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

Buy-to-let properties have long been a popular investment. With property prices and rental yields steadily rising across the country in general, you can understand why.

However, legislation changes within the last few years have seriously damaged the appeal, including reducing tax relief and increasing stamp duty, along with tighter regulations and lending restrictions. So, we ask has the tide turned on buy to let?

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

If you are fortunate enough to have an income that means you pay higher rate or additional rate tax, deciding if your buy-to-let property is still a suitable investment should be on your agenda.

For basic rate taxpayers, you too should be considering your options, especially if you are expecting to creep into a higher-rate tax bracket in the future.

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

Interestingly, according to research from The Landlord Works, more than a third of landlords have considered selling due to loss of mortgage interest tax relief. 

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, this January 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.

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. So, 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 aspect which might slip under the radar, is that your total rental income could force you into a higher tax bracket unexpectedly.  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.

As a result, you might be wondering if you should offset the losses 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 options?

  • Continue with your buy-to-let investment. For some landlords, the changes in legislation are not a major concern and the potential for long term growth and continued rental yields outweigh the loss of tax relief.
  • Some landlords have looked to mitigate the rules by setting up a limited company. This way you will still be able to continue to 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 could be a good idea to speak with an accountant first.
  • You could consider switching to a shorter-term fixed rate mortgage, to benefit from a lower rate of interest, but remember this carries additional risk, especially at the moment in a rising interest rate environment. If you consider this option, speaking with an independent mortgage adviser could be a worthwhile exercise.
  • Another option available if your spouse pays a lower rate of tax, is 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. A fully independent financial adviser could create a solution where you diversify your investment across different assets, such as cash, fixed interest, equities and still have an exposure to property if that’s important to you. Your views on investing ethically or environmental, social and corporate governance (ESG) factors 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.

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 a free 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.

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