Is buy-to-let still worth it?

19th January 2022

Property investors have been affected by a series of tax changes in recent years, causing many to question whether buy-to-let is as profitable as it once was.

Combine this with the financial and political uncertainty brought on by Brexit, as well as the pandemic, and it’s no wonder some people have their reservations about property investment.

But how has buy-to-let actually changed? And is it possible to still make good money from it?

To learn more about the benefits of buy-to-let, take a look at our free guide: 10 reasons to invest in property.

Tax changes have caused frustration

Changes to the tax system have left many property investors feeling frustrated. In 2016, the government added a 3% stamp duty surcharge on additional properties.

Then in 2017, changes were made to the way landlords declare their rental income, causing many investors’ tax bills to rise.

The new rules give landlords a tax-credit based on 20% of their mortgage interest payments.

For higher-rate taxpayers, this isn’t as generous as the previous system, which effectively allowed them to receive 40% tax relief on mortgage payments.

High yields are still available

Property prices aside, the money you make from your tenants can be a great source of passive income.

In the UK, the average annual gross yield is 4.12% but there are some areas where as much as almost 8% can be seen.

Research from Property Inspect shows that 11 of the UK’s top 20 cities have a rental yield above the national average.

Glasgow takes the top spot with an average rental yield of 7.52% while Manchester offers 5.19% on average. Birmingham, Sheffield and Leeds also boasted excellent investment opportunities.

Setting up a limited company can have tax advantages

Investing in property via a limited company is one option for investors looking to make the most of the market without paying too much tax.

This approach will give you access to full mortgage interest relief and is likely to benefit higher-rate taxpayers or those with multiple investment properties the most.

You’ll have to pay corporation tax at 19%, but this is much lower than the higher rate of income tax at 40%. According to Hamptons, 41,700 new buy-to-let limited companies were formed in the last year – an increase of 23% from 2019.

A graph showing a steady rise in the number of buy to let companies set up annually in Great Britain over the last 13 years

The benefits are significant. The Hampton’s website gives the following example: a limited company with a £250,000 property, a 75% LTV mortgage and £1,000 a month in rental income will pay around £1,033 per year in tax.

Meanwhile, a lower rate taxpayer in the same position but the property in their own name would pay 42% more at £1,463.

A higher rate taxpayer would pay 274% more at £3,863.

Property has survived lockdown

At the start of the pandemic, many people assumed property prices would take a hit.

After all, mortgage applications were affected by redundancies and furlough, in-person viewings were out of the question and the government discouraged people from moving except for in exceptional circumstances.

And yet, the property market has managed to survive. In fact, many homeowners and investors have seen the value of their properties soar.

If anything, the pandemic has only highlighted the property market’s resilience. If you’re looking for an investment opportunity that can stand the test of time, buy-to-let could be for you.

Brexit has made the UK market popular with foreign investors

When Britain voted to leave the EU, concerns were raised about the impact this would have on the property market.

Yet people still need homes and so the demand for rental properties continues.

Team this with the depreciation in sterling’s value since the referendum, and it’s no surprise that so many foreign investors are turning to the UK for generous returns.

People around the world still have faith in the UK market, and so should you.

The future looks promising for capital growth

Despite the political and financial instability brought on by the pandemic and Brexit, the property market is showing no signs of slowing down.

According to Savills, UK property is predicted to rise a further 21.1% in the next five years, taking the average house price from £230,920 to £279,644.

It’s true that many landlords have seen their profits affected by tax changes, but that doesn’t mean buy-to-let is no longer worthwhile.

With careful planning, wise investment choices and expert advice, you can build a profitable investment portfolio in one of the most trusted industries there is.

To learn more, take a look at our free guide: 10 reasons to invest in property

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