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Is Residential Buy-to-Let Still A Good Place to Invest Your Money?

In recent years the government has made life significantly tougher for UK landlords, in an attempt to de-ramp the buy-to-let market. The government have made buy-to-lets both less profitable by scrapping higher rate mortgage interest relief and less accessible due to the introduction of a 3% stamp duty surcharge for additional property purchases. To put this into perspective, a fairly modest £180,000 buy-to-let property would now incur a sizable £6,500 in stamp duty tax, and this is before other buying costs such are incurred such as surveys, solicitors and arrangement fees.

The above worked example produces a net return on investment of 4.2%, which seems reasonable but does not take into account potential void periods and assumes interest rates stay at their current low levels. At these levels there is limited margin for error, and for higher rate taxpayers the returns diminish further.

It appears that residential buy-to-lets are simply not as attractive as they once were. Given the modest net yield, landlords are probably seeking returns from rising house prices and subsequent capital gains, as opposed to rental income.

For young investors, the good news is that first time property purchases don’t incur the 3% stamp duty surcharge (even if it is a buy-to-let purchase), and instead you will pay the normal “home movers” rate. Young investors might also benefit from having lower average incomes and so can take advantage of the £12,500 income allowance before paying tax on rental income.

These two tax advantages cause quite drastic changes to the calculations above, and so a for a first-time buyer investing in buy-to-let, the returns can be significantly better. That being said, for a young investor with limited income, raising the finance to purchase a buy-to-let before a first home is a challenge, especially given the current climate in which banks are less willing to lend due to low-interest rates and the heightened possibility of pandemic-driven defaults.

While the first property purchased by a young investor has significant advantages, for those looking to acquire a portfolio of buy-to-let properties, these advantages quickly diminish. It is now much more attractive to run buy-to-let properties through establishing a Ltd company, especially if you intend on building a portfolio of multiple rental properties.

Running properties through a Ltd company allows you to claim full mortgage interest relief and can be a valuable way of retaining and reinvesting rental income without drawing and paying income tax. Importantly, the Ltd company route does have downsides however, such as added complications, higher mortgage rates and no capital gains allowance.

For many investors, these added complications associated with operating through a Ltd company are worth bearing. The prospect of acquiring a residential buy-to-let portfolio from scratch without operating through a Ltd company appears extremely challenging – that is unless house prices significantly increase in the next five to ten years.

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