In the UK, property has always been a favoured investment, whether as a home or as a Buy to Let (BLT) venture. Over the past few years, however, the financial landscape has changed and there are new implications such as changes in the tax regime for landlords and local authority charges to consider. So, is BTL still a good investment in 2023?
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Here we will take a look at the new legislation, how your rental income is affected, and how getting a loan agreement has been impacted.
How buy to let mortgages work
Most investors will need to take out a buy-to-let mortgage to purchase a property to rent out, and there are different rules which apply to this kind of loan agreement.
First of all, the deposit required is normally 25%, but this can increase to 40% with some lenders, although some may require a smaller amount. Most borrowers take out an interest-only mortgage, paying the interest on the loan each month but not the full capital amount.
Many buyers will take out an ISA at the same time and use this to pay off the debt at the end of the mortgage, or sell the property.
You will need to contact a property lawyer to help with your purchase and more information can be found online, such as Parachute Law Loan agreement advice with further information also available.
What are the tax consequences of a buy to let property?
Firstly, there is an additional 3% of stamp duty to pay on a BTL property over and above the standard rate for property in England. This rises to 4% in Scotland.
Secondly, since 2020, buy to let landlords pay income tax on the whole of their rental income, regardless as to what interest they pay on their mortgage, meaning you can no longer use an offset against interest costs.
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This has had a major effect on the economics of BTL for landlords. There is government guidance on how to work out your rental income and what level of tax you can expect to pay.
You may want to look at setting up a limited company since if you are in a higher tax bracket, you could be paying 40% on your rental income. By comparison, corporation tax is currently 19%. It would be worth seeking independent financial and legal advice to ensure that this is the right course of action in your circumstances.
Is Buy to Let still a good investment?
All investment involves an element of risk, but the history of UK property prices still makes the BTL market attractive.
Even given the tax changes, BTL can still offer a healthy income and return on your investment, especially since interest rates are still relatively low. You should be looking at a return of at least 8%, but this is definitely a long-term investment. Remember, however, that the income generated from rent is supplemented by the long-term capital growth in the value of the property.
