Should I let out my parents' old house or sell it and invest the capital?

Q I am due to inherit my parents’ three-bed semi in the Wirral which is worth about £180,000.

I have little idea about whether to sell and invest the capital for what I guess would be a return of about 2% from a bank or building society, or let the property which could give me a yield of about 5%. Similar houses in the area rent for £750 per month in the area.

On the face of it, letting is more than twice as lucrative as putting cash in the bank, but what costs such as tax, and so on would I face?

I am a standard-rate taxpayer and am likely to need an agent to manage the property for me as I live in Kent.

Most of the advice I have read largely concerns buy-to-let, not outright ownership, so I’d be grateful to know what the matters to consider are. MS

A You are right. On the face of it, letting the property is a much more lucrative proposition than selling the house and putting the cash in a savings account. That’s not least because you would be lucky to find an account offering more than 1.6% unless you are willing to tie into a fixed rate for a couple of years in which case you could get 2% or slightly more on your cash.

You are also right that buy-to let for landlords with mortgages has become a lot less attractive since changes to the tax rules for relief on finance costs such as mortgage interest – as well as interest on other loans and loan arrangement and early repayment fees.

Before 6 April 2017, a landlord could deduct all the mortgage interest from rental income to work out the tax bill. By 6 April 2020, landlords will be able to calculate what HM Revenue and Customs (HMRC) calls a “basic-rate tax deduction” of 20% of finance costs which is subtracted from your tax bill. A useful guide to the tax issues involved in letting property is available in the online guide to letting a property from HMRC.

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But as you say things are different if you own a property outright as, without a buy-to-let mortgage, the tax changes for finance costs won’t make a lot of difference to how much tax you pay or on the return on your buy-to-let property. What will eat into your property earnings is the money you have to spend on getting the house into a state where it can be let. This may include redecorating and, if you plan to let the house furnished, buying new furniture which meets fire safety standards. It must include fitting smoke alarms and, if there are solid-fuel appliances, carbon dioxide alarms.

You’ll also have to pay for a qualified registered electrician to check the electrics and provide an electrical safety certificate and pay a Gas Safe engineer to approve any gas appliances and, every year, provide a gas safety certificate.

If you were to use the full management service of a letting agent – which makes sense as you live so far away from the house – you could be looking at a reduction of 20% (including VAT) in the form of the agent’s fee for managing the property in the amount of rent you get.

There are extra costs for dealing with the tenancy paperwork, putting the tenant’s deposit into a government-approved tenancy deposit scheme, making an inventory and arranging works or refurbishment on the property. You also have to factor in the cost of insurance for the property as well as months when the property is empty and you’re not getting any rent.

Taking just the cost of using a letting agent into account – and not any of the other costs mentioned – you might get after-tax rental income of just over £4,752 which represents a yield of 2.64% on the £180,000 house. However the true yield will depend on how much you have to pay for other costs. If they were to mount up to £1,000 or so, there would be very little difference in the after-tax income you would get from a savings account paying 2%.

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https://www.theguardian.com/money/2017/oct/16/should-i-let-out-my-parents-old-house-or-sell-it-and-invest-the-capital