Buy to let - getting started

The popularity of buy to let investment is increasing. With very low interest rates people are looking for higher and relatively safe returns elsewhere and buy to let can seem attractive. There are pitfalls such as unforeseen repair bills, bad tenants, void periods and so on. These can be managed however and a regular income stream and the prospect of capital appreciation can make the investment worth the effort.

This blog is about helping you to get started by deciding on your strategy and the right structure.

So how do you go about finding a successful buy to let investment? Well the starting point is research. What properties let most easily? Where are the best returns? A good place to ask these questions is at your local letting agent. Often they will be more than willing to help as they see you as a potential customer. Some agents are even prepared to attend a viewing with you to give their advice on the suitability to let and what the rental might be.

When you have completed your research you can start to formulate your strategy. Will you be focussing on one or two bed flats, terraces or semis? Who are your typical tenants? What location will you invest in? Your strategy will be underpinned by numbers. This will show what returns you need to achieve over a period of time. You might set a long term goal of building up a portfolio of 4 or 5 properties and then work towards this in stages. Alternatively your ambitions might be more modest and one property may be all you want to invest in.

Another key decision after you have decided on your strategy is what structure you will use to invest in your first property. Will you invest as an individual, as a ‘partnership’ with other individuals or as a limited company?

Investing as an individual or shared ownership with other individuals is the simplest option administratively. There are other benefits too. The income on rental is free of national insurance. You are taxed at your ‘marginal’ rate of 20%, 40% or 50% depending on your other income. If your only income is from rental and your total rental income is below the personal allowance threshold (currently £9,440), your income will be tax free. Each person has a capital gains annual exemption of £10,900. This means that the first £10,900 of any gain on the sale of a property would be tax free.

If investing as a couple it makes sense to make use of the personal tax allowance and lower tax bands. So if one member of a couple is a relatively low earner it might be best to invest in the property in their name only (subject to mortgage considerations) to maximise tax relief.

There are usually higher administration costs in running a company. Another disadvantage there is often an additional tax charge when shareholders wish to extract any proceeds from the company. 

There are some advantages in using a company however if the following circumstances apply:

• You will be increasing your investment in residential property
• You are unlikely to be selling the properties on a piecemeal basis
• You are mainly financing the initial purchases from your own capital

If so, use of the company as a ‘tax shelter’ for the net rental income can be attractive. Corporation tax rates are relatively low so surpluses can be left to accumulate in the company to help fund the property portfolio. There are two long term advantages of the corporate route for residential property. Firstly it can be used to build a ‘retirement pot’. Over a period of time the financing can be paid off leaving a strong income stream to fund retirement. Secondly, if shares in the company are sold rather than the properties, this can be attractive to buyers due to the lower stamp duty rates on share sales.

In conclusion, for most investors, investing as an individual or through shared ownership is the simplest and best option. For serious long term investors or those looking to build a retirement fund, a company can be a sensible option. It would be a good idea to speak to an advisor in advance of investing to help you weigh up the pros and cons.

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