Buy to let property investment hurdles - what first time would-be landlords need to know and is it worth it?

By David Nicholson | Tuesday 1st March | 4 minute read

In recent years, the rewards from buy-to-let investment and property trading have come under attack. For those looking to invest in buy-to-let (BTL) property they are many pertinent questions - Is it still worthwhile? Has it got more expensive? What’s changed and what do first time would-be landlords need to know?

Buy to let property investment hurdles

A concerted government campaign to level the playing field for first-time buyers pushed up the cost: first in 2016 with an additional 3% stamp duty land tax (SDLT); then in 2017 mortgage and loan interest relief was slashed on second homes - with the relief removed altogether by 2021; and then in 2019 came the Tenants Fees Act which dramatically reduced what landlords could charge tenants for their services. 

Despite these recent hurdles, UK property investors appear undaunted. Since 2017 the value of the buy-to-let sector has risen by around £239 billion to reach £1.7 trillion, according to new research.

“There have been many challenges that have subdued investment into the private rented sector over the past few years,” says Stephen Clark of bridging finance company Finbri “But the sector has proved resilient and we have seen continued demand for finance in this vibrant part of the economy.”

Investors still trust in bricks and mortar, thanks to the sustained capital uplift over several years, especially when contrasted with low interest rates on savings accounts and uncertain gains from stock markets. Even the global slowdown caused by the pandemic had little negative effect on house prices: indeed UK property values rose by 16% between March 2020 and the end of 2021, according to Nationwide building society.

Far from discouraging property investment, many UK banks remain enthusiastic lenders. Over the course of 2021, the number of products available to BTL customers increased from 1,311 up to 2,235. The average five-year fixed-term rate for first-time landlords fell slightly from 3.56% in August 2021 to 3.47% in February 2022, according to Moneyfacts. 

“The BTL sector has faced its share of upheaval and changes to regulations and requirements, so it is highly encouraging to see that providers are still keen to attract first-time landlords,” said Moneyfacts’ Eleanor Williams. “Rents have risen at the fastest rate on record, while tenant demand has almost doubled.” 

So, if you’re an existing property investor looking to expand your portfolio, or thinking about buying a second property, what is the most important advice to bear in mind right now?

First, recent (and anticipated further) interest rate rises from the Bank of England will feed through into mortgage rates, so now is the time to get a long-term fixed rate while you can.

Second, consider whether to form a limited company for property investments. This is a big step, which has a major impact on your tax liabilities and right across your financial planning, so it’s crucial to understand the pros and cons. 

Advantages of using a limited company for property investment:

  • Your profits are subject to corporation tax at 19%, compared to at least 20% income tax as a private landlord and up to 45% if you’re a higher rate taxpayer. This is especially important if you’re a property trader, rather than a BTL investor, because your profits from selling will have a lower tax liability.
  • Mortgage interest is classified as a business expense for limited companies, so you can deduct this cost ahead of paying corporation tax. Private landlords only receive a tax credit equal to 20% of their mortgage interest payments.
  • You can withdraw income more flexibly. Tax is only paid on profits taken out of a limited company, whereas all profits earned by private landlords are taxed. 
  • The finance world has responded to rising demand from limited companies for mortgage funding, offering specific deals tailored to their needs. 
  • Tax planning is more efficient. You can form a family investment company or a limited liability partnership, helping to reduce your overall tax liability. And you can more easily transfer assets to family members, avoiding onerous inheritance tax payments.

On the other hand, there are downsides to limited companies:

  • There are fewer available mortgage products for companies, the interest rates are typically higher and they may require larger deposits. Some banks are wary of lending to limited liability companies, fearing that it harms their ability to reclaim their loans.
  •  You will have to pay tax on any dividends you withdraw from the company, on top of the corporation tax your company pays. Here are the current UK rates - https://www.gov.uk/tax-on-dividends.
  • If you already own an additional property and want to transfer it into a company holding, the company has to buy it from you, which means paying stamp duty, conveyancing and legal fees and Capital Gains Tax if the property has risen in value since you bought it.
  • You will have to file annual accounts, so it means hiring an accountant and dealing with paperwork and administration every year. 

Whatever the obstacles, UK BTL investors overwhelmingly use limited companies today, with 80% of BTL mortgages granted to companies. “Getting the ownership structure right could make a huge difference to the amount of tax you pay over your lifetime,” says property investment guru Rob Dix, otherwise known as the Property Geek.

His advice in a nutshell is: if you trade property, form a company. If you have three or more BTL properties, form a company. If you have one or two properties, consult an accountant. If you’re a basic rate taxpayer, it could be more trouble than it’s worth to form a company.

The UK Treasury has indicated that Capital Gains Tax could rise from 28% to 40% for higher rate taxpayers in the 2022 budget, alongside higher Inheritance Tax rates. If this happens, investors would do well to form a company and transfer investment properties soon rather than later.

“Many of our clients anticipate that getting onto the property investment ladder will become harder in time,” says Stephen Clark at bridging finance company Finbri. “We are ready to help them take this step, before the window closes.”  

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