The rental property market has faced many recent challenges besides COVID-19 and the interest rate base rate rises over the past year including a variety of new government measures, so is it still possible to make a decent income from buy-to-let in 2023?
Currently, Buy-to-let yields have hit a record low, fuelling fears that property investors will sell up. Landlords could soon turn a loss as higher interest rates bite, while the Government’s buy-to-let tax crackdown further amplifies the pain of soaring mortgage costs...
At the time of writing, the government bank of England base rate stands at 3% and is expected to increase further to 3.5% on December 15th.
Investing in Buy to Let can carry substantial risks and is only suitable for people who have the financial cushion to deal with unforeseen costs.
Managing properties is quite involved, particularly with new regulations for landlords which need to be followed through.
In this article, we cover ten considerations before acquiring a buy-to-let investment.
10. Buddy Up
1. Revised Tax Rules
As of April 2016, the government imposed a 3% surcharge on second homes and Buy-to-Let properties in England, Wales, and Northern Ireland.
For example, if you purchase a house worth £500,000, the surcharge would work out as an extra £15,000. This would be an additional expense to the usual stamp duty rates, which can be calculated here. For residents in Scotland, second homeowners must pay an extra 4%.
Have a look at HMRC's Stamp Duty Calculator which is updated regularly and can be used to calculate what tax is due. There are stamp duty reductions in effect which will last until 2025 as proposed in Jeremy Hunt's November 2022 statement. Further information can be found on the HMRC website
Tax relief changed in April 2020 where deductions are only allowed in companies and not for individuals. The interest that is charged by lenders can be written off against tax as an expense if borrowed from a company.
Individuals, do not have this benefit and are subject to tax depending on their band. Also known as mortgage interest tax relief.
Let’s compare landlords on the higher interest rate tax bracket vs lower income tax bracket. The monthly rental income of a property is £1,000 with mortgage interest payments of £400. In this scenario, we will ignore other expenses that can be set against tax.
Annual Rental Income: £12,000
Annual Interest paid: £4,800
Annual Tax on rental income:
Paying Tax at 20%= £2,400
Paying Tax at 40% = £4,800
Tax credit on interest (20% of £4,800) = £960
The bill you’ll need to pay
A basic rate taxpayer: £2,400- £960 = £1,440
Higher rate taxpayer: £4,800 - £960 = £3,840
Before April 2020, both owners could deduct their interest payments from the rental income before calculating their tax: £12,000- £4,800 = £7,200
The lower rate taxpayer had to remit the same in tax as the new system, £1,440. However, the higher rate taxpayer in this example paid £960 less = £2,880. Therefore, they are the ones who are really losing out on this new system. You’ll need to file an SA100 tax return yearly and this can be done by following this link.
2. Cutting Costs Through A Limited Company
To mitigate paying the extra income on your rental income, purchasing the property through a limited company can help as costs including mortgage interest payments can be deducted as a business expense. Instead, the company will pay corporation tax on profits which is currently set at 19%. This can change and to keep updated please follow this link.
As a landlord who is a shareholder within a limited company, you will be able to draw income in the form of dividends and take the money out at a time that suits you.
7.5% as a basic rate taxpayer
32.5% if you fall into the higher rate tax bracket
38.1% for the additional rate taxpayers
Please bear in mind that capital gains are also a consideration as the company will be liable for tax on gains if a property is sold at a profit.
For further information on how to set up a limited company, please visit the following link from Rapid Formations. You will be able to set up a basic limited company and a business bank account very swiftly. Read more on how to get a limited company buy to let mortgage
3. What is the Required Deposit Needed?
With a standard mortgage, deposits can now be secured with as little as 5% of the property price. The minimum deposit for a Buy-To-Let Mortgage is usually 25%, with a minimum income requirement of £25,000 per year.
As a specialist mortgage broker, we have access to lenders who only require 15%-20% of a deposit.
To be able to search and obtain a free no-obligation quote within 24 hours, follow the below following link to get started.
4. The Myth of First-Time Buyers Not Being Able To Qualify
Many lenders consider this group too risky and want to understand the reasons for wanting to own a Buy-To-Let property without having owned your own home. We have access to several lenders who consider first-time buyers, who would like to start their journey to becoming a portfolio landlord.
To understand how much you can borrow based on your rental income and what your rental income will need to be, use our free calculator to get an estimate. Buying a rental property can give a nice income stream, but it’s important to bear in mind the requirements and costs.
We will briefly explain how to calculate gross and net rental yields below.
5. Understanding What A Profitable Property Will Be
Before embarking on finding a mortgage for a Buy To Let property, you will need to understand first whether the property will be profitable for the lender to consider the loan.
Calculating rental yields is simple and can be done by taking the annual rental income of a property, dividing by the purchase price, and multiplying the figure by 100 to get a percentage. This will give you the ‘gross yield’.
To calculate the ‘net rental yield’, you will need to bear in mind the costs including maintenance, insurance, and management agent fees. Being able to show proof of being able to pay subject to the recent interest rate rise at the time of writing this article, will also need to be evidenced.
For example, say you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 2.5%, the monthly repayment will be £583.
But if the interest rate is 0.25% higher – the amount the bank rate increased in February 2022- the monthly repayment rises by £17 to £600. If you’re a fixed rate, you won’t see any change until the end of your fixed period.
A Buy to Let will be subject to capital gains tax if you sell the property. This is currently charged at
28% for higher-rate taxpayers
18% for basic rate taxpayers
It’s important to note that the gain will be added to your income if you’re currently a basic rate taxpayer, which could push you into the higher bracket.
6. Calculating Mortgage Fees
Some of the Fees and Interest rates can be higher for Buy-To-Let Mortgages compared to a standard mortgage. Mortgages are usually offered as interest only when it is an investment property, which means that the monthly payments will be lower than a repayment mortgage, however, you won’t be reducing your debt.
With an interest-only mortgage, there is plenty of flexibility to reduce your debt with lenders allowing you to repay a certain amount each year when your rental income is healthy. If your fixed term is coming to an end and you are looking for a remortgage, you can get started here
However, you’ll need to bear in mind that if house prices fall and you fall into negative equity, you may have to make up the difference which is why it is important to always build up enough financial cushion to not harm the growth of your property empire.
Accelerated Finance is a fee-free mortgage broker. We receive a fee from the lender once the finance is complete.
7. Cashing In Your Pension
Be careful if you are thinking of cashing in your pension pot to acquire a Buy to Let property. Only the first 25% of your pension pot will be tax-free if you choose to withdraw it. The rest is subject to income tax.
With this in consideration, you will be subject to stamp duty when you buy the property, tax on your rental income and eventually capital gains tax when selling the property.
8. Knowing The Area
Not being familiar with an area can lead to losses, especially in areas where the demand for rentals could be falling. It’s imperative to research extensively before investing. Have a look at some of the articles cited in Zoopla, or our most recent blog post on the best locations for to invest in a UK Buy-to-Let Property
It may be tempting to purchase a Buy to Let property in the area you live in but think about whether there is a big enough market for tenants. Going further afield may increase your options. With more and more people going on to further education, university towns and cities are hotspots for Buy to Let properties.
Register your property with the university housing services to increase your chances of ensuring your property is occupied each term. Properties within walking distance of major employers, shops and transport links are ideal, but try to avoid somewhere close to a nightclub, pub or fast-food restaurant, or on busy roads and junctions. You don’t want tenants complaining about noise, smells or fried chicken bones littering their front garden.
9. Check the EPC and Other Government Regulations.
From April 2018, landlords won’t be able to let a property with an energy performance rating of less than E, unless it’s a listed building, so if you’re thinking of buying a property within an EPC of F or worse, make sure you know how much the energy-saving improvements are going to cost before you commit.
There are over 100 regulations that landlords need to adhere to which you can find out more about it here.
10. Buddy Up
One of the options to help you expand your empire fast is to find a partner to go into business with. This could be an investment partner who can help you raise the capital you need to grow your portfolio. Or it could be someone who can help you manage your properties such as a tradesman who can work on renovations and onsite repairs.
If you’re setting up a partnership, it’s essential you take professional advice from the beginning. As well as choosing a name and registering with HMRC you’ll need to understand the rules and differences between Limited Liability Partnerships and a Company and adhere to them.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Your home may be repossessed if you do not maintain repayments on your mortgage