Property investment — buy to let

The UK prop­er­ty mar­ket, whilst cycli­cal, has proved over the long-term to be a very suc­cess­ful invest­ment. This has result­ed in a mas­sive expan­sion in the buy to let sec­tor.

Buy to let involves invest­ing in prop­er­ty with the expec­ta­tion of cap­i­tal growth with the rental income from ten­ants cov­er­ing the mort­gage costs and any out­go­ings.

How­ev­er, the gross return from buy to let prop­er­ties (ie the rent received less costs such as let­ting fees, main­te­nance, ser­vice charges and insur­ance) is no longer as attrac­tive as it once was. Investors need to take a view on the like­li­hood of cap­i­tal appre­ci­a­tion exceed­ing infla­tion.

This fact­sheet should be con­sid­ered only in the con­text of a UK res­i­dent prop­er­ty own­er.

Factors to consider

Which property?

Invest­ing in a buy to let prop­er­ty is not the same as buy­ing your own home. You may wish to get an agent to advise you of the local mar­ket for rent­ed prop­er­ty. Is there a demand for say, two bed­room flats or four bed­room hous­es or prop­er­ties close to schools or trans­port links? An agent will also be able to advise you of the stan­dard of dec­o­ra­tion and fur­nish­ings which are expect­ed to get a quick let.

Agents

Let­ting prop­er­ty can be very time con­sum­ing and incon­ve­nient. Ten­ants will expect a quick solu­tion if the cen­tral heat­ing breaks down over the bank hol­i­day week­end! Also do you want to adver­tise the prop­er­ty your­self and show around prospec­tive ten­ants? An agent will be able to deal with all of this for you.

Tenancy agreements

This impor­tant doc­u­ment will ensure that the legal posi­tion is clear.

Taxation

When buy­ing to let, tax­a­tion aspects must be con­sid­ered.

Tax on rental income

Income tax will be payable on the rents received after deduct­ing allow­able expens­es. Allow­able expens­es include repairs, agent’s let­ting fees and an allowance for fur­nish­ings.

Restriction loan interest relief for ‘buy to let’ landlords

The amount of income tax relief land­lords can get on res­i­den­tial prop­er­ty finance costs has been restrict­ed to the basic rate of income tax. Finance costs include mort­gage inter­est, inter­est on loans to buy fur­nish­ings and fees incurred when tak­ing out or repay­ing mort­gages or loans. No relief is avail­able for cap­i­tal repay­ments of a mort­gage or loan.

This restric­tion does not apply to non-res­i­den­tial land­lords.

Replacement of furnishings

A relief enables all land­lords of res­i­den­tial dwelling hous­es to deduct the costs they actu­al­ly incur on replac­ing fur­nish­ings, appli­ances and kitchen­ware in the prop­er­ty. Relief is due on the cost of replac­ing fur­nish­ings to a wide range of prop­er­ty busi­ness­es.

Exam­ples of eli­gi­ble cap­i­tal expen­di­ture are:

• fur­ni­ture
• fur­nish­ings
• appli­ances (includ­ing white goods)
• kitchen­ware

but excludes items which are fix­tures.

How­ev­er, the relief is lim­it­ed to the cost of an equiv­a­lent item if there is an improve­ment on the old item. The deduc­tion is not avail­able where rent-a-room relief is claimed.

Tax on sale

Cap­i­tal gains tax (CGT) will be payable on the even­tu­al sale of the prop­er­ty. The tax will be charged on the dis­pos­al pro­ceeds less the orig­i­nal cost of the prop­er­ty, cer­tain legal costs and any cap­i­tal improve­ments made to the prop­er­ty. This gain may be fur­ther reduced by any annu­al exemp­tion avail­able.

CGT is gen­er­al­ly charged at 18% with­in the basic rate and 24% for high­er rates.

CGT is payable on 31 Jan­u­ary after the end of the tax year in which the gain is made. A pay­ment on account of any CGT due on the dis­pos­al of res­i­den­tial prop­er­ty is required to be made with­in 60 days of the com­ple­tion of the dis­pos­al.

Student lettings

Buy to let may make sense if you have chil­dren at col­lege or uni­ver­si­ty. It is impor­tant that the arrange­ment is struc­tured cor­rect­ly. The stu­dent should pur­chase the prop­er­ty (with the par­ent act­ing as guar­an­tor on the mort­gage). There are sev­er­al advan­tages to this arrange­ment.

Advantages

This is a cost effec­tive way of pro­vid­ing your child with some­where decent to live.

Rental income on let­ting spare rooms to oth­er stu­dents should be suf­fi­cient to cov­er the mort­gage repay­ments from a cash flow per­spec­tive.

As long as the prop­er­ty is the child’s only prop­er­ty it should be exempt from CGT on its even­tu­al sale as it will be regard­ed as their main res­i­dence.

The amount of rental income charge­able to income tax is reduced by a deduc­tion known as ‘rent a room relief’ (£7,500 per annum from 6 April 2016). In this sit­u­a­tion no expens­es are tax deductible. Alter­na­tive­ly expens­es can be deduct­ed from income under nor­mal let­ting rules where this is more ben­e­fi­cial.

Tax allowance for property and trading income

Two £1,000 allowances for prop­er­ty and trad­ing income are avail­able.

Where the allowances cov­er all of an individual’s rel­e­vant income (before expens­es) then they no longer have to declare or pay tax on this income. Those with high­er amounts of income have the choice, when cal­cu­lat­ing their tax­able prof­its, of deduct­ing the allowance from their receipts, instead of deduct­ing the actu­al allow­able expens­es. The trad­ing allowance will also apply for Class 4 NICs.

The allowances do not apply to income on which rent a room relief is giv­en. Nei­ther do the allowances apply to part­ner­ship income from car­ry­ing on a trade, pro­fes­sion or prop­er­ty busi­ness in part­ner­ship.

The trad­ing allowance may also apply to cer­tain mis­cel­la­neous income from pro­vid­ing assets or ser­vices to the extent that the £1,000 trad­ing allowance is not oth­er­wise used.

Tax rates on property income

For 2026/27, income from prop­er­ty is taxed at the same rate as oth­er non-sav­ings income e.g. employ­ment income or income from self-employ­ment. The rates are 20% for income with­in the basic rate band, 40% in the high­er rate band and 45% in the addi­tion­al rate band.

From 2027/28, The gov­ern­ment is intro­duc­ing the fol­low­ing sep­a­rate tax rates for prop­er­ty income from 2027/28:

• 22% for basic rate tax­pay­ers
• 42% for high­er rate tax­pay­ers
• 47% for addi­tion­al rate tax­pay­ers.