In recent years buy-to-let has been a popular way of investing in residential property. Stock markets are out of favour with many investors who have seen the values of their portfolios, endowment policies and pension funds shrink, whereas property has generally continued to rise in value. Interest rates are at historically low levels and mortgage finance is readily available on competitive terms from major banks and building societies. This brings property investment within the means of more investors than ever before.
Buying to let pre-supposes that there is a tenant willing to rent the premises and provide the cash flow, which will service the borrowing and is only one of the factors, which need to be taken into account before entering into a commitment. These can be summarised under three main headings.
It has been said that the three most important matters to take into account when buying property are location, location and location and this maxim holds just as true for investment property,
- It should be situate in an area where tenants are looking to rent
- It should be attractive to tenants and be, for example, an apartment, penthouse or a period or modern house. Listed buildings or converted churches may have their appeal but it is to a narrower market
- It should be in, or brought into, good condition.
- It should be in an area where property is in demand, making a resale easier in the future.
For the right property mortgages are available both onshore and offshore, at competitive rates, from many of the major lending institutions and the terms can be negotiated. It is possible to obtain a loan on a repayment or interest only basis and for an agreed period. Whilst higher percentages are sometimes available we suggest not borrowing more than say 70% of valuation to avoid a cash flow crisis if interest rates rise and to allow for periods when the property is vacant. The lender will also be looking for a monthly rent of the order of 130% of the monthly repayment.
In the United Kingdom the investor will need to take into account the three main direct taxes,
- Income tax, which is payable on rents. Loan interest and the costs of repairs and maintenance are deductible
- Capital gains tax, which is not payable by a non- resident on the sale of a property held only as an investment and not as part of a trade or business.
- Inheritance tax, which is charged at 40% on the amount by which the aggregate value of chargeable assets exceeds a threshold, currently £263,000.
Exposure to taxation can be limited if, instead of the property being registered in the name of the investor, the title is held in the name of a company formed in a tax free area, the British Virgin Islands for example. This subject is covered below.
There is of course one other important factor in this equation,
It is important to take up references on a tenant both to ensure that he can pay the rent and that the occupants are likely to keep the premises in good condition. Amongst preferred tenants are professionals such as bankers, stockbrokers, financiers, solicitors etc. many of whom require a property only when they are in the city and who have no interest in purchasing.
Furnished or Unfurnished
This is a decision to be taken in the light of the objectives of the investor. If he is looking for a long- term tenant, unfurnished may be the answer. The typical tenant described above may prefer a furnished property however.
Structuring the investment
As mentioned above, in order to reduce exposure to taxation, the property should be registered in the name of an offshore company, the shares in which are owned by the investor. By this means our foreign domiciled, non-U.K. resident investor can,
- Eliminate completely any liability to inheritance tax
- If each property is held within a separate company, avoid the risk that on a future sale the proceeds will be treated and taxed as trading income.
It is very important that the company itself be managed and controlled from a non-taxing jurisdiction.