Buy-to-let properties mean guaranteed, sustainable income well into your later years. That’s why many contractors are putting their hard-earned savings to work by investing in the property market.
A buy-to-let investment could guarantee you a source of revenue when contracts are few and far between, or help you build up a hefty retirement income. Improved lending conditions and rising property prices mean this investment is ideal for contractors. You could even discover that the long term profit potential is life changing.
However, there are costs involved, so it’s important to ensure that you know how to get the maximum return on your purchase. Here we share some expert advice to show you how you can make the most out of the buy-to-let market and continue earning big money long after retirement.
Can I make money from buy-to-let? Multiply your income now!
The buy-to-let market used to be available only to the privileged few. However, a combination of more innovative mortgage products and rising entrepreneurialism has seen many contractors successfully try their hand at becoming a landlord.
Mortgage lenders have cottoned onto the trend over the past decade, meaning there are now numerous providers who specifically cater for contractors and freelancers. So if you were concerned that your ‘unconventional’ form of income would impede your ability to secure a loan, let us put your fears to rest.
Buy-to-let offers arguably the most lucrative investment opportunity available to many contractors right now. This is down to a number of reasons, including:
- Continued rapid rise in property values
- Comparatively low interest rates on savings and ISAs
- Taxation on dividends wiping out significant portions of pension funds
- Tax breaks on offer from buy-to-let investments
In addition to this, buy-to-let mortgage rates are at very low levels, with lenders also often willing to lend up to 75% of the purchase price of the house. So, providing you have a decent amount saved up to begin with, and the numbers crunch well, now is a great time to enter the market and reap the rewards.
What is the stamp duty charge on buy-to-let? Unfortunately, the buy-to-let boom hasn’t gone unnoticed by the Government, which has raised stamp duty land tax (SDLT) rates for additional property purchases.
SDLT applies to increasing portions of a residential property price above £40,000. In other words, the first £40,000 is tax-free, but the amount exceeding this is charged SDLT at a rate depending on the threshold it falls into.
The current SDLT rates [for tax year 2016/17] are:
- Between £40,000 and £125,000 – 3%
- Between £125,001 and £250,000 – 5%
- Between £250,001 and £925,000 – 8%
- Between £925,001 and £1.5m – 13%
- More than £1.5m – 15%
Should you decide to sell your property, you will be charged Capital Gains Tax (CGT) on the fee received at the higher rate of 28%.
What expenses can be offset against rental tax? Rental tax is another outgoing you’ll need to be wary of, though it’s only due on the profit made from renting out the property. This is following deductions made for allowable expenses, which include:
- Letting agents’ fees
- Accountants’ fees
- Council tax
- Utility bills
Maintenance fees. At the time of writing [September 2016], mortgage interest is also classed as an allowable expense, although it’s being phased out from the 2017/18 tax year, with the changes set to be fully implemented by 2020. All is not lost though, as you’ll still be able to claim 20% tax relief on mortgage interest.
Rental tax is charged at the same rates as income tax, so it’s important to consider your overall annual earnings to determine how much rental profit is going to the taxman. There is, however, a way to minimise this outgoing.
How save tax on buy-to-let – find out how you can maximise your returns!
If you’re feeling adventurous, you might opt to run your property portfolio through a company. You can do this the same way you would open a contractor limited company, and there are potential tax advantages.
For one, companies are still able to offset mortgage interest against rental tax in full. In addition to this, rent is only taxed at the 20% corporation tax rate, regardless of your personal income. These two factors combined could result in huge cash savings.
It’s important to remember though, that you’ll have to factor in the combined costs of corporation and dividend tax when making withdrawals from company profits. It’s generally accepted that incorporating your property business works best from a tax and rent point of view, but it’s all dependent on your earnings and outgoings. You’ll have to do the maths to figure out what’s best for you!
Where can I get expert advice on property investment? Entering the property market is admittedly more involved than simply investing in stocks or a pension fund, but it’s also ultimately far more rewarding. There are initial costs involved, but soon enough you’ll find that a buy-to-let property pays for itself.
To guarantee that you’re getting the best value for your investment, check out our relevant content on tax and mortgages. Our know-how and expertise can help you maximise your returns, leaving you free to enjoy your new-found wealth.