| The basic idea underpinning the Buy-to-Let sector is to invest in property in the expectation of capital growth, and in the meantime earning rent which can be applied to cover the costs of ownership. |
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Many investors were encouraged by soaring house prices, but it is now clear that prices could not continue upwards at such a rate, nor can rent levels always be sustained, and it may not be possible to cover mortgage repayments out of rents. |
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Typically a rental yield of about 6% is required to cover mortgage interest of about 5% and any additional costs such as letting agents' fees, but yields can be as low as 3% (and as high as 9%). Please remember that the greater the borrowing, the greater the risk. |
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However, experts believe that Buy-to-Let investors can expect a reasonable rate of return on their capital if they take a long term view of at least seven years. Properties should be chosen with care, in areas where tenant demand is high. The cautious investor will build up a cash reserve to be able to cut rents or go without a tenant for a couple of months, if necessary. |
The Student Scene
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One special area where Buy-to-Let makes very good sense is in the provision of accommodation for student members of the family. Traditionally, this has involved paying out fairly high rents over a period of three or four years and seeing nothing in return (except perhaps a sizeable student loan). |
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By buying a house in the university area, your children can be assured of somewhere decent to live and should be able to cover most of the costs by renting rooms to other students. |
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The situation presents significant tax saving opportunities, but the correct formalities need to be observed. Lenders may be happy to offer a mortgage to a student if the parents act as guarantors, and good rates could be available to the student first time buyer. |
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The property should then qualify as the student's principal private residence and so capital gains tax (CGT) exemption will be available on any profits from the eventual sale. The rental income is potentially subject to income tax under the Schedule A business rules, which allow a proportion of the running costs (including mortgage interest) to be claimed against the rent. Alternatively, the provisions of the Rent a Room scheme allow the first £4,250 of rent in each tax year to escape tax, with any excess rent over £4,250 being taxed in full. |
Furnished Holiday Lettings (FHLs)
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In the 2009 Budget it was announced that the special tax treatment of FHLs would be abolished from 6 April 2010. In the lead-up to the General Election the abolition was scrapped as part of a fast-tracking of legislation. The Labour party has said that it will reinstate the abolition in a new Bill if re-elected. |
Main residence
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If a property has, at any time, been your main residence for CGT, it may also be possible to claim the residential lettings exemption as well as exemption for the period of occupation as your main residence and the final 36 months exemption. |
