be any purely financial advantage.

Another alternative would be, of course, to sell your partner half of the first property (to be financed by their taking out a mortgage).

As to the capital gains tax aspects when you come to sell the rental home, you’ll enjoy main residence relief on gain for the proportion of time you resided there and last three years of ownership plus lettings relief up to same proportion.

As to your wisdom in becoming a landlord and increasing the value invested in residential property, that can only be sensibly commented on after learning a great deal more about your specific personal circumstances than you would want to disclose on a public BB.

It’s always a good idea to have a written agreement with your partner over the jointly owned property and discuss your ideas for that agreement with the solicitors advising you on the house purchase who usually treat that as part of their role when unrelated partners jointly buy a house – there are plenty of drafts of such agreements viewable on the internet.

[gracetaxer]

I really like and appreciate your idea, but I'll get very less profit by this. I know the way is very legal, but is there any way I can get more profit out of it.