Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
Property
I own a house valued at £150,000, which is in need of some decoration /windows (£10,000 would do a nice job). The house cost me £44,000 five years ago in the good old days. I pay a mortgage of £300 and owe about £37,000 to the building society on the mortgage. I am the sole owner. I am debating selling my house and buying a house with my brother, value about £200,000.
I would put up half the purchase price. My intention, barring advice to the contrary, would be to continue paying the mortgage on my old house and use £100,000 from the sale of the old house to purchase the new one with my brother. I would invest the balance of £50,000 for use in purchasing another dwelling should my brother and I go our separate ways.
I wonder would you explore this scenario from the viewpoints of: (a) The ramifications of joint ownership of a dwelling from a legal and financial slant;
(b) The taxation implications for me on sale of my old house;
(c) The wisdom of investing the £50,000 over paying off the old mortgage;
(d) Where to invest the £50,000 in order that it gain sufficient interest so as to keep pace with house price increases - the object here would be so that should my brother and I decide to go our separate ways, I would still be able to afford to buy a house on the bottom rung of the ladder;
(e) The option of renting out my old house, borrowing the £100,000 to purchase the new house;
(f) In the case of (e) above I believe I would be hit for 9 per cent stamp duty if I choose this option. Would my brother also be hit for 9 per cent on his share of the house price? He doesn't own any property.
I realise that to explore all aspects of the aforementioned is impossible; however, I should be obliged if you would give it some consideration.
Mr K.L., Dublin
The first element of your question is possibly the most delicate. Financially, the implications of your joint ownership depend on how you and your brother arrange the deal. Legally, your position in joint ownership depends on the contractual relationship between you. Joint ownership is not necessarily a disadvantageous position; indeed, in the current house market it has become increasingly popular and not only between siblings.
However, it is worthwhile to draw up a contract that will determine what will happen: a) if either of you dies; b) if either of you wants to sell their portion of the property or, alternatively, wants to buy the other out, or; c) if either of you fails to meet your commitments, financial and otherwise, in joint ownership.
This in not condemning the arrangement to failure in advance. It is merely a judicious safeguard to ensure that both owners have a clear understanding of the nature of the deal between them and what will happen if either's circumstances or commitments change. You are far better organising this in advance with a properly drawn up legal agreement than waiting until the unexpected occurs and then trying to organise things as emotions are strained. Any lawyer should be able to draw up such an agreement and the cost is well worth it.
Turning to your second point, there is no tax implication on the sale of your home. It is your principal private residence and its sale is not therefore liable to tax.
On the next point, you may not have a choice in whether you pay off the existing mortgage. Mortgages are generally secured on the property for which they were borrowed. If you were to sell the property, it is almost certain you would not get the deeds back from your lender without repaying the mortgage. You can see why they would be reluctant to turn a £37,000 mortgage into a £37,000 unsecured loan over which they would have no claim if things went sour. Even if you were to be allowed continue with the now unsecured mortgage and invest the £50,000 balance on the sale of your home after investing in the new property with your brother, whether you should do so is another thing. As you raise in your next question (d), trying to find an investment in today's volatile market that will match the increase in property prices would be some challenge.
Even if you did so, you would have to ask whether the risk of losing your nest egg was not too great. Even finding a risk-free investment that would match or exceed what you would be paying in interest on the other hand on the ongoing mortgage would be difficult. In any case, as I say, it is likely to be academic, as your lender will want their money back when you sell your current house. Assuming you are not tied into a fixed-rate mortgage, that would leave you with around £13,000 in the bank after the transaction - also assuming you don't invest the £10,000 in the current house as you speak about. In any case, the stamp duty, legal fees and other charges incurred in buying your share of the new house would probably eat up most of that.
For simplicity's sake, I think you need to accept that you would be half-owner of a £200,000 property with no mortgage, but no other balance from the existing property's sale value.
As you say in (e), you could always just keep the current property and borrow to part purchase the new one, but you would be liable to 9 per cent stamp duty on your share of the property and 2 per cent anti-speculation tax for the first three years - a total of £15,000 in your case. You would also be paying off two mortgages and would need to gauge your ability and comfort in doing so. If you are toying with selling the one house to buy the other, I would suggest you would need to take careful advice before taking on two mortgages.
My understanding is that your brother would not be hit with the Bacon measures on stamp duty and speculator's tax if he had not previously owned a property and was buying this as his principal private residence.
In conclusion, I sense and understand your concern in having options should the arrangement break down. I would argue that the surest way to tackle this is to draw up a proper legal contract between you, outlining what would happen should this occur. It is a far better option than playing the investment markets with the risk required to offset the worst case scenario.
Given the detail of your queries, the answers here can only really be a pointer. If you are seriously considering this route, you really should take legal advice. Doing so doesn't imply mistrust of your brother, only a desire for a hassle-free arrangement.
Renting
In last week's Irish Times you answered a question from a Ms AM.F about tax payable on renting her house. She states that she has heard that one can receive £6,000 in rent a year tax-free if one has a mortgage. You state in your answer that you have never heard of such a thing.
In The Irish Times of Friday, January 5th, 2001, Clare O'Dea states: "One of the measures introduced in Budget 2001 was to allow homeowners to take up to £6,000 in rent per annum without being liable for tax."
Perhaps you could find out more about this (as it seems that it does exist) and provide some information about it in next week's newspaper, as the information you have provided to Ms A-M. F is incorrect.
Ms S.B., e-mail
Ms S.B. is not alone in taking me to task for allegedly misleading Ms A-M.F. on the situation with regard to renting one's property. There was a pretty full postbag on this one. Unfortunately, all missed the point.
As Ms S.B. and others point out, there is indeed a provision to rent out a room in one's home without the income necessarily being subject to tax. However, Ms A-M.F. was seeking information regarding the rental of the house, not a room, and this to be done while she was out of the house, indeed out of the country, for a year or two. In her situation, as I said, I have not heard of any provision for tax-free rental income. In fact, as I stated, in the situation she envisaged all her rent would be taxed here regardless of where she might pay tax on other income she might earn while abroad
As a matter of interest, what the rent-a-room provision allows for is the rental by a homeowner of a room or rooms in their principal private residence free of tax, provided the gross rental income comes to less than £6,000 a year - £500 a month.
As importantly, letting one's rooms in this way will not affect any relief on stamp duty - a major concern for first-time buyers. It will also not alter the relief against capital gains tax that property owners enjoy on the sale of their principal private residence or their entitlement to mortgage interest relief.
Of course, none of this applies when one rents out one's house in full. In such instances, you lose mortgage interest relief, and may face a clawback of stamp duty relief. You will also face a capital gains charge on part of the eventual sale price of the property, the scale of which will be determined by the amount of time in your ownership that it has been rented.
Naturally, all this information on the rent-a-room scheme is predicated on the proposal being passed in the Finance Bill 2001, which was published yesterday.
