Is any form of "rent to buy" legally possible?

[ProDave]

Here is an interesting conundrum.  As many of you know we are trying to sell our old house, without a great deal of luck

 

We have someone interested but not in buying it just yet, but eventually.

 

What this person has in mind, is renting the property for a few years, and in that time building up the B&B business with a view to buying it in 4 or 5 years time. But here is the rub, any rent they have paid, would then reduce the eventual purchase price. So say (arbitrary figures to make the maths simple) she pays £1000 per month rent, and buys the house in 5 years time, she would expect to pay £48K less than the valuation price because she would already have paid £48K in rent.

 

Now in principle, I am fine with that arrangement. The house would not be sold until a proper legal offer was on the table when the time came, and if it all fell apart, then at least we have had rental income so won't have lost out, and the rental income should help us move the new house forwards.

 

But here is the complicated bit.  TAX.  If we just sell the house, it is (and has been for 13 years) our family home so there is no tax to pay on the sale.  At the moment we are both low earners and with todays high tax thresholds, neither of us pay any income tax.  But if we accepted rent for the house that would push both of us into paying some tax on the rental income.

 

So if we just informally treated rent payed as advance purchase and then accepted a lower sale price, we will in effect have paid tax on part of the sale price.  That it ethically wrong.

 

Is there any legal way to set up such a rent to buy agreement such that the monies paid count as being towards the eventual sale of the property and are therefore exempt from tax?

 

Also bear in mind this is in Scotland so we are talking about the Scottish legal system here.
 

[Nickfromwales]

The convenience needs to be a two way street. If there's an excess tax accrued via the arrangement then it would have to be at least a 50/50 split IMO. It's just down to how much you want to get 'out' of the old house and into the new one tbh. 

Cant say I've ever heard of such an agreement / arrangement, but I've often thought about it. 

[ProDave]

My thinking is as currently non tax payers, if we accepted £10K rent in a year, and that resulted in us paying £1K tax (purely guessed figures) then as far as I am concerned she will have only "paid" £9K towards the house.
 

[Stones]

We've certainly been through the mill with previous house sales, and considered various options, but discounted them all as they simply didn't help us achieve our aim of moving on, so fully understand why you are considering this.  

 

Can't advise on the tax situation, but I can't imagine HMRC being supportive of anything which would in theory reduce their tax take.  As per your last post, I think you would have to negotiate with your potential tenant/purchaser that you would only reduce the final sale price by the net amount (your after tax take) of rental paid.  

 

Nothing unusual about having an option to buy at the end of a rental period.  A few thoughts though: how do you value the house - current valuation or value in 5 years time using an independent valuer (which could go either way for you).  How much account do you take of B&B earnings if she grows the business such that it significantly exceeds the amount you were taking in on an annual basis?  

 

  

[Crofter]

Another complication is if you make this arrangement and then another potential buyer comes along who is willing to buy the house outright.

 

I take it you are planning to run B&B from the new house as well? Otherwise there is presumably a drop in your income which would more than compensate for the rental, no?

[AliG]

I just spoke to someone I know who did this.

 

She said there was no way to avoid the income tax that she knew of.

 

What you are talking about is rent with an option to buy.

 

You would set a point in time in the future where the renter could buy the property at a previously agreed price.

 

Normally you would not take all the rent off the future price which will cover you for the tax that the rent would incur.

 

She also said exactly what Crofter said, it is very limiting if the market changes and you find you could sell the house in the meantime, although knowing your situation you probably aren't too worried about this.

 

The person I know, the renters started to use it as their own house and did work on the house even though they did not own it.

 

They also turned out to be the local drug dealers, she only found out after throwing them out. A somewhat surprised tiler working at the house couldn't believe who she was having a go at and told her who it was!

[Ferdinand]

I looked at a couple of rent to buys as a way of letting family friends who were not mortgage viable as they had just gone self-employed get onto the housing ladder.

 

It would have worked, but in these circs it is people you trust enough or get it totally legalled.

 

You could I suppose inject it into a limited company, but that will have an overhead of 500 to 1k per annum probably and a small setup cost. And that tends to delay tax or let you move it in time rather than avoid it.

 

I think you have to eat the income tax liability, unless you mitigated by eg adjusting the rent level down and the purchase price up slightly as there is undoubtedly a defensible market variation in prices. BUt that is back to trust.

 

In the scheme of things the tax liability is perhaps a small factor.

 

Or you could invest all the money in the property to offset it against tax  .

 

Ferdinand

Edited September 25, 2016 by Ferdinand

[ProDave]

The person wanting to buy it currently runs an on line marketing business which she is trying to grow. She also wants to run the B&B. We have never run the B&B as anything more than a hobby so it's never been particularly widely advertised and occupancy has been quite low, but that suited us for an easy business that helped earn the not very much we need to live on. She has been doing a trial run for 2 months now, living in, running the B&B and marketing it more aggressively and the results are already showing with much increased occupancy.

 

We looked at selling the B&B as a business but there are several pitfalls there compared to just selling the house. One was the only agents interested in marketing it as a business wanted a hefty up front fee to engage them and much higher sale fees than a normal agent, then there is the possibility of capital gains tax if sold as a business asset. This is why you will see many houses clearly trading as a B&B advertised with a normal agent, and advertised as having "B&B potential" (nudge nudge wink wink)

 

All I want from the house in total is what it's currently marketed for, which is presently 5% under the professional surveyors valuation.  If in the intervening few years the buyer turns the B&B into a fantastic business and by some miracle property prices here rise, then that will be her gain and not my loss, I will still be happy to accept the same.

 

If we do go ahead with this, we will take the property off the market and tell the agent it has gone to rental. There would not then be others looking at it to buy it.  It's still in the early days of exploring this and it's unlikely we would move out and start formally renting it before the spring.

 

Yes I think I will have to take the tax on the chin. As we are currently non tax payers, some of the rent would just use up the last bit of our tax allowances so it would not be taxed on the full rental income, just a bit of it.

 

We are not planning to do B&B from the new house. That is our retirement house, and part of the reason is downsizing. We felt if we stayed where we are and just stopped doing the B&B then the house would be too big. So the new owner would be able to contine the B&B without any competition from us.
 

[Mikey_1980]

Just to add to this, if it is no longer your main residences wouldn't you then become liable for capital gains tax as well when you eventually did sell?

[ProDave]

My understanding is while you live in the property, it is exempt from capital gain tax as your main residence.

 

If I move out and rent it, and then later sell it, there would ge a capital gain liability from the value at the time you move out, to the value at the time you actually sell it.

 

In the present market, I am not anticipating any such capital gain.
 

[Ferdinand]

You will need advice.

 

If it has been used partly as a business then that part should not be exempt unless there is a specific rule.

 

Also cut calculations are not what they were,but otoh since prices have not home up very far for a looooooong time that will mitigate.

 

Ferdinand.

[IanR]

I wonder if there is a way of setting it up like Lease hire of a vehicle, with a balloon payment at the end to take full ownership.

 

You effectively give them a loan of the notional value of the property, and they pay back that loan. They take ownership once full payment is received. Since it would be 0% interest on the loan, there would be no profit for you. Fix the term so that if the balloon payment is not received at the allotted time they walk away or enter a further agreement with you.

 

Make sure the Lease is "full repairing and insuring".

[Ferdinand]

I think the issue with setting u systems is firstly that the govt has spent the last 3 years working how to spank landlords without loopholes, and there are now general principles in place for all sorts of reviews. Secondly it is difficult to adjust your arrangement later unless there is trust.

 

I did take high powered advice when going for PP does my housing estate plot, and the advice  from specialist accountants was that it was not generally worth the candle trying to be too clever.

 

 I suppose you could get into the right type of 50:50 ownership with your wife, and sell it to them as 2 halves, which would let you use 2 cut allowances if there is any chat there, or you could do a shared ownership, and treat the money as a progressive purchase, which is a normal way to do it.

 

But it is still all marginal in benefit.

 

FErdinand

 

 

Edited September 25, 2016 by Ferdinand

[Temp]

16 hours ago, ProDave said:

What this person has in mind, is renting the property for a few years, and in that time building up the B&B business with a view to buying it in 4 or 5 years time. But here is the rub, any rent they have paid, would then reduce the eventual purchase price.

 

I was a small scale buy to let landlord for 20 years. I would steer well clear of that deal.

 

A chunk of the rent you receive "goes" on tax, agents/management fees & VAT (even if it's only your own time - are you working for free?), insurance, maintenance, wear and tear and compensates you for loss of interest on the capital that you would otherwise get investing elsewhere. None of that should come off the purchase price. It's like they are asking for an interest free loan and some. 

 

Consider what happens if interest rates have to rise and that causes a drop in house prices?  Potentially you loose two ways. There would be a greater lost interest and a lower eventual purchase price. 

 

If this was just a house I would strongly recommend sticking to a standard Assured Shorthold Tenancy even if they want a longer contract. However because they want to run a B&B you will need someone with relevant experience (solicitor or letting agent?) to draw up a different sort of contract. Either way I would stick to a standard terms that courts have previously deemed fair and reasonable and which gives you strong powers to evict if necessary. I would want to know if the house was being rented by them personally or by their B&B business and does this make it harder/easier to evict and get your money if it all goes pear shaped? Suppose you had to evict them in a years time and found there was a little old lady in room 27. Would you legally be able to evict her as well or could she have acquired some legal protection?  Your contract would need to cover the terms under which they let rooms to said little old ladies.

 

We had to evict two tenants and one of those was having his rent paid by his employer.  They paid the rent regularly but the tenant caused too many problems with the neighbours and the police had to be called several times. Fortunately we never had to go through the courts but that can be expensive. 

 

The fact that you already own the house shouldn't affect the investment decision. If you walked into an IFA and said you had a few hundred thousand to invest I doubt they would recommend you to put it all into property on those terms. They are much more likely to recommend a balanced portfolio of stocks and other investments. Especially as you already have money invested in your own house. 

 

 

 

[Ferdinand]

All good advice, plus if they are running a business with your knowledge you need to check everything against that of course, eg insurance, mortgage etc.

 

Ferdinand

[ProDave]

No mortgage on the house.  It's already insured on a guest house insurance policy, it has to be as it's been trading as a B&B for 12 years.

 

I am pretty sure there will be no CGT liability.  We only operate as a 2 room B&B, which is a bit of a loophole / exemption in the law. You don't need planning permission to let 2 rooms for B&B and are exempt from a lot of the red tape, e.g you don't need a commercial kitchen, you don't need fire doors on every room or a full fire alarm system etc.
 

[Temp]

The CGT rules are pretty complicated. You will be aware there would be no CGT liability on any gain made while it's your Principle Private Residence. After that it gets tricky and you have options...

 

For two years you can elect which house is your PPR even if you don't live in it. However you do need to make a formal election or the HMRC will decide which one based on where you actually live in. The other house (the one not elected as PPR) could potentially be liable for CGT on gains made during those two years.

 

However it might not pay to elect the old house as PPR. That's because there is another rule that says something like.. As long as it's been lived in the last 18 months of your ownership it also counts as your PPR. If I've understood correctly it might pay to elect the new house as PPR and use this 18 month period for the old one. That way gains on both are exempt for 18 months?

 

You should also investigate a capital gains tax break called Lettings Relief. This gives the owner of a rental property another allowance of up to £40,000 if the property being let has at some point been your PPR - which it has.

 

Don't forget that the tax treatment of second homes can change (cgt, council tax and income tax could all change). It might change dramatically if Labor get in. You might want a clause in your contract with the new owners that allows you to bail on the deal. You wouldn't want to find yourself liable for greatly increased taxes and unable to increase the rent or sell up to get out of the situation. 

 

Edited September 28, 2016 by Temp