Buy to Let

How to read the buy to let market

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Converging factors mean now could be the ideal time for investors to get into buy to let or for existing landlords to expand their buy-to-let portfolios. Here’s why.

More than 20% of the UK’s households rent their home privately. High average house prices mean first-time buyers are getting on the housing ladder later in life and renting for longer, while the demands of a flexible workforce have mean that proportion is only likely to increase.

As a result, rental property appears to be an attractive investment for those looking for a decent longer-term return on their money. But is it really that easy? Since April 2016, a number of changes to the tax regime have impacted potential returns on buy-to-let property, while changes imposed on lenders’ underwriting criteria have also made the position more difficult for some. Would-be landlords need to be aware of the changes and make sure their investment really does deliver.


In recent years the number of lenders offering buy to let has increased massively. This competition has forced the interest rates charged down to record low levels, making property investment attractive to more people. But at the same time, the government’s changes have made it less attractive a proposition for many.

For a start, landlords can no longer offset all of your mortgage interest payments against rental income as an allowable expense. The new rules started to be phased in from April.

It will take four years to creep entirely into the new system, giving landlords a bit of time to adjust. But you need to be aware of the impact of the changes on your tax bill right now, as not only it will affect your future investment strategy, it will directly impact your next tax return.

What’s happened?

From April, the ability to offset your property finance costs as an allowable expense started to be gradually replaced by what is effectively a 20% tax credit against your rental income, regardless of your tax rate.

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Who will lose out?

According to the government, only one in five landlords will be negatively impacted by these changes, and the burden will be borne by those with higher incomes.

Those with any mortgages on their investment properties will have the extra administration of adjusting to the new regime, although if you submit your tax return online the government says the new calculation will be automatically made for you.

If you are a basic rate taxpayer you may not see much change in your overall tax bill, unless you are on the cusp of higher rate tax, in which case the changes could push you over the edge.

Ying Tan, managing director of The Buy to Let Business, says: “Landlords within the higher tax bands will be affected primarily, however the changes could push some lower rate tax payers into the higher rate bracket as they’ll now be taxed on rental revenue and not just profit.”

The National Landlords Association estimates that more than 200,000 landlords who are currently higher or additional rate taxpayers stand to lose out directly, while hundreds of thousands more could be pushed into the higher rates without any change in their income.

It also estimates that from 2020, when transitional protections end, the cost to landlords will be broadly equivalent to a typical loss of benefit of £1,497 a year per mortgaged property for a higher rate taxpayer, or £1,872 for additional rate taxpayers.

Your individual circumstances will determine exactly how much tax you will pay but, for some landlords, the new system could mean a shift from a profit-making position on their portfolio to a loss.

It’s vital that you understand the total effect of the tax changes in your bottom line, so you can review your portfolio and, if necessary, change your strategy.

But what can you do?


Become a business: You could consider buying investment properties through a limited company structure which is taxed in a different way. As Tan points out: “This can be a smart move as operating as a limited company also means you will avoid the Prudential Regulation Authority rules. That being said it’s not for everyone and there are costs involved.”

Smart tax move: If your partner is a non-taxpayer or basic rate taxpayer and you pay a higher rate of tax, you could look into transferring your investment properties into their name to save money. Seek independent tax advice before doing this.

Increase your income: It’s not always possible to increase your rent but it’s something to consider, especially with the slew of hikes to your expenses seen in recent years. Tan suggests this is already happening across the UK: “Rent increases have already come into effect as many landlords try to mitigate the higher costs of buying to let.”

Trim your outgoings: If you use a letting agent it might be worth trying to negotiate your fees, or consider managing the property yourself. And if you can switch your mortgages to cut your monthly outgoings this could make a huge difference to your profit. Offsetting your savings against your mortgage to reduce your interest has, until recently, been avoided by many landlords. But the new income tax regime makes offset buy-to-let deals worth a second look.

Goodbye to buy-to-let: Perhaps the tax changes simply make your investments unviable or maybe they are the straw that broke the camel’s back. Selling up will be an option for some landlords to consider, especially if you can currently achieve a profit.

Next steps

There’s a lot to consider which is why it’s important to seek advice from a tax specialist. They can look at your overall portfolio, your wider finances and your long-term plan before advising you of the best way forward.