April 11, 2024 12:56 pm

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Nikka Sulton

In recent years, shifts in policies like mortgage interest relief and stamp duty surcharges have prompted landlords to question the viability of buy to let investments. These alterations have impacted profitability, coupled with an increase in mortgage costs.

The dilemma arises: is buy to let still a lucrative income stream, or is it time to reconsider its worth?


How has buy to let changed?

In November 2023, UK property prices experienced a significant decline, marking the sharpest decrease in over a decade and raising concerns about the riskiness of buy to let investments. 

The government’s intervention in the buy to let market has intensified in recent years, primarily through tax system adjustments. For instance, in April 2016, a 3% surcharge in stamp duty was imposed on additional properties, encompassing second homes and buy to let properties. Additionally, since April 2020, landlords no longer enjoy tax relief on mortgage interest payments, with higher-rate taxpayers receiving a flat-rate tax credit based on 20% of their mortgage interest. This change disproportionately affects landlords in higher tax brackets.

Furthermore, landlords now face altered tax reporting requirements, where they must declare the income used to service their mortgage, potentially pushing some into higher tax bands and resulting in larger tax liabilities. The impending Renters Reform Bill, which aims to enhance fairness for tenants, proposes various reforms, including restrictions on rent increases and limitations on landlords’ ability to impose blanket bans on tenants. Amidst these regulatory changes, mortgage rates have risen notably over the past year, further adding to the cost of obtaining a mortgage.


How have buy to let profits changed?

With the discontinuation of mortgage interest relief, landlords, especially those in higher tax brackets, have experienced a substantial decline in profits. Previously eligible for 40% tax relief on mortgage payments, higher rate taxpayers now receive only half of that relief. This alteration poses significant challenges for landlords with interest-only mortgages, particularly those subject to higher tax rates.

To illustrate the impact of these changes, consider a scenario where a landlord pays £500 monthly in mortgage interest while earning £1,000 in rent.


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?

Determining whether buy to let remains a viable investment extends beyond tax considerations. It hinges largely on the investment objectives and desired outcomes.

Outlined below are the advantages and disadvantages of buy to let as a means of generating returns.


Advantages of buy to let

  • Rental income can be lucrative, especially in high-yield areas like Sunderland, Dundee, and Glasgow, where it can reach around 8%. 
  • Additionally, there’s potential for capital growth as your property’s value appreciates over time. 
  • Mitigate risks by obtaining insurance to safeguard against loss of rental income, property damage, and legal expenses.


Disadvantages of buy to let

  • Post-April 2020, expect a higher tax bill, reducing your overall profits.
  • Potential property price decreases could diminish your capital, especially concerning with interest-only mortgages where you might need to cover any shortfall if the property sells below its purchase price.
  • Account for additional expenses such as stamp duty, insurance, and maintenance costs.
  • Landlordship entails significant responsibilities; ensure you’re well-prepared with our practical tips.
  • Be aware of the impending reduction in the capital gains tax allowance from £6,000 to £3,000 starting April 2024 when selling your buy-to-let property.

Many individuals opt for buy-to-let properties as a source of retirement income, sometimes withdrawing substantial sums from their pension funds to invest in this venture.

If considering this route, it’s crucial to consult a financial adviser beforehand. Accessing your pension pot carries significant implications and potential tax repercussions.


How do I get started with buy to let?

Here are the typical steps involved in becoming a landlord:

Step 1: Sort out your finances and consult a financial adviser to determine your investment amount and target returns. Also, engage with a mortgage broker to secure the best deal or obtain a mortgage in principle for swift property acquisition.

Step 2: Locate and secure your property. This process may vary in duration, but be prepared for a few months on average. Properties already rented may expedite the process, but it’s wise to anticipate timelines.

Step 3: Arrange insurance coverage. Besides buildings insurance, consider safeguarding against unforeseen expenses like tenant injuries, property damage, and rental income loss.

Step 4: Attract tenants. Whether through an agency or independently, choose the method that aligns with your involvement preferences. Even with familiar tenants, formalize agreements with legally binding contracts.

Step 5: Be hands-on with your investment. Regularly review your mortgage terms, conduct property maintenance, and ensure tax efficiency in managing your buy-to-let income, potentially with the assistance of an accountant.


What are some good alternatives to buy to let?

Buy to let investments offer steady income and potential long-term gains, yet they demand significant upkeep and tie up assets for extended periods. Assessing alternative investment options based on your goals is prudent.

  1. Real Estate Investment Trusts (REITs): REITs allow property market exposure without the hassle of property management. By pooling funds with others, investors can access commercial properties through publicly traded investment companies. While typically long-term, REITs offer greater liquidity than direct property ownership.
  2. Bonds: Bonds provide stable, low-risk investment avenues, with varying levels of risk. Investors lend to borrowers, such as governments or corporations, receiving fixed interest repayments over set periods. Government bonds (gilts) and corporate bonds offer different maturity options, from one to ten years.
  3. Peer-to-Peer Lending (P2P): P2P platforms facilitate direct lending to individuals and small businesses, yielding higher returns than cash savings or bonds. Despite increased risk and lack of Financial Services Compensation Scheme protection, P2P lending suits investors seeking higher potential returns and flexibility in investment amounts.
  4. Shares: Shares present higher risk but potential long-term rewards, with fluctuating values over time. While offering liquidity compared to property, shares require patience amid market volatility. Investors should be prepared for fluctuations and avoid investing funds needed in the short term.

Explore investment options further to align with your financial objectives. For more insights, consider our articles on renting or buying a house.





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