Nest eggs made of bricks and mortar

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The Independent Online

In planning for retirement a growing number of us are buying property to gain income from the rent. According to the Council of Mortgage Lenders, the value of buy-to-let loans increased to £1.6bn in the second half of this year, up from £1.3bn over the same period last year.

In planning for retirement a growing number of us are buying property to gain income from the rent. According to the Council of Mortgage Lenders, the value of buy-to-let loans increased to £1.6bn in the second half of this year, up from £1.3bn over the same period last year.

Even though property prices remain high, buy-to-let is still popular. "Towards the end of last year, there was a lot of talk that the buy-to-let bubble would burst," says Dominic Toller, Bristol & West's head of marketing for lending. "Since then, though, we have seen a change in confidence, and buy-to-let is looking a very strong market."

The slowdown in house prices may be persuading more people to enter the buy-to-let market.

"Those considering it will benefit from the fact that the market is now quieter," says Ray Boulger, senior technical manager at mortgage broker, John Charcol. "A less aggressive market makes it easier to buy a suitable property. People will not be pressurised into buying quickly, and are likely to have more control over the price they pay. The gains may not be as much as landlords have seen over the last two years, but property is still good for long-term investing."

Concern about retirement provision is persuading an increasing number to take the plunge. "Lots of people are concerned because of the reductions in the state pension and the low annuity rates," says Steve Royal, chief executive of Close Direct, a subsidiary of merchant bank Close Brothers. "So they are looking for other ways to build up a nest egg."

Close Direct recently launched the Enhance scheme aimed at higher-rate taxpayers wanting to invest in property. Enhance makes use of a little-known tax-efficient vehicle created in the late 1980s, the Funded Unapproved Retirement Benefit Scheme, or Furbs.

This scheme enables higher-rate taxpayers to put money aside and get tax advantages above the tax benefits of a pension. If a higher-rate taxpayer were to take out a buy-to-let mortgage, rental income would be taxed at 40 per cent. But with Enhance it is taxed at 22 per cent. And while normally 40 per cent would be charged on capital gains tax, with Enhance you would only pay 34 per cent. An Enhance Trust is also not liable to inheritance tax.

But while this scheme is worth considering, it is not suitable for everyone. All earnings from your property go into your Furbs account so you can't draw the lump sum or an income until you are aged 50 or over.

Increasingly, however, mortgage lenders do cater for those with disposable income looking for alternatives to the stock market; the loans are now more competitive with rates not much higher than on standard mortgages.

Most lenders will consider applications on the property details rather than your income. The maximum loan-to-value is 85 per cent, although most lenders only offer up to 80 per cent. You will have to satisfy the lender that the rental income will cover the mortgage; most require it to be 130 per cent of the mortgage interest. It is important therefore to do your calculations carefully.

* Contacts: the Council of Mortgage Lenders supplies the leaflets 'Buying to Let' and 'Thinking of Buying a Residential Property to Let', 020 7440 2255; Enhance, 0800 917 1993; John Charcol, 0800 718191.

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