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Buy to let mortgages
Investing in a buy-to-let property as a pension
So why would you want to be a landlord?The simple reason is because buying property which you then rent out can provide you with a regular income, not to mention the potential for capital growth in the medium to long term. Many people are investing in a buy-to-let property as a pension – the monthly rent may be a useful supplement to other retirement income or the property could be sold and the proceeds used as a nest-egg.
However, buying to let is certainly not a get-rich-quick scheme. Remember that you are investing in an asset that has ‘low liquidity’. This means you won't be able to get your capital back out in a hurry if you need it fast. Investing in rental property may make sense as part of a broader investment portfolio.
Don't buy a house or flat just because it would appeal to you. You must put personal taste aside and look at property from a purely commercial viewpoint. It would be prudent, for example, to ask a letting agent's advice on what type of property is suitable for rent in the area you are looking to buy in.
The main factors to consider are location, type of property and how best to equip and furnish it. Letting agents say that good selling points include stripped wooden floors rather than carpets, and generous storage and fitted wardrobes, while appliances you may wish to install could include a dishwasher, microwave oven, washer-dryer and power shower.
Good research is as vital for the property you want to let as it is for the property you live in! Is it close to transport links? What sort of parking is there? How far away and how good are the local amenities such as shops and leisure facilities?
Mortgage lenders used to consider property investors as high risk and tried to put them off with high interest rates and surcharges. However, the market has changed substantially in the last decade and several lenders now compete to offer a new breed of buy-to-let mortgage, sometimes known as a residential investment loan.
Loans available include capital and interest, interest only, endowment, pension or ISA-linked, or a mix of them all. Some allow for overpayment and payment holidays, which can be useful for void periods (when the property is empty).
Buy-to-let mortgages take rents achievable into account, that is to say your lender will calculate the amount they are willing to lend against the potential income you may get from renting the property out. Some lenders will go even further, expecting investor landlords to consider building-up a mini property investment portfolio and be prepared to take on substantial levels of debt to do so. Loans of £15,000 to £1 million are available for periods from five to forty-five years and for up to 80 per cent of valuation.
As a rule of thumb, potential lenders will expect the rent to be charged to be between 130-150 per cent of the mortgage costs. They may also stipulate whom you may or may not take as a tenant. You may find diplomatic and DSS tenants are excluded. Some diplomats, in the past, have used diplomatic immunity to avoid paying rents, while DSS tenants may be excluded because some local authorities are late with rent payments and refuse to re-house tenants without a repossession order.
Exclusions on property type can include freehold flats or maisonettes and not more than one kitchen or five bedrooms in case the property is used for bedsits. Generally, it is a condition of buy-to-let mortgages that tenancy agreements are drawn up as Assured Shorthold Tenancies, except where the rental value exceeds £25,000 a year and falls outside the provisions of the Housing Act. Then a tenancy drawn up under contract law would apply.
The way you let your property out may be stipulated by your mortgage lender. You should make sure you are aware of the different kinds of occupancy and tenancy agreements that are open to you to arrange and the legal rights and obligations that are conferred by any agreement you enter into. Using a letting agent will take a lot of the work and worry of running a rental property off your back – an agent even arranges for repairs and refurbishment when necessary.
Your tax liability will be based on your net income from the property after you have deducted the following costs:
- interest payments on your buy-to-let mortgage ( but not capital repayments)
- mortgage arrangement costs
- maintenance costs (such as painting and decorating)
- 10 per cent a year depreciation of furniture value
- cleaning
- ground rent, service charges and buildings insurance, where applicable
- advertising the property
- letting agent's fees
- accountant's fees
- insurance policies on white goods, gas boilers, plumbing cover
- any incidental costs of disposal, such as estate agents and lawyers fees
- the original acquisition cost
- the cost of any capital improvements to the property
When it comes to calculating your selling price, you may deduct legal fees, estate agent's commission and advertising costs, but you can't claim the cost of any mortgage redemption penalties if you are redeeming a mortgage early. Once you have worked out your actual gain, you may then deduct indexation allowance for any periods of ownership up until 1998 and taper relief thereafter.
Letting property is not a trade. Almost all residential property is a non-business asset for CGT taper relief purposes. This is the case even when, for the purposes of income tax, the profits of your property business are worked out in the same way as if you were carrying on a trade.
Each of us is allowed to make a certain amount of capital gains each year before tax. Assuming you have made no other capital gains, this amount can be deducted from the 'tapered gain' to give the chargeable gain, which is treated as if it were a 'top slice' of income. Thus, for higher rate taxpayers the gain will be charged at 40 per cent and for basic rate taxpayers at 22 per cent. Bear in mind that the chargeable gain itself might be enough to push a basic rate taxpayer into the higher rate tax band.
If you move into your buy-to-let property after the last tenant has moved out, you may claim the property as your principal residence and, in doing so, the last three years' worth of gains become tax free. However, to claim this relief, you must actually take up residence and be able to prove that you live there - for instance, by having your mail redirected and being able to show that you used the facilities there by keeping copies of utility bills. An unmarried couple owning, say, two buy-to-let properties may claim one property each as their principal residence, providing they can prove that they really did live in each property for a certain period of time.
Furthermore, if the property was ever formerly your main residence (i.e. your home), you are exempt from CGT if you sell within three years of it becoming a rental property. Where a gain is made on disposal of a property that has been your main residence at some point, but has also specifically been let as residential accommodation, then a further special relief is available.
It may be possible to fragment the ownership among your family, to maximise the CGT annual exemption. However, if, for example, the property is owned by husband, wife and two children, then there would be four times the annual exemption available.
If you would like to discuss your specific property requirements
with us please contact us to arrange a meeting.
Your home may be repossessed if you do not keep up repayments on your mortgage.