Buy-to-Let: Is it time to sell?

Buy-to-let properties have long been a popular investment, providing a good income stream for people both during their working life and throughout retirement. With rental yields rising across the country in general, investing in a buy to let property can seem attractive.  

However, legislation changes over the last few years have damaged the appeal, including reducing the benefits of tax relief and increasing stamp duty, along with tighter regulations for landlords and increasing mortgage interest rates. So, is a buy-to-let property still a worthwhile investment?

Arrange your free initial consultation

Buy-to-Let: Is now the time to sell?  

Whether you are a basic rate taxpayer, or if you have income which means you pay higher or additional rate tax, you should be considering your options with your buy-to-let properties, particularly if your rental income is going to push you into higher-rate tax brackets. This is increasingly likely for many people, given that personal tax allowances are frozen until 2028.

Changes to legislation, void periods - where your property may be unoccupied - higher borrowing costs, stamp duty and maintenance costs are all factors in the latest trend of selling buy-to-let properties.

A recent property survey by property finance broker, Finbri, revealed that more than 44% of landlords are considering selling their investment properties once base rate reaches 4.5% – thus increasing re-mortgage costs (The Intermediary: June, 2023). The Bank of England’s Monetary Policy Committee (MPC) announced in May 2023 that interest rates did indeed need to rise again to curb inflation, so time will really tell whether the landlords surveyed will sell their properties.

What has changed with buy-to-Let?   

One of the most attractive benefits for a buy-to-let investment, was the generous tax relief available on your mortgage interest.

This meant you could previously offset your mortgage expenses from the rental income you received from a tenant(s) and therefore reduce your tax bill.

For example, if you received £10,000 a year in rental income, and the annual mortgage interest payment came to £9,000, you could deduct the £9,000 interest payment from your rental income. Meaning you would only pay tax on the remaining £1,000 – so if you were in the 20% tax bracket, your tax bill on rental income would have been £200.

Unfortunately, from 2017 this relief began to phase out and has no longer been available at all since April 2020. So, January 2023 would have been the first year those filing their tax returns would have felt the full impact of these changes. Importantly, this change of legislation only affects private landlords – meaning those individuals and/or couples who own the property, rather than through a business.

As a landlord, you now receive a tax credit for 20% of the mortgage interest payment only. If you are a higher rate taxpayer, this is much less favourable than the 40% tax relief received before the changes.  

If we consider the previous example, the new rules mean you will end up paying tax on the full £10,000 rental income, without the deduction of mortgage interest payments at the outset, at your own marginal tax rate. For a basic rate taxpayer you’d still pay £200 in tax as you’d receive a 20% tax rebate on the total income of £10,000 (£10,000 x 20% = £2,000, minus 20% tax rebate at £1,800 = £200). Remember all taxpayers are able to deduct the £1,800 from their tax bill due to the 20% tax credit.

For higher or additional rate taxpayers, however, the bill will increase substantially. As they are only permitted to deduct the 20% tax credit from their bill, the example of £10,000 rental income would mean that higher rate taxpayers will now pay £2,200 in tax (£10,000 x 40% = £4,000, minus £1,800 tax credit) and additional rate taxpayers will face a tax bill of £2,700 (£10,000 x 45% = £4,500 minus £1,800 tax credit).

An important thing to consider, is that your total rental income could force you into a higher tax bracket unexpectedly, particularly now that personal tax allowances are frozen, or in the case of the additional rate bracket, has reduced. This is because you will need to declare the full rental income on your tax return. Depending on the income received from other sources, such as your salary or pension for example, your combined income could be pushed into the higher or additional tax rate brackets, meaning your rental income could be charged at your marginal rate of 40% or 45%.

With increasing interest rates, the availability of ‘cheap’ mortgage money that helped the expansion of many property portfolios has now stopped. Many landlords are now struggling to remortgage their properties at an affordable level. Remortgaging and trying to get a better rate won’t be possible for many landlords, with the lowest rate available for a two-year fix starting over 3.5%, and for a 5-year fix over 4% - as of May 2023 (BBC: May, 2023). Lenders have also become a lot stricter with lending money and are scrutinizing each case in depth as well as increasing the stress testing they do before offering to lend.

A new factor to also consider is the minimum energy performance standards, which the government are looking to implement from 2025. Under this legislation, any new rental property will need a rating of at least C, and any existing tenancies have until 2028 to bring the property up to scratch, or suffer from harsh penalties up to £30,000.

As a result, you might be wondering if you should offset increases in costs by raising rents and clawing some losses back directly from your tenant - or you might be considering if it’s time to sell the property.

What are my buy-to-let options?  

Do I continue with my buy-to-let investment? Well, for some landlords who are already in a fixed rate mortgage, the changes are not a major concern and the potential for long term growth and continued rental yields outweigh the loss of tax relief.

As an alternative to combat the changes to legislation, some landlords have looked to mitigate the rules by setting up a limited company.  Doing this means you can still declare rental income after deducting the mortgage costs. However, mortgage rates for businesses are more expensive than for private landlords, which might mean you pay more than you’re saving in higher rate tax relief. You will also need to consider stamp duty costs on transferring the property to the business, along with corporation tax on the business’s profits. If you consider this option, it would be a good idea to speak with an accountant first.

Another option to consider is if your spouse pays a lower rate of tax, it may be possible to transfer ownership of the property (as long as this doesn’t force them into a higher tax bracket!). When considering this option, it would be a good idea to speak with a solicitor that specialises in property.

Lastly, you could sell the property and invest the proceeds, and an independent financial adviser can help with this to create a solution where you diversify your investment across different assets, such as cash, fixed interest assets, equities and still have an exposure to property if that’s important to you. Your views on investing ethically (often called ESG investing) can also be taken into account. Your attitude to risk and making use of available tax allowances, would also form part of your financial plan. It's important to remember though that investing can result in the value of your investments going up and down depending on what happens in markets. And we’d always recommend taking the advice of an Independent Financial Adviser when it comes to investments and financial planning 

If you’re concerned about your buy to let portfolio and feel now may be a good time to look at other investment options- and have £100,000+ in investible assets- why not get in touch and see if we can help. At The Private Office we have a team of award winning independent, chartered financial planners, experts in working with you to protect and grow your wealth.

Arrange your free initial consultation

Please note: that the Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice and some forms of Buy-to-Let mortgages. Your property may be repossessed if you do not keep up repayments on your mortgage. This Market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.