hotdog, the plan makes sense, it is just a case of working the numbers through.  We planned to do something similar (although the property prices involved were lower) last year, and we did it as follows:

Bought the new place outright, using savings for the deposit, and got an offset mortgage for the remainder.

The plan was then to renovate the old place, remortgage for as much as possible, and then use the funds raised in the offset mortgage on the residential property.  (as it happened we decided to sell it to release more funds, avoid CGT and buy properties in a different area).

One pitfall you need to be aware of is that if you decide to sell the current house more than 2 years after moving out of it, then any monies made will be liable for Capital Gains Tax.

The advantage of doing it this way however is that you are maximising you tax, by having as large a mortgage as possible associated with the rental income.

Finally, make sure that you have sufficient funds behind you to be able to pay for both, with no rental income for at least 6 months, and remember that interest rates are expected to rise again, so factor this in.  You dont want to expose yourself so far you end up losing both just becuase you have a lean period on renting it out.  Also consider what would happen if you lost your job tomorrow.
 

I have a house worth 425K - i have outstanding mortgage of 30K.  I want to be able to borrow against the value of the house say £360K in a buy to let way, then let that house for say a monthly income of £1600-£2000. 

I then want the £360K  raised and the income from the buy to let to go towards another property valued at £500K in which the remaining £160K mortgage would be paid for via the income from letting.

Can anyone advise me of the pitfalls and or any errors i am making?

Cheers