Advice please! Become landlords (Ltd co) or sell up to buy a new house

[housingplanningquestion]

Advice here please, my partner and I disagree about a financial planning issue. We are both higher rate taxpayers.
We have a 3 bed flat that we own outright in Zone 2 London near a tube (edges of the financial district, but not a very smart area). Value of the flat is around £500K. Rental yield on the flat could be 2500-2700pcm. We are looking to buy a house value around £900k. We are disagreeing about whether to sell the flat to release funds (~500k), or whether to set up a Ltd company to sell the flat to and release 75% of the value (~375k) to use as a deposit for the new house.

If we transferred the flat to a Ltd company: We could get a 25 year interest only mortgage of around £1400 per month (4.19% fix for 5 years).

If we sold the house - 25% more cash for deposit (500k vs 375k), no hassle, no stamp duty re purchase of flat (£27500), could afford to do side return extension on flat sooner rather than later. Downsides are - possibly missing out on later profit from flat.

If we kept the flat and rented it out: extra hassle, not very profitable initially - would profit only 2-4k per annum after lettings management fees and corporation tax for the first few years. But after 25 years, the rental yield and value of the flat would be likely to have kept pace with inflation whilst mortgage wouldn't increase, so profit on both of those fronts (both also liable to corporation tax - though may take out profit via pension to reduce this exposure). Extra rental income could be used to reduce the capital repayment or taken out as dividends. We could also transfer the flat to our children if they are shareholders, avoiding capital gains tax and possibly inheritance tax.

What would you do? Or have you been in similar situation - how did it work out?

Additional complications: one of us is quite emotionally attached to the flat. Also if we were to separate at any point in the future, it would feel easier to keep the big house (better for the kids, no forced sale) if a flat is already part owned (wouldn't need to remortgage the flat necessarily, could just pay market rate - may be more expensive but may not be able to remortgage on one income - wouldn't want to move into rental).

Thanks for reading so far x

Sell it.

Two rather different responses there!

@C4tastrophe what's your thinking?

@Farmerking tell me more - does it look like free money? It does a bit to me. But my partner is not convinced. Tbf, it's not as much free money as I initially thought, but it is essentially self funding. Even if you can't take out as much as profit as is going into it - a lot goes on tax - I don't mind that really.

Have you considered the CGT and SDLT implications of transferring the property to a Ltd co? I’d speak to a financial advisor: most small landlords who do not run a full time property management business will not meet the qualification criteria for incorporation relief to avoid paying these.

As a former landlord of my own old flat that I owned before I met DH and bought a new place together, I’d sell (I did.) Good tenants are so hit and miss and with all the changes to tenants’ rights in favour of the tenant, we decided that on balance we couldn’t risk ending up with a tenant who wouldn’t pay and also wouldn’t leave, as some friends in the same position had with their BTL.

U need to calculate if any CGT and SdLT applicable, CGT allowance is reduced now, also the dividend allowance soon will be zero I think, already reducing to 1k so if u high tax payer something to consider, main thing is BTL rates and if ur rent will cover that mortgage
If above numbers work out, go for it

@ComtesseDeSpair Yes we've taken that into account - £27500 stamp duty on the LTD company purchasing the flat; no capital gains tax because it's all done via the Ltd co. Corporation tax on profits and on dividends. So the only profits are rental once the mortgage is paid off, and then from selling the property. Both subject to corporation tax. We'd get landlords insurance to cover voids and evictions and non-payment. But it is an extra hassle to think about. But then so is £500k in 25 years time.

I'm a landlord and I'd sell, there are many unknowns at the moment. I would invest the money, feed an isa in full every year. For the return you'll be getting it really isn't worth the risk. More legislation is coming probably along with the lack of enforcement prevalent in this area, which leads to more legislation so more stuff to do eating into profit with even fewer returns.

You'll save on cgt, stamp duty tax and with the relief curtailed at 20%, it's a no brainer.

Have you crunched the numbers properly?

Landlord here and I'd sell with the new EPC regulations coming in and the government's lack of support for private landlords.

Why do you say your mortgage wouldn't go up in the future or am I misunderstanding?

I'm a landlord and going against the grain, I'd become a landlord in your position.

Join the NRLA and some landlord groups if you're on fb-get some decent advice. I don't use an agency, just advertise on gumtree when I have a property for rent. Interview potential tenants-give them an application form and pick it up from THEIR house so you can see what they live like. Trust your gut and make sure you do everything right. If It's in a decent area you could remortgage it and release equity in future.

How will the Ltd company pay the @ 30k costs to buy the apartment? Will you have to lend the company the money or the company will get a corporate loan?
How will you as private individuals get 375k out of the company without declaring it on your tax return?
The tax man will be all over this.

Sorry if u own three flat in your name when u sell to Ltd company it will still incur CGT, and as high tax payer that will be lot depending on market rate that u sell for and how much gains
I may be wrong but check this out
And all rental income is taxable, no allowance for any interest in mortgage

@PrincessofWellies I think a lot of those issues aren't relevant if you've set up as a private landlord i.e. sold the property to yourself as a Ltd company. If you do that before you buy the second company then you don't pay stamp duty as a second home on buying the house for example (you do pay stamp duty on the flat but we've factored that in). It's not really about extracting money from rent, certainly not to begin with, more about paying off the mortgage to have a lump sum in 25 years.

The extra money would go on the mortgage of the new house, so wouldn't be available for saving in an ISA (although would eventually I guess).

@stayathomegardener the BTL mortgage repayments wouldn't increase over the years, but rent and the flat's capital value would. I read that EPC improvement requirements are capped at £3.5k.

I'm not trying to be obstructive, I just can't see any other way of making that kind of return on investment with minimal work. I've just done a compound interest calculator, inputting £125k, no other additional sums, 4% interest (as a proxy for savings interest / inflation) over 25 years: return is £340k. So that's a basic estimate of inflation only. I just think that property inflation over 25 years, for a three bed flat with garden next to a tube, near the City, will beat that by a fair bit. And that we are still likely to get some rental dividend value out of it on top of that. But maybe I'm being overly optimistic, and maybe the hassle wouldn't be worth it.

My partner is saying putting it in the S&P 500 for example would make more. But our pensions are in those kinds of vehicles. Wise to diversify?

You will be liable to CGT on the transfer of the property to the Ltd Co - although you would probably be able to claim PRR if you lived in the property or incorporation relief.

SDLT is payable by the Ltd Co on the transfer. As you say it’s approx £30k, I assume you will have to loan the company this amount? If so you can then essentially withdraw £30k tax free when profits are available.

Remember the additional admin involved with having a Ltd Co.

I don't know if it's as simple as just getting landlord insurance to cover unpaid rent and voids- my understanding was that rent guarantee insurance only covers non payment of rent by the tenant, not general voids in the property, and often only up to a specified limit. It can take a long time to evict someone via the courts, particularly if your paperwork isn't perfect/up to scratch, so possibly you'd hit the upper limit of your policy in terms of unpaid rent? And then if the flat was left with damage, you'd need time to repair that and probably also have a void period.

Obviously that's the worst case scenario, but it can happen.

What happens if you do end up making a loss in one of the first few years? Can you absorb that?

I'm still not getting it sorry.

The BTL mortgage repayments would only stay the same if you opted for a fixed rate for the whole time, surely you would remortgage every 5-10 years?
Interesting about the potential £3.5k EPC cap, seems a little pointless in the goal of trying to bring old housing up to standard but I guess our government isn't always logical.

Personally I'd look at investing in land as you would have the domestic property market covered by your main property, diversifying and all that.

Thanks everyone :)
@C4tastrophe
How will the Ltd company pay the @ 30k costs to buy the apartment? - We have savings / could take it out of the £375 k directors loan.
Will you have to lend the company the money or the company will get a corporate loan? Yes, lend the money company.
How will you as private individuals get 375k out of the company without declaring it on your tax return? The company would get a BTL mortgage. the Ltd company would buy the flat from us as individuals. It's all tax compliant.

@Malbab We don't own three flats in our name - just the one currently. We'd probably arrange a broker so that the transfers of ownership are done on the same day, avoiding CGT. Again, that is legally fine. And mortgage interest is exempt for Ltd companies - only pay corporation tax on profits.

@Christmascracker0 Yes, forgot about that advantage re paying ourselves back the SDLT tax free.

@Postapocalypticcowgirl Yes we could absorb the loss of a couple of k for a few years, although my partner wouldn't be happy about it as he doesn't want to in the first place. But we could cope with it. And similarly I can see that it could be stressful, hassly and have time costs as well.

@Itsdaftasabrushwithnohandle Thank you! That's great to hear. You'd go ahead in our shoes just because it looks like it does make financial sense to you? And yes, I think I'd try to assess potential tenants quite carefully. And be fully informed on responsibilities.

You are assuming your mortgage won't go up? My five year buy to let mortgage fix ended and it doubled. You don't know where interest rates will be in five years.
I'd probably let it though. I'm not sure about the tax implications of becoming a Ltd company - I am not one, and I got a 4.4% fix in March.
I do plan on paying off the mortgage as and when I can, so factored in penalty payments - you are likely to be in a position to pay off chunks too - I certainly wouldn't let it run for the full 25 years - you have no idea what your life will look like then, whether you will still be with your partner, both still working etc.
Also have you taken into account the repairs? I don't know what it is, but tenants seem to have a lot more issues with plumbing/boilers/white goods/ than I do! Service charge? You're responsible for that. I think at least one month's worth of rent is spent on repairs and maintenance.
Rents are high at the moment so you should get a good amount if your flat matches the market - I would not rent out a property that isn't decorated and up to a standard that I would live in. As you are thinking long term, go fir a minimum two year lease, but always have a break clause in case the tenants turn out to be bad. Rent guarantee is not worth it in my experience - tenants will have to have stopped paying for six months and you must have served them eviction notice before it will kick in, even then it's tricky. I had a non paying tenant and got him out after four months and and did didn't get a penny (i served notice after two missed payments - he was playing the system and was truly a disgusting person). But most if my tenants have been gone - foreign students in particular were all great (not an HMO though, that really can be a hassle).
Do all your figures again, factor in change of circumstances on your end. Good luck.

@stayathomegardener Sorry yes, mortgage would be adjustable. So yes we could overpay and get into rental yield sooner. I just meant that mortgage repayments wouldn't wipe out all the profit forever as rental charge and house value would increase.

Sell. Very few things in normal western European life are worse than renting from an amateur landlord.

One flat does not make you a landlord.its a risky income hobby. Sell it.

I agree with the husband. Sell the apartment, your money will still be in the new property.
If you want an investment, open ISAs for the kids, max out pension contributions and your own ISAs, if you are still flush then buy global trackers from HL, ILBR etc.

IKBR

They are already talking about removing the 3.5k epc cap, either totally or maybe making it a 10k cap.

does landlord insurance cover void periods?

I did the sums when I was thinking about buying a house and renting it for £700 a month and after mortgage payments, tax, gas safety checks it really wasn’t looking worthwhile. Then if your tenant leaves after a year you have a void period, redecorating possibly, agency fees if you use one to find a tenant. Plus any repair costs. It was going to be minimal profit each year with the possibility of no profit.

Sell.
If you are emotionally attached to the flat, how will you cope with the general wear and tear of tenants? And even worse, if one of them damages it.
The government is generally anti landlords currently, and I think it is only going to get tougher for small "individuals" with very small portfolios.

Have you checked that the company can get a BTL mortgage? Even if it can you will likely need a deposit of around 40% of the property value