Buying to let

With property in the UK being usually a good long-term investment, buying to let is often a highly attractive prospect for those who can afford it. But despite what you may have heard, it’s not a licence to print money. There is a lot of work involved and the overheads can be considerable. You will also need a special kind of mortgage, which presents more challenges than the standard home-buyer’s mortgage.

Buy-to-let mortgages

You will almost certainly need to be a homeowner yourself in order to be offered a buy-to-let mortgage.

Most buy-to-let mortgages are interest-only, which means your payments only cover the interest and do not reduce the capital sum of the loan. In most cases you’ll repay the loan when you sell the property – but if property prices fall then you run the risk of losing money.

Expect to be charged a higher interest rate and much higher fees than with an ordinary mortgage. You will also need a deposit of around 25 per cent of the property’s value (a few lenders require less, some much more).

Most lenders also require you to have other income (i.e. not from the rent on this property) of at least £25,000 a year.

Also note that buy-to-let lenders are not regulated by the Financial Conduct Authority (FCA). For this reason it’s highly advisable to go through a mortgage broker who is regulated.

The best way to start is to book a free mortgage review with a regulated adviser. Just click the special offer below.

Buy-to-let and tax

Many first-time landlords forget to take tax into account when doing their calculations. Income from rent is just like income from any other source, and so is subject to income tax. Take extra care if you are already near one of the tax bands, as income from your rental property could push you into the next tax band – making a serious dent in your profits.

Buy-to-let tax relief

Until April 2017, landlords can deduct mortgage interest from their rental income before the tax they owe is calculated. This is known as buy-to-let tax relief. However, from April 2017 the tax relief is changing to a flat rate of 20 per cent. Higher-rate and additional-rate taxpayers (who currently receive 40 and 45 per cen tax relief respectively) will therefore have to pay more tax.

The change may also push some landlords into a higher tax bracket, because the tax bracket will be worked out before interest is deducted. THis change will be phased in over three years, starting in 2017.

Stamp duty

All second and subsequent properties (including all buy-to-let property except corporate buildings) are subject to an additional 3 per cent stamp duty.

Capital gains tax

Tax may also be a factor when you sell the property. As it isn’t your primary residence, any increase in its value may be subject to capital gains tax. Anything over your annual allowance (£11,100 in 2016/17) is taxable at 18 per cent (or 28 per cent if you are a higher-rate taxpayer).

Capital gains tax must be paid by the end of the tax year. However, from April 2019 it must be paid within 30 days of the sale of a property.

Reducing your tax bill

Necessary expenditure may be tax-deductible, which means it can be set against your profits when calculating how much income tax you owe. For this reason it’s vital to keep detailed accounts of everything you spend on the property.

Tax is such a big factor in buying to let that it’s highly advisable to have an accountant to keep track of it all and improve your tax efficiency – particularly if you have more than one rental property. Find an accountant here.

To discuss the implications of the tax reforms to buy to let, speak to an independent financial adviser. You can find one here.

Questions to ask your mortgage broker:

  • How much can I borrow?
  • How big a deposit do I need?
  • How can I achieve a lower interest rate?
  • Can I extend the mortgage term?
  • What are the risks?