Buying an investment property – what do you need to consider?

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According to a report by Savills published on 18 January 2024, property prices fell by -0.2% and -0.3% across Prime Central London and Outer Prime London, respectively, during the final quarter of 2023. This represents a significant improvement on the fall in prices when compared to the year as a whole (the Prime Central London market recorded a total average drop of 0.8% across 2023).

This improvement reflects growing buyer confidence in the market, which is largely attributable to easing mortgage rates since the drop in inflation towards the end of 2023. As a result, an increased number of buyers may once again be considering the desirability of property as an investment option.

Finance arrangements

An immediate consideration for buyers assessing the viability of property as an investment option should always be: how will the purchase be financed? Whilst mortgage rates may never return to their previous low-levels, lenders do appear to be gaining confidence, with Barclays reportedly last week launching a two-year fixed mortgage at 4.17% (for buyers with 60 per cent loan to value), and other banks are set to follow suit.

Most lenders will require a minimum 75% loan-to-value in order to offer a buy-to-let mortgage for investment purchases, however this should be discussed with a mortgage broker as early as possible in order to ensure that the proposed borrowing is affordable, and commercially viable, and to avoid disappointment later on.

Structuring the purchase

Deciding how to structure the purchase and own the property, for example whether to hold the property in an individual name, in the name of a company, or on trust on behalf of beneficiaries (such as children), is another key consideration for investment buyers. Different methods of ownership can have significant effects on matters such as the amount of Stamp Duty Land Tax (SDLT) payable, future inheritance tax liability, capital gains tax calculations and other amounts that are required to be paid during the ownership of the property (such as income tax).

It is crucial to speak to a qualified accountant or tax specialist at the outset of the transaction, who will be able to provide advice on the most appropriate (and tax-efficient) method of ownership, which can depend on the intended use of the property, such as use as a holiday home or use for rental income.

Stamp duty

Once the preferred structure of the purchase has been determined, your property lawyer will be able to provide advice on the amount of SDLT that will be payable. SDLT is payable on completion of the purchase and is often the most significant tax implication of buying property in England. A similar tax, known as Land Transaction Tax (LTT), applies to purchases of property in Wales.

Crucially, since 1 April 2016, the purchase of a ‘second home’ by an individual buyer will result in an additional rate surcharge being payable in respect of SDLT. The additional rate means that such buyers will be required to pay 3% higher tax, which is added to each of the usual SDLT brackets. The surcharge means that the purchase of a second (or additional) property for £500,000 will now result in an SDLT liability of £27,500 – rather than £12,500 if the surcharge didn’t apply.

Separately, buyers who are primarily based overseas (for at least 183 days in the 12-month period leading up to completion) will additionally be subject to a further ‘non-resident’ SDLT surcharge of 2%. This measure was introduced on 1 April 2021, in an effort to reduce house-price inflation and help first-time buyers onto the property ladder. As a result, overseas buyers who also own a second property will now be subject to an increased SDLT liability of £37,500, based on a £500,000 purchase price.

Who pays for what?

Since the introduction of the Tenant Fees Act 2019, in the case of rental properties there are now strict prohibitions on private landlords attempting to recover certain outgoings from their tenants.

A landlord will, in most circumstances, now only be able to demand payments from their tenants in relation to monthly rent, a deposit payment (usually calculated as 6 weeks’ rent), council tax payments and the cost of utilities (such as electricity, gas, water and a TV licence).

In the event that the property is a leasehold flat, a landlord will be required to pay the annual service charges and ground rent due under the lease, without the ability to recover those sums from their tenants.

Additionally, the landlord will be required to arrange, and pay for, gas inspections every 12 months, and electrical inspections every five years. These inspections will usually be arranged by the letting agent on behalf of the landlord – and, don’t forget that the letting agent will charge a fee for their services too (ranging from around 6-8% of the monthly rent for a rent collection service, to as much as 12-15% for a fully-managed service).

Overseas entity registration

Any overseas-based companies that wish to purchase property in the UK will now first need to register with Companies House as an Overseas Entity, before they can complete the purchase, following the introduction of the Economic Crime (Transparency and Enforcement) Act 2022.

Specialist advice should be taken in order to ensure that the overseas company is properly registered, and has disclosed all relevant information to Companies House, to ensure that the requirements of the Act are complied with in full. The application process can be time consuming, so it is important to obtain advice and submit for registration as early as possible. Failure to comply with the requirements of the Act can constitute a criminal offence, for which directors of the company can be held accountable.

Landlord’s consent to sub-let (and alter)

When considering buying a leasehold flat for rental investment purposes, the provisions of the lease should be reviewed in detail, in order to ensure that any restrictions on subletting are complied with and all required consents are obtained.

Many leases will require that a subtenant enters into a covenant with the freeholder of the building, to confirm that they understand, and will observe, the terms of the lease throughout their period of occupation of the property. However, some leases (particularly for properties in Prime Central London) will be more restrictive and may require a formal licence from the freeholder which confirms their consent to the tenant’s occupation of the property, after reviewing the tenant’s references and carrying out ID checks.

Similar lease provisions may also apply in the event that you wish to carry out works to the property with a view to increasing its market value – as is commonly the case for investment purchases – and the landlord may request detailed plans and specifications, along with the opinion of architects and surveyors, before they will issue a formal Licence to Alter.

Instructing a lawyer

Whilst there are a number of additional considerations to keep in mind when deciding whether to invest in the property market, these can be successfully navigated with the assistance of an experienced property lawyer, who will be able to guide you through the legal implications of the purchase and the commercial decisions involved. The property market remains a potentially lucrative investment option for prudent buyers who have carefully considered their position.

At Boyletts Law, we have a strong track-record of advising investment buyers on all of their property considerations, both in Prime Central London and across the UK. We also have excellent connections with third-party advisors, such as tax specialists, who are on hand to assist.

Our aim is to ensure that the process remains as exciting and stress-free as possible, from start to finish. If you are looking for a conveyancing lawyer, please give us a call on 01279 295047 or complete our online enquiry form and we will be in touch.

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