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Latest News The landlord’s guide to buy-to-let
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The landlord’s guide to buy-to-let

The landlord's guide to buy-to-let

Are you thinking of becoming a buy-to-let landlord, but aren’t sure where to start? In this guide we’ll talk you through the steps to get started, from choosing a property and securing a mortgage, through to taking out the right buy-to-let insurance to protect your investment, and calculating rental yield.

A quick overview of today’s buy-to-let market

The buy-to-let market has undergone significant changes in recent years. Many of these changes have been driven by government legislation. Since 2020, buy-to-let landlords have not been able to deduct finance costs such as interest on mortgages, loans and overdrafts from rental income when calculating their taxable income. Instead, landlords can claim a 20% tax credit on the smaller of these following three things; finance costs, property profits or adjusted total income.

In addition, since 2016, purchasers of buy-to-let properties have had to pay a Stamp Duty surcharge of 3% in addition to the standard rate. This has made it more expensive to add properties to your portfolio and has led some landlords to ask themselves, “Is buy-to-let worth it?”

While the recent changes have eaten into many landlords’ profits, it doesn’t mean that buy-to-let can’t be a good way to add to your income. Some landlords can reduce the tax they pay by buying properties via a limited company. More importantly for new landlords entering the sector, there is currently a huge demand for rental properties and returns in some areas of the country are excellent.

How much demand is there for rental properties?

Demand for rental properties is strong and on the rise. A report commissioned by the National Residential Landlords Association calculated that the UK needs 227,000 new private rental homes per year to meet government targets. Rightmove has found that competition between tenants for available properties has doubled. In addition, rental income is rising, the Rightmove Rental Trends Tracker reported a 9.9% rise in the average rent in 2021 compared to 2020.

Where should I purchase a buy-to-let property?

There are quite a few factors you need to take into account when choosing a buy-to-let property.

First of all, you need to consider location. If you invest in a buy-to-let property near to where you live then it makes it easier to manage the rental yourself, including finding tenants. If you choose a property that’s further away, you may need to hire a lettings agent to manage the property for you. This will reduce your profits.

Some areas of the country offer better yields on buy-to-let properties. This tool from Thomas Sanderson (a blinds and shutter specialist, so you may want to take the results with a pinch of salt) helps you identify buy-to-let hotspots. If you already have your eye on a particular property, use our rental yield calculator to work out the potential return on the investment.

What kind of buy-to-let property should I go for?

The kind of buy-to-let property you choose depends on your priorities, personal circumstances, your budget, and how much time and money you are willing to put into property management.

Purely in terms of rental yield, Houses in Multiple Occupation (HMOs) offer the best returns. These are properties in which three or more tenants who are not members of the same family share a bathroom, kitchen, living room or other communal space. However, HMOs are strictly regulated and it can take a long time to get the necessary licence. In addition, these properties can have a high turnover of tenants, which may result in extra administrative work. Although you could look at advertising the property as a student let which can result in one set of tenants per year. Whichever route you take, remember that you will need a specialist mortgage and specialist insurance.

If purchasing and managing an HMO is not the route you want to take, then your next options are to buy a house or a flat. Generally speaking, one-bedroom flats give a higher yield than one-bedroom houses. For two or more bedrooms, houses tend to produce a better yield.

Whichever type of property you choose, you should carefully consider its EPC rating. Currently all new tenancies must have an EPC rating between ‘A’ and ‘E’. However, if government proposals go ahead, all new tenancies must be in bands ‘A’ to ‘C’ by 2025, with all rented homes complying by 2028. Upgrading a less efficient property could cost up to £15,000, while failing to do so could result in a fine of £30,000.

Should I choose a holiday let?

Investing in a holiday home can significantly increase your income during the periods it is  let. However, there are higher costs associated with managing these properties, a higher potential for void periods when out of peak holiday season, as well as different tax rules to normal buy-to-let properties. If you’re thinking of investing in a holiday let, take a look at our article Holiday Home vs Buy-to-Let.

Should I set up a buy-to-let limited company?

In 2021, landlords set up nearly 50,000 limited companies – the highest number on record. There are good reasons for doing this.

If you buy a rental property via a limited company, the company pays corporation tax at 19% rather than income tax at 20% (basic rate), 40% (higher rate) or 45% (additional rate). Most importantly, finance costs such as mortgage interest relief are deductible – an option that’s no longer available to individual landlords. It can also be tax efficient to draw income from the company as a combination of salary and dividends.

That said, there are downsides to holding property via a limited company. If you sell a property, you can’t make use of your personal Capital Gains Tax (CGT) allowance. Also, buy-to-let mortgages for companies tend to be more expensive. Most importantly, you can get hit by a large bill if you transfer a buy-to-let property you already own to a company. This is regarded as a sale and means you will have to pay Stamp Duty, legal fees and potentially CGT.

If you are thinking of setting up a limited company you should consult an accountant first.

Buy-to-let mortgages

New landlords often have many questions about buy-to-let mortgages. In this section, we’ll answer some of the most common ones:

Can I apply for a buy-to-let mortgage?

This depends on your personal circumstances. It can be hard to get a buy-to-let mortgage unless you already own your own home, but it’s not impossible. Lenders will consider several factors, including your income, the affordability of the mortgage, your credit history and the size of your deposit.

How much deposit do I need for a buy-to-let mortgage?

Buy-to-let mortgages generally require a higher deposit than a residential mortgage. Expect to be asked for a deposit of around 25%, although you may find some specialist lenders willing to accept 20% or even 15%.

How much can I borrow for a buy-to-let?

This normally depends on how much rental income you expect to receive. As a rule of thumb, lenders require your rental income to be at least 25% – 30% higher than your mortgage payment.

Are there any additional fees with buy-to-let mortgages?

Buy-to-let mortgage fees tend to be higher because of the perceived extra risk to the lender. In particular, arrangement fees are usually higher, although you may be able to add the fee to your mortgage.

Can I get a capital repayment buy-to-let mortgage?

Yes, you can, but relatively few lenders offer them and affordability assessments are very strict. The vast majority of buy-to-let mortgages are interest-only – you have to pay back the capital at the end of the mortgage term.

Tip: since 2021, new ‘green’ buy-to-let mortgages have been on the market. These offer lower interest rates to landlords who invest in energy-efficient properties, or who want an incentive to improve the energy efficiency of their existing properties.

What are the running costs of a buy-to-let?

While mortgage lenders usually want to know the gross rental yield of your property, the more important figure for you is the net rental yield. This is the gross rental yield minus your running costs.

It’s a good idea to work out the potential net rental yield of a property before you purchase as it indicates the likely return on your investment. To help you, we’ve summarised some of the main buy-to-let running costs.

Tax on rental income

If you own the property personally, your rental income is subject to Income Tax. The following tax rates currently apply:

  • You have a tax-free personal allowance of £12,570.
  • £12,571 – £50,270 is subject to 20% tax.
  • £50,271 – £150,000 is subject to 40% tax.
  • Over £150,000 is subject to 45% tax.

You can see the latest income tax rates here. You’ll also have to take into account National Insurance. If you own the property via a company, you need to pay Corporation Tax at 19% on your rental income. You can then use salary and dividends to give yourself an income (which have their own tax rates).

For a more detailed insight into your tax responsibilities as a landlord, please refer to our landlord tax guide 2022/23.

Capital Gains Tax (CGT)

If you sell a property, you need to pay CGT on any profit you make within 60 days of the sale. If you are a higher or additional rate taxpayer, you pay 28% on your gains from residential property. If you are a basic rate taxpayer, you pay 18%. You also get an annual CGT tax-free allowance of £12,300.

If you own a property via a limited company, you don’t pay CGT. Instead, you pay Corporation Tax on the profits. Read our article for more information on CGT.

Stamp Duty

When you buy a property as a landlord you have to pay a Stamp Duty surcharge of 3% over the normal rate. The Government’s Stamp Duty calculator  makes it easy to work out how much you will pay.

Letting costs / fees

If you use a lettings agent to find tenants and manage your properties, you will need to pay their fees. You can save money by doing these things yourself, but you will need to carefully consider whether you have the time to do so. See our article, top five tips for finding good tenants.

Maintenance costs

These cover everything from decorating and refurbishment, through to repairs and replacement of items such as white goods. As a rough guide, expect to pay in the region of 1% of the property’s value in repairs and maintenance each year.

Insurance

It’s essential you have the right landlord insurance for your rental property to protect your investment and the additional risks that come with letting property. More on this below.

Licensing and registration costs

In some areas of the UK, you will need a licence to rent out your property. For example, Rent Smart Wales requires landlords to register and, in some cases, licence your property. Some local authorities in England run licensing schemes in selected areas. In Scotland you also need to register as a landlord.

Other costs

You will also need to cover a variety of other costs. These include legal fees (when buying or selling a property), periods when the property is vacant, along with potential damage or vandalism. Some of these costs can be reduced with the correct insurance. You also need to cover health and safety costs (see below). Our article on The Cost of Being a Landlord gives you an insight into some of the things you need to take into account.

Your responsibilities as a buy-to-let landlord

As a buy-to-let landlord, you have a wide range of responsibilities. These range from making sure your property is safe and fit to live in, through to making sure you have the legally required documentation such as an Energy Performance Certificate, and complying with the rules on tenancy and eviction.

We have compiled a thorough guide to landlord responsibilities, which talks you through all your responsibilities and obligations and covers the following in more detail:

Health and safety responsibilities

This includes making sure your property is fit for human habitation and covers things like gas and electrical safety, fire safety and risk assessments for legionella.

Providing tenants with the right documentation

You need to give tenants certain documents, including a tenancy agreement, inventory, Energy Performance Certificate, details of deposit protection and the current How to Rent guide (England), Tenant Information Pack (Scotland) or a rent book containing certain information (Northern Ireland).

Responsibilities to tenants

You need to protect your tenants’ personal data in accordance with the GDPR, only charge legally allowed fees, follow rules on rent increases and property inspections, give tenants privacy in their home and check each tenant’s right to rent (in England).

What insurance do I need for a buy-to-let property?

When you become a buy-to-let landlord, it’s essential to make sure that you have the right landlord insurance in place. If you have a mortgage it’s likely that having landlord insurance is a condition of the loan.

There are various different types of landlord insurance available, which you can generally combine into a single policy. We’ve summarised the main options in our article landlord insurance: a beginner’s guide, but it’s worth considering the following:

  • Landlord buildings insurance. Protects your property against risks such as fire, theft, malicious or accidental damage, subsidence, flood and escape of water.
  • Landlord contents insurance. Although you will normally expect your tenants to have their own contents insurance, if you have your own fixtures or furnishings in the property it’s a good idea to cover them with landlord contents insurance.
  • Legal and rent guarantee insurance. Covers the unpaid rent and supports you through the eviction process. The policy we offer protects you for up to 15 months’ worth of missed rental payments whilst you regain possession of your property. It can also cover legal expenses and 75% of rental income for three months as you search for new tenants.

You can supplement these with a variety of add-ons, such as excess protection insurance and landlord home emergency cover. Standalone landlord legal expenses insurance is available if not bought alongside rent guarantee.

For further information on landlord insurance and how we can help you protect your investment, contact our expert team on 01603 218000.


Legislation and guidance included in this article is correct as of June 2022. Please note that legislation does change, it is always best to check the most up to date guidance on gov.uk. Most landlord insurance policies arranged by Alan Boswell Group also have access to a legal advice helpline where policyholders can seek further advice.

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