What does the future hold for buy to let?

The buy-to-let property market is looking on shaky ground. What does this mean for investors in the space?

Higher interest rates, unfavourable tax changes and a shaky housing market have been hitting buy-to-let investors where it hurts.

So, with the current 'crisis' in mind, does it have a future?

The old maxim ‘an Englishman’s home is his castle’ still holds true today, with homeownership a key financial priority for most Britons.

Such is the nation’s fondness for bricks and mortar that many choose to own multiple houses. Offering the prospect of a regular income and lucrative growth potential, property is commonly used as a pension and investment vehicle.

This explains the popularity of buy-to-let mortgages. Since the first product hit the shelves in the mid-1990s, millions have borrowed money to build property portfolios, in many cases enjoying lucrative returns.

But the market’s future is looking increasingly fragile. The combination of an uncertain economic outlook and several unfavourable tax changes in the past few years is lessening the attraction of property as an investment proposition.

Here, we analyse whether the buy-to-let market is running out of steam.

What does the current market look like?

Figures underline just how popular buy-to-let has become; the market now comprises 2.82 million landlords, collectively owning a reported £1.8 trillion in property assets.

If you were one of the lucky ones who bought properties in the 90s, you’re probably sitting on some juicy returns right now. Perhaps you’ve already realised them.

While property has always proved a solid long-term investment, the past quarter of a century has been particularly fertile. The average home has doubled in price, even after factoring in inflation.

And even though prices aren’t currently skyrocketing, they are still ticking upwards as we head into 2025.

Rental incomes are growing at a rate of 5.4% a year - down from 10.2% the previous year and the lowest level for three years. However, much depends on location, with rental income up 10.1% in Belfast and 8.8% in Newcastle.

What does the future hold for buy-to-let?

Interest rates now look like they are back on a downward trajectory. The Bank of England base rate stood at 4.75% in November 2024, falling from a peak of 5.25%.

However, while rates have fallen and are expected to fall further in the coming year, mortgage rates are slow to follow after initially decreasing. At the time of writing, the combination of the UK Autumn Budget and the US election had injected some uncertainty, and fixed mortgage rates were still rising.

At the end of 2024, Savills is predicting house prices will grow by 23.4% over the next five years while rental growth is expected to achieve a 17.6% rise over the same time period.

How have tax changes affected buy-to-let?

While tax isn’t the only consideration when eyeing an investment opportunity, it can make a sizeable dent in any potential growth and income.

The tax treatment of buy-to-let has become increasingly unfavourable in recent years. So, what’s changed?

Capital gains tax (CGT)

Currently, the rate of CGT on residential property is 24% if you pay the higher or additional rate of income tax or 18% if you are still a basic rate taxpayer once your taxable capital gain is taken into account.

This is the same as the rates charged on gains on investments and other chargeable assets, which were equalised with property rates in the Autumn Budget in 2024.

The rate charged on property gains was reduced from 28% to 24% in April 2024. But while that was good news for landlords, it followed successive reductions to the CGT allowance which has fallen from £12,300 in 2022/23 to £3,000 today, increasing CGT bills for those that pay the tax.

Learn more: Can I avoid capital gains tax on my buy-to-let property?

Replacement relief

Until April 2016, you could claim 10% from net rents to cover the ‘wear and tear’ of furnishings and fittings without needing to provide receipts. But this was scrapped and succeeded by the less favourable replacement relief.

In order to claim, you now must provide itemised receipts - for instance, showing the cost of new carpets - if you wish to offset the costs against your tax bill.

Mortgage interest tax relief

Funding a property purchase through buy-to-let previously came with other tax perks. Prior to April 2020, you could offset mortgage costs against your tax bill at your marginal rate of tax. So, if you were a 40% taxpayer, you could claim relief at this rate.

However, this was replaced with a 20% tax credit regardless of the rate of tax you pay. This significantly reduced the relief rate available to landlords who pay the higher or additional rate of tax, who would have previously been able to claim 40% or 45% relief.

One way around this is to set up your buy-to-let dealings through a limited company, where all mortgage payments are deemed an allowable business expense. There are other things to consider here, and you should take expert advice from an accountant before taking action.

Stamp duty

Buy to let lenders need to factor in the cost of stamp duty. In addition to the standard rate of stamp duty, people buying a second property need to pay a surcharge. This started at 3% but increased to 5% in October 2024.

That now means a landlord would pay £15,000 more in stamp duty  on a £300,000 property, than a buyer purchasing their own home.

Concerned about how you might be affected?

If you’re a buy-to-let landlord, you may wonder what to do next. You’re probably asking yourself key questions, such as whether to lock into a fixed rate or use capital to reduce some of your outstanding loans.

Whatever your situation, Unbiased can connect you to an expert who can help.

Click below to speak to a regulated mortgage broker who can help you make the right decisions with your buy-to-let property portfolio.