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.