In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.
The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.
Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.
However, the gross return from buy to let properties – ie the rent received less costs such as letting fees, maintenance, service charges and insurance – is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.
Factors to consider
Do
- think of your investment as medium to long-term
- research the local market
- do your sums carefully
- consider decorating to a high standard to attract tenants quickly.
Don’t
- purchase anything with serious maintenance problems
- think that friends and relatives can look after the letting for you – you’re probably better off with a full management service
- cut corners with tenancy agreements and other legal documentation.
Which property?
Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.
Agents
Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.
Tenancy agreements
This important document will ensure that the legal position is clear.
Taxation
When buying to let, taxation aspects must be considered.
Tax on rental income
Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for furnishings.
Tax on sale
Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any annual exemption available and is then taxed at either 18% or 28% or a combination of the two rates. CGT is payable on 31 January after the end of the tax year in which the gain is made.
Student lettings
Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.
Advantages
This is a cost effective way of providing your child with somewhere decent to live.
Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.
As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.
The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’. This is £4,250 each year. In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.
Furnished holiday lettings
Furnished holiday letting (FHL) is another type of investment that could be considered. This form of letting is short holiday lets as opposed to letting for the residential market.
The favourable tax regime for furnished holiday letting accommodation has been significantly amended. Most importantly the regime has been extended to cover qualifying property located anywhere in the European Economic Area (EEA). This extension is effectively backdated and means that it may be possible to claim the benefits of FHL treatment of losses and capital gains in UK tax years within the normal four year time limit.
The conditions necessary to qualify for FHL treatment have been amended from 6 April 2012. From that date the property will have to be available for letting for at least 210 days in each tax year and must actually be let for 105 days. Provided that there is a genuine intention to meet the actual letting requirement it will be possible to make an election to keep the property as qualifying for up to two years even though the condition may not be satisfied in those years. This will be particularly important to preserve the special CGT treatment of any gain as qualifying for the lower CGT rate of 10% where the conditions for Entrepreneurs’ Relief are satisfied.
One area of previous benefit which has now gone is that losses arising in an FHL business can no longer be set against other income of the taxpayer. This change applies for the 2011/12 tax year onwards. It also becomes necessary to segregate losses into UK losses and EEA losses. Each can only be offset against profits of the same or future years in each relevant sector.
FHL property has some advantages but it has other disadvantages which should also be considered.
Advantages
You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.
Generally however the rules for allowable expenditure are more generous.
Disadvantages
Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).
Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.
If you would like any further advice in this area please get in touch.
How we can help
Whilst some generalisations can be made about buy to let properties it is always necessary to tailor any advice to your personal situation. Any plan must take into account your circumstances and aspirations.
Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.
We would be happy to discuss buy to let further with you. Please contact us for more detailed advice.