Investing in UK Buy-to-Let 2021

If you’re looking to invest in Buy-to-Let property, we run through buying a Buy-to-Let property, selling a Buy-to-Let property and the other processes you may come across during your investment journey. 

Buying a Buy-to-Let Property

Fundamentally, buying a Buy-to-Let property works in a very similar way to any residential property. You can either pay with cash or with a mortgage, although the type of mortgage will differ slightly.

The main difference is how the lender categorises your primary income source – usually they’ll look at your potential rental income over your personal income, which is usually a secondary factor.

Rental income will need to meet at least 125% of the monthly interest payments on the loan, a view known as ‘rental cover’. So if you’re mortgage interest payments equal £1,000 a month, you’ll need to be earning £1,250 in anticipated rental income.

At the same time, a deposit on a Buy-to-Let mortgage is typically bigger than the one on a standard mortgage. Most BTL lenders expect a deposit of 20% but there is examples of 40% deposits for those investing in UK Buy-to-Let property.

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Selling a Buy-to-Let Property

Selling a Buy-to-Let property is relatively easy and typically, will work in the same way as selling any other property. However, the ease of selling a Buy-to-Let property depends on whether or not it is still tenanted. While this doesn’t necessarily make the process more complicated, there are just more things to consider.

Tenants have rights, so first and foremost, you’ll have to give them plenty of notice. If the tenants want to stay in the property, then it is possible to sell a Buy-to-Let property tenanted, but this means that the only market that would be interested in the property is landlords. But buying a Buy-to-Let property already tenanted is often perceived as a prime opportunity, with it cutting out the process of marketing the property and sourcing tenants.

However, if you’re selling a Buy-to-Let property empty, you’ll be able to target both landlords and the residential market. As well as widening the pool of prospective buyers, an empty Buy-to-Let property minimises any complications that come with viewings.

Regardless of whether it’s empty or tenanted, selling a Buy-to-Let property is relatively straightforward. But as we mentioned earlier, any profit made on the sale will be subject to capital gains tax.

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Final Off-Plan Units

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What Taxes Come with Buy-to-Let Property?

Investing in UK Buy-to-Let property comes with a wealth of considerations, with tax arguably, being one of the most important elements to consider. From start to finish, investors can expect taxes to be a key consideration throughout.

If you’re thinking of this as a journey, then your first stop is Stamp Duty Land Tax. Whether you’re a seasoned investor or new to the game, you’ll probably be aware that the UK has been on a Stamp Duty holiday since July 2020, which is due to end in October 2021.

However, for investors, Stamp Duty on Buy-to-Let property has remained in some capacity. While investors have benefited from only paying the 3% surcharge, from October 1st, the flat rate will need to be considered on top of this. This tax fluctuates depending on the value of a property, but is a necessary payment for both UK and non-UK buyers purchasing property over £125,000.

Another Buy-to-Let property tax is income tax, which investors will be required to pay on any profits made on their monthly rental income. The amount of income tax you stand to pay depends largely on which tax bracket you’re in, starting at 20% for the basic rate, and increasing to 45% for the additional rate.

While income tax could potentially reduce your monthly passive income, the strong rental growth that comes with buying a Buy-to-Let property more than makes up for this additional tax.

At some stage on your investment journey, you may find yourself thinking about selling a Buy-to-Let property in your portfolio. For those investors, you should consider the possibility of paying capital gains tax on your Buy-to-Let property

Much like income tax, this fluctuates depending on how much profit you make.

For those investing for the long-term, inheritance tax may also be one to consider. If you’re planning on leaving your Buy-to-Let property, or property portfolio, to your loved ones when you pass, your asset(s) may be subject to this tax. Although there is a £325,000 threshold, if the estate is valued more than this figure, it will have 40% deducted in inheritance tax.

Can I Invest Through a Limited Company?

The process of buying a Buy-to-Let property through a limited company is also known as incorporation, which has been on the rise in recent years. At the root of its popularity is the flexible approach to property investment on offer, along with the possibility of tax savings.

Although the external market is a big consideration for those buying a Buy-to-Let property through a limited company, this investment process has become much simpler over time. As a result, we have seen more investors with larger portfolios setting up a company for their Buy-to-Let ventures.

The appeal of buying a Buy-to-Let property through a limited company lies predominantly with the tax benefits. A limited company will typically pay corporation tax on any profits at a rate of 19%, whereas individual investors can expect to pay income tax rates of up to 45%.

Setting up a company for your Buy-to-Let properties also gives the opportunity to save on capital gains tax, especially for those on a higher income tax bracket, but this benefit will only really be felt in the long-term.

Are There Risks of Investing in Buy-to-Let Property?

All investments come with some degree of risk, including investing in UK Buy-to-Let property. But unlike other assets, a lot of the risks that come with buying Buy-to-Let property can be addressed with research.

Using trusted partners is one of the most important parts of property investment, and can significantly streamline the overall process. When choosing a developer, look for testimonials, completed projects and a consistent track record. If you’re investing in Off-Plan property, this is even more crucial, so be sure to pay close attention to previous completion times.

Another risk that comes with investing in UK Buy-to-Let property is void periods. Void periods occur when the property is not being rented out, and subsequently, isn’t generating a passive income. For those with an extensive property portfolio, void periods can be particularly worrying, especially if the investor has mortgages to cover.

However, thorough research can often minimise the risk of void periods. When buying a Buy-to-Let property, the future tenant should always be considered, choosing locations and property types that are in high demand in the current market.