What is Buy-to-Let Property?
Buy-to-let (BTL) is buying an additional property to your main residence with the intention of renting it out. A buy-to-let property is typically chosen because of the passive income it can deliver, as well as the natural price growth it can experience.
As an asset, a BTL property in the UK is best suited as a medium to long-term investment strategy, where long-term rental returns can be reinvested, allowing the investor to scale effectively.
Buy-to-let properties are usually regarded as a relatively stable, reliable investment opportunity, making them ideal within a more diverse portfolio of assets.
What Does Buy-to-Let Property Investment Involve?
Buy-to-Let is purchasing a property and then letting it out and charging rental payments. The goal is to ensure that the rental payments are higher than the maintenance cost of the property, any partner fees and obviously, the monthly mortgage repayments.
You’re still required to pay a deposit, mortgage fees and Stamp Duty Land Tax when you purchase a buy-to-let property. If you already own a property or you purchase a property from overseas, you typically pay a higher rate of Stamp Duty.
Depending on the property you invest in, you may need to pay for any improvements or renovation. If you’re investing in a new-build buy-to-let property, expenses will usually be around furnishings.
The final taxes to consider are income tax on your rental returns and capital gains tax. Income tax is based around your overall income, while capital gains tax is based on the profit you make when you sell the property.
How Popular Is Buy-to-Let in the UK?
Buy-to-Let has been a key investment asset in the UK for nearly two decades and has grown increasingly popular over time.
Since 2000, UK buy-to-let has grown by around 2.5 million rental properties, making it the second largest demographic in the UK housing market and making up 20% of all UK households.
In 2022, buy-to-let property is considered one of the most important investments and investing in buy-to-let has the potential to deliver lucrative income.
The investment boom has largely been driven by the stamp duty holiday and low interest rates, as well as the long-term demand that has been building in the market.
Populations in key cities are rising at an incredible rate and supply is struggling to keep pace. This alone has highlighted the potential of a buy-to-let property, especially as more people look to rent indefinitely.
Stunning Off-Plan Investment Opportunity
- Off-plan apartments – estimated completion 2023
- City-centre location just 3 minutes from Brindleyplace
- Unique waterfront living in Birmingham
- 24.5% price growth expected by 2026 (JLL)
- Top location for London leavers – forecasting yields above 5%
What is a Buy-to-Let Mortgage?
A buy-to-let mortgage is essentially a mortgage that is designed specifically for buy-to-let property.
If you’re buying-to-let and renting a property out, you must have a buy-to-let mortgage.
This works in the same way as a ‘traditional’ mortgage in that you borrow a sum of money for a set time period and make regular payments throughout that time period.
What is a Buy-to-Let Deposit?
A major difference between a buy-to-let purchase and a residential purchase is the deposit. Because buy-to-let mortgages are considered to be ‘riskier’ than residential mortgages, lenders require a larger deposit.
Depending on the lender and the development, it can be anywhere between 20% and 40%. Much like residential mortgages, the bigger the deposit, the better the deal, so it’s wise to put down the highest deposit you can.
Portfolio investors tend to use the rental returns from one property to help fund the deposit for another, which can help scale a buy-to-let portfolio efficiently.
What Taxes Are Involved in Buy-to-Let?
There are a number of taxes that come with buying-to-let. These are largely mandatory but change depending on your own personal circumstances. The most important taxes to consider include Income Tax, Capital Gains Tax and Stamp Duty Land Tax.
Income tax is a tax you pay on your rental returns and is worked out based on individual income tax rates, which obviously includes your other sources of income as well.
Everyone has a personal allowance that they earn before income tax comes into effect.
Right now, that is £12,570 and is set to remain the same for the next five years.
If you earn between £12,571 and £50,270 – which obviously includes your income from rental returns – you will pay 20% tax on your entire income.
If you earn over £50,271, you enter the higher threshold and start paying 40% income tax on your returns.
As always, the additional rate threshold of 45% is still at £150,000.
Capital Gains Tax
If you ever sell your buy-to-let property, you’ll need to consider paying Capital Gains Tax (CGT).
CGT is a tax applied to the sale of any buy-to-let property and is calculated on the profit you made – the increase in value between the sale price and the purchase price.
The amount you pay also depends on whether you pay basic, higher or additional rate income tax and the type of asset you’ve sold.
If you pay basic rate tax, the CGT you pay on property is 18%. If you pay higher or additional rate tax, the CGT you pay is 28%.
Stamp Duty Land Tax
If you’re purchasing a buy-to-let property in England or Northern Island, you’re required to pay Stamp Duty Land Tax (SDLT).
This is calculated on the value of the property you’re buying, whether this is a second property purchase (which it likely will be with buy-to-let) and whether you’re buying from overseas.
If you’re looking to find out how much Stamp Duty Land Tax you stand to pay, you can use our Stamp Duty Calculator.
The Stamp Duty tax bands are as follows:
Property Value / Rate
Up to £125,000 / 0%
£125,001 to £250,000 / 2%
£250,001 to £925,000 / 5%
£925,001 to £1.5 million) / 10%
Above £1.5 million / 12%
If you’re buying an additional property, an extra 2% is required on top of the base rate. If you’re buying from overseas, another 3% is added on to the base. This means an overseas buy-to-let investor adds 5% to the base rates above.
What is Stamp Duty Land Tax?
When it comes to investing in buy-to-let property, there’s a lot to consider. Not only do investors need to think about their own finances, but there’s also a wealth of taxes that could apply.
Paying Stamp Duty Land Tax is a legal requirement, but what actually is it?
It’s one of many taxes you will need to prepare for when looking for their first – or next – property investment, one that needs to be paid at the start of the investment journey.
With normal band rates, additional property charges and an overseas surcharge to consider, it’s worth knowing where you stand on your investment before taking the plunge.
In our latest blog, we have rounded up everything you need to know about Stamp Duty Land Tax. Whether you’re investing from the UK or Hong Kong, this is an essential read for understanding UK property taxes.
Read our Buy-to-Let Investment FAQ’s
Is buy-to-let a good investment?
If you were to measure how ‘good’ a buy-to-let investment is based on its past performance, this asset would probably come out on top. However, different assets will suit some more than others based on their financial goals.
If you’re looking for a resilient asset that can offer a passive income as well as the opportunity for capital growth, buy-to-let property could be the best asset for you.
With 20% price growth in the UK on the horizon, along with 12% increases in rents by 2026, forecasts suggest that buy-to-let property could be the route to financial freedom for many investors.
Is buy-to-let worth it?
When it comes to investing there’s generally no ‘one size fits all’ approach and buy-to-let property will suit some investors more than others.
However, for those who are looking for a long-term investment asset with a track record of competitive growth and more price increases on the horizon, buy-to-let is often the best option.
Buy-to-let is a flexible investment assets and can offer diversification across a wider portfolio. It’s historically one of the most stable assets and is much less exposed to external factors, plus it’s a physical asset, which makes it appealing with certain investors.
The answer to ‘is it worth it?’ depends entirely on how you use it. If you use it as a long-term asset, it’s proven to be a potentially lucrative investment vehicle that can be scaled effectively.
How does buy-to-let work?
Buy-to-let is fairly self-explanatory – it involves purchasing a property with the intention of letting it to a tenant for a monthly fee.
Owning a buy-to-let property comes with a wealth of responsibilities, some of which are compulsory and some depend on how much of an active investor you are.
Being a landlord, you will be responsible for maintaining your rental property, unless you choose to go with a property management company.
Similarly, you’ll be required to find your own tenants and market the property yourself, unless you work alongside a letting company.
Can a first-time buyer purchase a buy-to-let?
First-time buyers are eligible for a buy-to-let mortgage, but with far less experience in the property market than existing landlords, there will be typically less lenders to choose from.
The majority of lenders offering buy-to-let mortgages ask applicants to have owned a residential property for a certain period of time, with an existing residential mortgage acting as ‘reassurance’ for the lender providing the buy-to-let mortgage.
How much is a deposit for buy-to-let property?
Deposits for buy-to-let property can vary, but 25% of the property’s value is usually the industry standard.
That said, deposits can range from 20%-40% depending on an individual’s circumstance and product.
While cash investors will be able to cover the entire cost of the property or land, those who plan on getting a buy-to-let mortgage for the remainder of this amount will generally need at least 20% of the entire cost to secure the property.
Do I pay stamp duty on buy-to-let?
Stamp Duty Land Tax is a mandatory payment for those purchasing property in the UK over a certain value – even if it’s for buy-to-let purposes.
While there was a temporary Stamp Duty holiday in the UK, normal rates have now resumed. Homebuyers and investors will now need to pay tax on any property purchases over the £125,000 Stamp Duty threshold.
For those investing in buy-to-let property, there is an additional property surcharge of 3% that needs to be considered, which is added on top of the original rates.
Likewise, overseas buyers also need to factor the extra 2% surcharge for non-resident investors, equalling a 5% increase on normal rates.
Stamp Duty Rates
- Up to £125,000: 0%
- The next £125,000 (between £125,001 – £250,000): 2%
- The next £675,000 (between £250,001 – £925,000): 5%
- The next £575,000 (between £925,001 – £1,500,000): 10%
- The remaining amount (anything above £1,500,000): 12%