personal finance

A guide to buy-to-let


Since back in April 2015 retirees have been able to take their whole pension as cash. This opened up a wide range of options, including investing the sum or using it to buy a property.

The combination of regular income from rental property alongside potential for house price growth is appealing. However, there are major pitfalls to this approach, particularly when it comes to tax.

Here’s what you should consider before taking the plunge with buy-to-let property:

What are the tax drawbacks of buy-to-let?

Property is expensive, and while you can take 25% out of your pension as a tax-free cash sum, you will pay tax at your personal rate on the remainder. You could push yourself into the higher-rate tax band by taking a large sum out. Drawing smaller, regular sums across the years will prompt a lower tax bill.

If you buy a property to rent out and later sell it, beware capital gains tax on any profits made from the sale. This is charged at 18% or 28%, depending on your overall income and gains in a tax year.

Stamp duty is another potential major cost. Assuming you already own another property, buying an additional property for buy-to-let purposes will in most cases incur a 3% surcharge on your purchase.

Then there’s the matter of inheritance tax (IHT). If your buy-to-let mortgage is just in your name as an individual and owned only by yourself – then you’re liable to IHT if your property is valued above £325,000 (minus any outstanding mortgage or combined value of your estate).

If the buy-to-let property is jointly owned with your spouse or civil partner, then you each have a threshold of £325,000, with IHT starting at £650,000. Anything above these amounts will be taxed at 40%.

The downsides of buy-to-let

* You may have spells when the property is unoccupied and you won’t receive rental income.

* Managing a buy-to-let property can be a headache. Are you prepared to sort anything from boiler breakdowns to tenants who leave it in a state? And you employ a managing agent you will lose a sizeable chunk of your potential income.

* Moving from a tax-efficient environment in a pension to a single asset (one property) is a risky approach to investment. Typically, a diversified approach is better.

Read our guide to things to look for in a good buy-to-let property

What are the benefits of buy-to-let?

* Buy-to-let offers a regular income (aside from vacant periods) with the potential for capital growth.

* If you’re able to use your 25% tax-free lump sum to put down a deposit on a property, you avoid being tied to just one asset for retirement income.

* Rental yields can be attractive, averaging around 5% and reaching a 10% gross or much more in the right area.

* You will own a tangible asset. You may find this more appealing than a statement on an investment account.

And bear this in mind too when you buy-to-let…

Buy-to-let is a business – not an investment or a hobby. It requires a clear insight into the property market, knowledge of rents, ability to deal with tenants, usually paying an agent and a clear business plan at the start.

It also needs faith that property prices will rise enough to protect against any losses and ensure a capital return when you need it.

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