Is buy-to-let still a sustainable investment strategy?

By Huy Le, Buy-to-Let Finance Specialist

Three tips for investing in buy-to-let today

Changes to tax laws across the buy-to-let sector have seen landlords’ profits take a hit since 2016.

Firstly, a 3% surcharge in stamp duty was applied to additional properties in 2016. The following year, a reduction in mortgage interest relief came into force, which meant higher rate taxpayers (of 40%) would be subject to a flat rate of 20% tax relief, rather than the previous 40%.

Coupled with today’s cooling housing market and continued inflationary pressure, landlords would be forgiven for questioning whether buy-to-let is still a sustainable investment strategy. But despite this shifting landscape, we still see several compelling reasons why buy-to-let investors should stay the course.

Benefits from limited company structure

Purchasing a buy-to-let property through a limited company structure, rather than as an individual, can benefit investors in a number of ways starting with tax advantages. When a property is purchased in the client’s name, the rental profit is added to their other earnings and taxed as income. Rental profits on properties in a limited company, however, are taxed at the current rate of corporation tax, which tends to be around half of the higher rate of income tax. You can also offset the mortgage interest as a business expense.

A limited company can also be beneficial for succession planning purposes. Children can be added as directors or shareholders of the company, without being impacted by inheritance tax. However, it’s always advisable to seek professional tax advice to assess what options are best suited to them.

Clients who currently own properties in their own name can shift to a limited company structure without triggering a stamp duty liability but this can be a lengthy process to complete (two-three years). With that in mind, it’s worth asking a mortgage broker to speak to the client’s accountant and tax adviser to see what option would work best for them.

Opportunity in commercial to residential development

We’re seeing an uptick in acquisition enquiries, particularly among investors who are keen to develop commercial properties into residential. The reason for this being, residential property values tend to have a premium attached compared with buildings that are classed as commercial, so there are plenty of opportunities emerging in the market where investors can purchase properties at competitive rates to then redevelop via permitted development rights planning changes for residential use.

One recent example saw a client purchase a commercial property at £400,000. They invested £120,000 to redevelop it into a residential home, which increased the property value to £700,000. So, there are still real opportunities across the market to be found.

Consider rising yields

Clients investing in property should concentrate on return on investment – whether that’s capital appreciation or rental yields – rather than cost. There is no question that capital values will come under press during the coming two years. UK house prices could decline 5% in each of the next two years before returning to growth in 2025, according to new Knight Frank forecasts. Meanwhile rental yields in London and the Southeast sat at around 4% as of early October and are set to rise.

Higher mortgage rates and years of steep house price inflation will result in fewer people being able to buy a property in the months ahead, placing greater demand on the rental sector. The sheer demand on rental properties means investors will likely have very low void periods and will inevitably lead to competitive rental levels. UK rents should climb 4% in 2023 and 20.5% over the next five years, according to Knight Frank forecasts. In Greater London the corresponding figures are 3% and 22.8%.

The coming 18 months will provide a prime opportunity to secure high yielding properties and those that match the opportunities above. With the right investment strategy, investors can build resilient portfolios that will generate higher rewards when capital values return to growth from 2025 onwards.