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Advice on what to do with extra income (also posted in Investments)

(9 Posts)
PDR Sun 30-Aug-09 13:17:11

Hello everyone,

I have not posted in the "money" before as am normally content with gossip & shopping!

Anyway, we have decided to rent out our second home for a few years as we never use it anymore and can't be bothered with holiday lets.

So we will be getting a regular income of aprox. £1200/month once we have set some aside in case of maintenance etc.

I am wondering what ppl suggest we do with this as the bank is offering such a poor rate of interest.

Here is what we already have:

Cash ISA each (full for this year) earning 3.2% (7200 in each one I think)

Save £250/month (the max) with our bank at 5%

Mortgage free in our house but the rental house is mortgaged with interest only payments of about £500/month.

Property abroad (not mortgaged) and savings earning v poor rates but want to leave them where they are.

My husband is saying we should just overpay on the mortgage every month, but surely this would also mean paying more tax on the rental income?

Any advice most welcome

clop Sun 30-Aug-09 15:04:10

Is the 2nd home abroad? Where is your own tax domicile? Whose name is the 2nd home in?

PDR Sun 30-Aug-09 15:59:23

Second home is in the UK and in my name only. I don't pay tax (don't work/earn enough).

I am UK domiciled but I think my husband's domicile is Kenya to avoid paying tax on earnings there that we do not bring in to the UK.

My DH is a higher rate tax payer in the UK.

clop Sun 30-Aug-09 16:36:02

I'm not an accountant or IFA, to clarify! But we looked a lot at Buy-to-Let recently.

Paying off the mortgage for the 2nd UK home might work out to your advantage if you intend to keep the 2nd UK property for a long time (decades). It's only when you go to sell that you realise Capital gains tax penalty, and you could earn a hefty profit margin from letting the 2nd home otherwise, until your death, really. It's often in retirement that people most need an income stream like that, too. You didn't mention anything about your pension provisions.

I think there's no way to avoid paying some income tax on the 2nd home rent. However, any money you use to upgrade/repair the property is tax deductibile, and therefore may be a good investment in the long run.

Given the numbers involved, and your complicated finances/tax domicile situation, etc. I think it's well worth your while to consult (pay) an accountant to assess your options.

PDR Mon 31-Aug-09 11:44:02

Hi clop !

Yes we probably will need every penny in our retirement as I don't have any pension provisions at all (only 24 tho so that might change) apart from the equity in our second home.

My DH only has the property abroad as his "pension" and of course our current house. He started to pay into a pension fund when he started to work in the UK 2 yrs ago so there isn't much in there - maybe upping contributions might be a good idea with some of the rental income..?

Yes maybe we should get some (paid) advice as might be worth it in the long run!!!

selby Wed 09-Sep-09 01:27:38

On my rough estimates - excuse me if I'm completely incorrect, you will actually have approx £300 pcm to 'invest.' I've assumed you have £1000 net of letting agency fees and after 40% tax of £500 rental income, this comes to £300. Personally, if you have children, I would top up their CTFs' followed by topping up your own pensions.

selby Wed 09-Sep-09 01:38:25

Sorry, my mistake, the house is in your name so it's potentially basic rate tax on the rental income rather than higher rate tax subject to the rest of your income e.g interest from your savings/investments.

PDR Fri 11-Sep-09 13:08:07

Only used agents to find tenants not manage it so paid the fees up front.

Will be able to offset most of this year's "profit" as we have had some work done and can obv offset mortgage interest (about £500).

We have owned this house for a while, not bought as buy to let so we have been paying the mortgage ourselves every month so now the rent is covering the repayments we now have that cash spare.

PDR Fri 11-Sep-09 13:09:43

We have 1 child and we have already invested the maximum in his CTF for this year.

My mum also has a fund going for his university.

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