Owners still hang on the end of the chain: A brainwave to complete the link leaves one house too many

SIX MONTHS ago, Jim and Joan Walters came up with an intriguing solution when the housing chain they were in seemed to be falling apart. As the couple at the top of the chain, they bought the pounds 44,000 terrace home of the couple at the bottom, after a first-time buyer had pulled out.

As we reported at the time, the three families caught in the chain met informally and agreed to an arrangement based on trust. Mr and Mrs Walters, who were committed to moving to a smaller retirement home, had planned to invest their released equity, but instead agreed to use it to take over the unsold house. The other two families, including Jane and Andrew Waters at the bottom of the chain, each undertook to pay Mr and Mrs Walters pounds 110 a month in partial compensation, for six months.

After this time, the families hoped, a new buyer would have been found for the house, which is at Drighlington near Leeds. 'It would have been unfair to younger people to tie them to an open-ended commitment,' Mr Walters said at the time.

Now the six months are up, but the house remains unsold. 'I think the house was maybe a bit overpriced, and we said we'd cut our losses and sell at pounds 42,000,' Mr Walters said. 'But the market hereabouts is absolutely dead, and we're not getting anyone in. Now I'm going to say to the agents, 'Let's take it off the market for a year.' '

He has already found a short-term tenant, whose rent of pounds 220 a month replaces the income he has now lost from the other families. However, like other people who have taken the renting option after failing to find buyers, the Walters are having to cope with the practical problems involved.

The maintenance of the house (about 70 miles from their own home) is one issue. 'The first month's rent from the tenant went straight back to the plumber, to fix the boiler,' Mr Walters said. Another concern was insurance. 'We found that to get an empty house insured is just about impossible. We had to go to Lloyd's, and we're paying through the nose.'

Maintenance, insurance and the legal fees incurred in the house purchase together have reached about pounds 1,000. Jim Walters estimates that had he and his wife invested the pounds 44,000 spent on the house in a high-interest income bond, they would have been receiving about pounds 250 gross a month. While the pounds 220 a month received more or less replaces this, it clearly hasn't covered other expenses.

There is also the tricky problem of tax. Rental income from unfurnished property is taxed as investment income, after deductions for allowable expenses such as maintenance payments, insurance and any management costs. If Mr and Mrs Walters had borrowed to purchase the property, their mortgage interest could also be fully tax-deductible. The tax rules allow relief on this sort of loan where properties are let at full commercial rent for at least six months and are available for letting for at least a year.

However, the Revenue does not make any allowance for the cost of the 'lost' investment interest when properties are bought for cash, as in the Walters case. 'Perhaps they should have considered borrowing to fund the purchase and invested their equity,' said George Bull of the City accountants Robson Rhodes.

He added that the Revenue would sometimes allow a cash purchaser to set up a matching mortgage loan after the property had been purchased, although, he said, the prospect of Mr and Mrs Walters being able to do this after six months was 'probably very slight'.

They may miss out under capital gains tax rules, too. Any loss which they make when they finally sell the Drighlington house cannot be offset against their income tax liability on the rental income, although it can be set against any capital gains they make. However, the annual individual CGT exemption of pounds 5,800 may mean that in practice they will not have enough taxable capital gains.

Clearly, on the surface Mr and Mrs Walters have not benefited financially from their chain-breaking arrangement. But as Jim Walters points out, money isn't the only consideration. Three families have been able to move to the houses of their choice, including Mr and Mrs Walters themselves, who are enjoying life in a peaceful part of Lincolnshire.

'How do you put a value on that sort of thing?' Jim Walters asked. 'I've no regrets. I'm very happy with the decision we took.'

(Photograph omitted)