A guide to buy-to-let

11 November 2014

The benefits, tax implications and drawbacks of investing in buy-to-let property as a source of income in retirement.

From April 2015, retirees can take their whole pension as cash. This opens 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 major cost. Payable on buying a property, it is set in tiers depending on the price, and ranges from 0 to 7%.

  • Property forms part of your estate for IHT purposes, charged at 40% on everything above the £325,000 nil rate band.

Read Paul Lewis' guide to inheritance tax...

The downsides of buy-to-let

  • You will have periods 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? If you employ a managing agent you will lose a chunk of your income, at up to 13%.

  • 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.

  • Rental income could be eroded by rises in interest rates over the next few years. Mark Carney, governor of the Bank of England, has warned that rates could rise to 3% from the current low of 0.5% by 2017.

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 are able to use the 25% tax-free lump sum to put down a deposit on a property, you avoid being tied to one asset for retirement income.

  • The landscape is changing for older property buyers seeking mortgages. More lenders are willing to offer mortgages, including Bath Building Society, Kent Reliance, and The Mortgage Works.

  • Rental yields are attractive. According to Rightmove, they average 5.7% - and can reach 10% gross or more in the right area.

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

Find out more about buy-to-let mortgages.

An increasing number of the over-50s are investing in rental property. Known as ‘grandlords’, they are turning to the rental and the buy-to-let markets to supplement their retirement income. For more information about becoming a landlord, download our free guide

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.