While it is true that significant gains have been made in capital values in the last few years and rental values have remained fairly consistent, investment in property for both income and capital return must still be viewed as a more volatile type of investment than some other traditional methods. Past performance is no guarantee of future gain. As seen in the past few months property values can decrease as well as go up.

In the vast majority of cases a loan to assist in the purchase of an investment property will be secured be way of a mortgage over a property. The property used as security may well be the investment property itself but in some cases the borrower may choose to use their own residential property as security for the loan.

Rates of interest available for buy to let mortgages vary greatly. Traditionally this sort of mortgage was considered to be more of a "commercial" proposition and as such the rates available reflected this, being higher than normal residential mortgages and only being available from a number of specialist lenders. In recent years more and more main stream lenders have experienced a demand for this type of loan and as such have developed products which cater for this market.

While many buy to let mortgages are still structured around a variable base rate it is possible to find lenders who are prepared to offer incentives such as fixed and capped rates for this type of lending. As the market becomes more competitive and lenders recognise the potential returns available in this sector it is likely that competition will increase and rates, as a consequence, are likely to become increasing competitive. This is all good news for the investor trying to maximise the return from their investment.

While individual circumstances may vary it should be appreciated that income received, in the form of rental income, is treated as earned income by the inland revenue and is taxed accordingly. It is therefore important to consider, and take advice on, your own tax position, before entering into this type of transaction.

There are however some benefits available to the investor to try and minimise their tax position in respect of rental income. In most cases the inland revenue will allow a borrower to offset interest paid on a loan used to purchase an investment property against the rent received. In some circumstances certain other expenditure may also be able to be offset so reducing the ongoing liability still further.

In the following simple example we assume an interest rate of 8% on an interest only loan used to purchase an investment property.

Property purchase price £80,000
Loan £60,000

Rental income received in tax year £6,500
Interest payable in tax year £4,800
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Rental income less interest paid £1,700

Income tax payable (assuming a rate of 23%) = £1700 x 23% = £391

While the total bill of £391 may not seem excessive, the overall return, in the example above, to the borrower is £1700 - £391 = £1,309.

Bear in mind that £20,000 was used in the example above as a deposit on the property and this money could have been invested in, for instance, a savings account during the same twelve month period. If we assume a net rate of return of say 5% on this money then the borrower has in effect given up £20,000 x 5% = £1000 of interest during this time to achieve a return of £1,309. Although the rate of return offered by the rental property in the example above is 6.54% as opposed to 5% received from the savings account, it can be seen that, taking all the factors into account the return available is not always as attractive as it may at first seem.

The factor that has not been accounted for in the above equation is the change in the capital value of the rental property itself. If the property has appreciated in value during the period then the effective return of the overall investment made is enhanced (although in the event of a sale there may be further tax implications through capital gains tax) but if the asset has depreciated in value during this period then the overall return may well have turned into an effective overall loss.

It is important to note that any rise in the value of a property not used as your own owner-occupied residence will be treated as a capital gain by the inland revenue. Careful tax planning is required for borrowers who believe that they may face a capital gains liability.

Although the amount of work involved may seem onerous rental property has, in the last few years, provided an excellent return on capital invested and although there is no guarantee that this will always be the case the large number of high street lenders now designing mortgage products to cater specifically for rental property purchase is an indication that the market still continues to attract new customers and is likely to remain a significant feature for the foreseeable future.