Buy-to-let properties can be a great way to grow your wealth, but there are several important factors to consider before you invest. In this short guide, we’ll explore the key points to help you make an informed decision about buy-to-let.
What are buy-to-let properties?
A buy-to-let property is designed for those individuals who want to rent their property out to other people rather than living in it themselves. Buy-to-let mortgages work very differently to normal mortgages.
Lenders consider buy-to-let mortgages to be higher risk than standard residential mortgages. This is largely due to the uncertainty of rental income, as properties can sometimes be unoccupied or tenants may fall behind on payments.
What costs are associated with buy-to-let properties?
Similar to residential properties, there are many costs associated with buy-to-let properties.
- Mortgage fees – as well as monthly fees, buy-to-let properties typically require at least a 25% deposit.
- Stamp duty – this is likely payable on all buy-to-let properties if they are worth more than £40,000.
- House valuation – to assess the property’s market value before purchase.
- Legal fees – you’ll be required to comply with regulations such as gas and fire safety standards, which can involve additional costs.
- Letting agent fees – a letting agent can manage your property portfolio for you, from finding appropriate tenants, liaising with them on a regular basis as well as sorting any property repairs that arise. You typically pay a certain percentage of your monthly rental income for this.
- Day to day running costs – such as monthly buildings insurance, wider landlords’ insurance and property decoration and updates.
Are there still good investment opportunities with buy-to-let?
As the Bank of England base rate has come down to 4%, investing in buy-to-let could be a good opportunity, as lenders are more likely offer better mortgage rates and terms. Buy-to-lets are also a great investment opportunity to add to your financial portfolio, offering the potential for regular rental income, long-term capital growth, and valuable tax advantages when structured correctly.
How to prepare for your first buy-to-let property
- Ensure you understand your legal duties – there are many legal obligations associated with buy-to-let property and before you allow tenants, it is crucial you meet all legal requirements.
- See what mortgage options are available and most suited to your situation – looking at the mortgage options available and tailoring them to your circumstances, whether you’re a first-time landlord or expanding your portfolio, can help you maximise returns and avoid costly mistakes.
- Secure reliable tenants – one of the key issues with investing into buy-to-let property is tenants not making payments on time. To avoid this ensure you carry out tenant screening. Things like credit checks, employment references, and previous landlord references will help ensure you find a reliable and suitable tenant.
- Set a clear budget – before looking into buy-to-let set a clear finance plan so that you can ensure you can afford all additional costs that come alongside it such as mortgage payments, property updates, operational expenses, estate agent fees and more.
What are the tax considerations associated with buy-to-let properties?
Income tax or corporation tax – Depending on how you own the property, either in your personal name or via a limited company, influences how much tax you pay on the profit you make. If you own the property in your own name, you will pay income tax which is charged at 20% for basic rate taxpayers, 40% for higher rate and 45% for additional rate. If you own it via a limited company, the Corporation Tax rate is 25% for companies with profits over £250,000, and 19% for companies with profits below £50,000. Please note that these corporation tax bands may be reduced if shareholders have control over other companies. For example, if an individual owns a company that holds their buy-to-let properties, as well as two trading companies, the threshold for the 25% tax rate will decrease to £83,333 (£250,000 ÷ 3), and the threshold for the 19% rate will reduce to £16,667 (£50,000 ÷ 3).
Capital gains tax (CGT) – when selling the property, CGT will be due if the property’s value has increased since you purchased it. If a taxpayer still has any of their basic rate band available in the tax year of selling, the portion of the gain falling within that band will be taxed at 18%. Any gain exceeding the basic rate band will be taxed at 24%. Higher and additional rate will pay CGT at 24%. However, the first £3,000 of gain is covered by an annual exemption.
Inheritance tax – Buy-to-let properties are not exempt from inheritance tax. They will form part of your estate and may be subject to 40% tax upon death, unless the value is below the ‘nil rate band’ of £325,000.
Thinking of investing in a buy-to-let property?
The buy-to-let property industry can be a difficult landscape to navigate so it is important you understand all the areas before you commit to an investment and take on the responsibilities of being a landlord.
At PM+M, our expert mortgage director, Mark Chadwick, is here to help. Whether you are navigating the buy-to-let mortgage market for the first time or are an experienced investor, he will help you find the right deal, structure your finance efficiently, and guide you through the process with confidence.
Contact us
For further advice and to explore your options, please contact our mortgage director, Mark Chadwick, by clicking the button below.
PM&M Mortgages Ltd is an Appointed Representative of The Right Mortgage Ltd, which is authorised and regulated by the Financial Conduct Authority.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Some buy to let mortgages are not regulated by the Financial Conduct Authority.
