Buy to Let
Investing in a Buy-to-Let Property
When you buy a property to rent out, the loan is normally referred to as a “buy-to-let” mortgage.
Lenders apply different criteria to the terms they offer when you buy a home in which to live. In particular, they regard your loan as a commercial mortgage.
A deposit of between 20-25% of the purchase price is normally required, and if you can find 25% of the purchase price, this opens up a wide range of lenders and a spread of competitive terms and mortgage products.
What is Involved in Owning a Buy-to-Let Property?
You will be responsible for the normal purchase and maintenance costs, mortgage payments, plus all the other duties and obligations placed upon a “landlord.”
Using a Letting Agent
Agents usually charge around 10/15% of the rent but can offer a useful service and spare you some of the onerous responsibilities of a landlord. For example, they will find a tenant, collect the rents and generally manage the property.
If they screen applicants in an approved manner, their insurance company may guarantee the rents if the tenants fail to pay.
What Could Go Wrong?
Tenants could fail to pay their rent or move out, and there may be a gap before new tenants move in.
Even if you are not receiving a rental income, you will still have to make the mortgage payments.
You might need to dip into your savings if any of these events occurred.
Other expenses you need to consider are:
- Ongoing maintenance and repairs, i.e. leaking roof, etc.
- Fire and Local Authority Regulations – if you are served with a schedule of alterations or repairs, it could be expensive.
Realising Your Assets
With many investments, if you need cash, you may make total or partial withdrawals quite quickly with little or no cost or penalty, e.g. various Bank/Building Society deposit accounts, National Savings, unit trusts, etc.
However, if you need to “cash in” a buy-to-let property investment, you will need to sell individual properties and this will involve agents and solicitors’ fees, and of course you will have to wait for a purchaser to be found. You will also be subject to prevailing market conditions – if there is a lull in the property market you might have to accept a lower sale price than you would have liked, or wait some time to find a purchaser.
You are liable to pay income tax on the rental income you receive, charged at your highest marginal rate. There are a number of expenses you can offset against income tax:
Interest Payments on the Buy-to-Let Mortgage (but not capital repayments), Mortgage Arrangement Costs, Maintenance Costs (such as painting and decorating), Depreciation of Furniture Value, Cleaning, Ground Rent, Service Charges and Buildings Insurance, where applicable, Advertising the Property, Letting Agents Fees, Accountants Fees, Insurance Policies on White Goods, Gas Boilers and Plumbing Cover.
Capital Gains Tax
When you sell the property, you will be liable for Capital Gains Tax (CGT), but only on the profit you have made. You have a personal CGT allowance each year. If your property is held in joint names with a spouse or partner, you can add your allowances together. Any net gain is added to your total gains from other sources in the year, to determine the tax payable. If the property was formerly your main residence, (i.e. your home), you may be exempt from CGT if you sell within 3 years of it becoming a rental property. If the property was never your main residence, there is not likely to be an exempt period – Your potential CGT liability for any profit on the sale of the property is normally effective from the day you complete on the purchase.
This information is, however, subject to variation at any time and is only our own impression of how the current tax rules are applied.
It is essential that you consult your Accountant or tax professional to obtain clarity about your own tax position. HM Revenue & Customs (HMRC) publish their own “Property Income Manual” which is available at:
Our Qualifications and Experience
Regents Court Financial have three advisers who hold mortgage qualifications, and they all have skills, knowledge and experience of Buy to Let.
Our Principal has received National Industry awards for mortgage advice and in a previous career was an Estate and Letting Agent.