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

We rented out a house a few years ago and really got stung for tax. I would sell it.

so make sure you are aware of this if the value increases or the limit decreases

https://www.gov.uk/guidance/annual-tax-on-enveloped-dwellings-the-basics

The point u make about Voiding inheritance tax is valid, your kids could become shareholders and directors when they turn 18 and start earning the rent, and eventually inherit
If you are able to soak up any maintenance bill or empty periods then it is worth it, you have to work out the BTL rates for your LTV though, in your case also have to consider if that extra 125k if u sell will get u a better primary residence...

Wow. Hadn't heard of this one. Thanks.

A change of government could make renting property out a lot less profitable. Tax laws might change a lot, and in the current climate, most likely very much to your disadvantage. I doubt mortgage rates will fall much, they may well go up. There is more uncertainty on all these points than for some time. Reducing your mortgage would be useful. Generally paying off debt is better than investing money to service it.
I'd sell if it was me.

I would sell it so that with your new house, you can either have a much smaller mortgage ( thus saving £££ in interest payments) or a much nicer house or a combination of both - all without any risk or hassle.
The appreciation in capital value you expect to get on your current property over 25 years will be the same if you invest in a bigger & more expensive family home, with the advantage that your family actually get to enjoy the asset for all those years.

I can't help thinking you're looking at it with rose tinted specs.

You don't appear to have factored in the maintenance which if at the better end of the market can be quite high. Decorating fully on a 2 bed flat inside only with plastic window frames costs around 2k and will need doing every 3 to 5 years. Cleaning in between tenants is £800. Service charges - the only way is up. Electrical check every 5 years, gas every year, repairs to white goods. 12 % letting fees, replacement of white goods if integral, replacement kitchen and bathroom every 10 years. Replacement boiler contingency, new carpets/flooring throughout every 5 to 8 years depending on your type of tenant.

Then there's the accidental damage . . .

On your figures you're not going to be in profit by much.

If you have a non payer, which you are more likely to get if you're using an agency it can take 9 months to get them out, and unless there's an injection of money into the court system it'll get worse.

OP - what did you decide to do? We’re in a similar position so I’m curious to know what you went for and why if you’re happy to share!

I would remortgage the flat as a buy to let without bothering with ltd company. Then I would buy the new house. You'll have to pay extra second home stamp duty on the new house. However, if you sell the flat within three years you can claim that back. So maybe after 1-2 years of renting flat out you can see if you like being landlords, if not yet rid of it and use the equity and the extra stamp Duffy refund to fund the extension

OR if you want a flat to rent out, get a cheaper one somewhere else later on and rent it as a holiday home on air bnb- much more efficient

Before you do anything make sure you speak with an accountant that specialises in property investment through a limited company. They will be able to give you advice about which taxes are relevant to your situation. Make sure it’s one that knows about capital allowances.

Good Luck.

You said bring a landlord was “minimal work.” On that basis alone, you should sell. It is not minimal work- it is a part time job, often feeling like a full time job.
i also despair at property investment strategies that rely on capital growth. The rental yield is crucial if you want to avoid ploughing money into the property every month.

Ignore- just seen Zombie post by a spammer