February 8, 2024 11:47 am

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Nikka Sulton

In the past ten years, multiple alterations, such as modifications to mortgage interest relief and the introduction of a stamp duty surcharge, have raised doubts among prospective landlords about the viability of buy-to-let investments. The impact of these changes is evident in reduced profits for landlords, coupled with a notable increase in mortgage costs.


How has buy-to-let changed?

In November 2023, UK property prices experienced the most significant decline in over a decade, elevating the risk associated with buy-to-let investments. The government’s tightening grip on the buy-to-let market, particularly through tax system adjustments, has been notable. The introduction of a 3% surcharge in stamp duty on additional properties, such as second homes and buy-to-let properties, in April 2016, marked a pivotal moment. Additionally, since April 2020, landlords are unable to deduct mortgage interest before tax, altering the landscape for higher-rate taxpayers who previously enjoyed 40% tax relief on mortgage payments.

Under the current system, landlords now receive a flat-rate tax credit equivalent to 20% of their mortgage interest, impacting those in higher and additional tax brackets. The shift requires landlords to declare the income used for mortgage payments on their tax return, eliminating the previous practice of declaring rental income after deducting mortgage repayments. This alteration may inadvertently push some landlords into a higher tax band, resulting in increased tax liabilities. The prospective Renters Reform Bill, anticipated for passage this year, introduces numerous reforms to enhance fairness for tenants, prohibiting landlords from imposing blanket bans on tenants.

The Renters Reform Bill will implement new regulations specifying the frequency of rent increases, empowering tenants to contest unreasonable hikes. Concurrently, mortgage rates have experienced a significant surge in the past year. Despite a recent decline, securing a mortgage remains relatively more expensive.


How have buy-to-let profits changed?

With the elimination of mortgage interest relief, landlords, especially those in higher tax brackets, witness a substantial decline in profits. The removal of 40% tax relief on mortgage payments results in a halved tax relief, proving particularly burdensome for landlords with interest-only mortgages facing higher tax rates. To illustrate, a landlord paying £500 monthly in mortgage interest and earning £1,000 in rent experiences a notable shift in their tax implications due to these changes.

Before 2017
From 2020
Annual rental income £12,000 £12,000
Annual mortgage interest £6,000 £6,000
Taxable annual income £6,000 £12,000
Tax credit of mortgage interest 0% (£0) +20% (+£1,200)
Tax bill (lower rate) £1,200 £1,200
Tax bill (higher rate) £2,400 £3,600


Is buy-to-let still a worthwhile investment?

Assessing the worthiness of buy-to-let investments goes beyond tax implications, hinging on specific investment goals. Pros include the potential for lucrative rental income, particularly in high-yield areas. Additionally, capital growth may occur as property values appreciate, and insurance options exist to mitigate risks like rental loss and damage.

On the downside, tax changes post-April 2020 have increased bills, diminishing profits for investors. Property price declines can impact capital, especially for those with interest-only mortgages. Other crucial considerations involve factoring in stamp duty, insurance, and maintenance costs, underscoring the responsibilities associated with being a landlord.

Furthermore, selling a buy-to-let property after April 2024 could result in a higher capital gains tax, as the allowance decreases from £6,000 to £3,000.

Many individuals opt for buy-to-let as a retirement income strategy, withdrawing substantial sums from their pension pots for this purpose. If considering this route, consulting with a financial adviser is crucial, as accessing the pension pot carries significant implications and potential tax penalties.


How do I get started with buy-to-let?

The journey to becoming a landlord typically involves these five steps:

Step 1: Organize your finances and consult with a financial adviser to determine the investment amount and target returns. Also, talk to a mortgage broker for the best deal or a mortgage in principle, ensuring readiness to make an offer when the right property is found.

Step 2: Find and secure your property. This process might be quicker if the property is already rented, but it’s advisable to allocate a few months for the overall procedure.

Step 3: Obtain insurance. In addition to buildings insurance, safeguard against unforeseen costs such as tenant injuries, property damage, and loss of rent.

Step 4: Locate tenants. Whether through an agency or privately, choose the option that suits your involvement level. Even with known tenants, create a legally binding contract.

Step 5: Buy-to-let requires hands-on management. Regularly review your mortgage, conduct property maintenance, and ensure tax efficiency in handling buy-to-let income, seeking assistance from an accountant if needed.


What are some good alternatives to buy-to-let?

Buy-to-let is an investment with regular income and potential long-term yield, but it’s high-maintenance and less accessible. Explore alternatives:

  1. Real Estate Investment Trust (REIT): Invest in the property market without direct property ownership. REITs pool funds, often in commercial properties, offering a more liquid investment.
  1. Bonds: Stable, low-risk investments with fixed interest rates. Government bonds and those from large UK companies are available, with varying terms from one to ten years.
  2. Peer-to-Peer Lending: Directly lend to businesses and individuals through platforms, generating higher returns than cash savings or bonds. Higher risk, but suitable for those seeking higher potential returns with smaller investment sums.
  3. Shares: High-risk, volatile investments with potential long-term rewards. Shares offer liquidity compared to property, but be prepared for market fluctuations and invest with a long-term perspective.



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