Buy-to-Let Update


Helen Tandy (Partner, Castlefield Advisory Partners) and Olivia Bowen (Partner, Castlefield Advisory Partners)

As financial advisers we are often asked to comment on whether potential investors should buy a property to let or invest money into investment markets. Whether you decide to invest your money in an investment portfolio (other terms include: collectives, unit trusts, bonds, discretionary managed portfolio) or to purchase a rental property (buy-to-let) will depend on your objectives. Both types of investment can provide an income or capital growth, but come with their own benefits and risks.

Due to over-inflated house prices in much of the country, with many people struggling to afford their first home, the Government is looking at ways to discourage the buy-to-let investor through tax changes, as well as making tax more beneficial for the investor with a reduction in income tax and capital gains tax on investments.

Stamp Duty tax on a buy-to-let property?

From 1 April 2016 the stamp duty land tax rates are as follows (these are 3% higher than when purchasing a residential property):

• 3% tax on the first £125,000 • 5% on the portion up to £250,000 • 8% on the portion up to £925,000 • 13% on the portion up to £1.5 million • 15% on everything over that

George Osborne used last week’s Budget to reject initial plans to provide an exemption to 'significant investors' - both companies and individuals - buying more than 15 properties. This has removed the loophole that would have allowed buy-to-let investors to club together and buy multiple properties through a company to avoid the additional tax.

Do you pay tax on buy-to-let property income?

Yes. The income you receive as rent is taxable. You need to declare any rent you receive as part of your Self Assessment tax return. The tax on your income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).

From April 2017 it will no longer be possible to offset any mortgage interest against higher or additional rate tax income, as the maximum tax relief available will be 20%.

The tax breaks for people who let a room in their own home to a lodger will improve from April 2016. Homeowners will be able to receive as much as £7,500 in rent from lodgers without having to pay tax, compared with the current ‘rent a room’ limit of £4,250.

Do you pay Capital Gains Tax (CGT) on a buy-to-let property?

Yes, if you sell the property for more than you paid for it after deducting costs such as stamp duty and estate agent/solicitors fees. By making a profit you are essentially ‘gaining capital’, and so the tax applies. However, as an individual you get an annual allowance to set against any gain. Joint owners can each use their CGT annual allowance. Buy-to-let and second homeowners were deliberately excluded from the recent capital gains tax cut from 28 per cent to 20 per cent - the aim seems to be to discourage the buy-to-let market. For more on Capital Gains Tax see…


Rental Property


  • Over the long term a property investment has the potential to produce a positive real rate of return, as property values and rental income have a trend of increasing over time. Note that they can also fall, as has been shown by the trend from 2007, and if there is a sizeable mortgage on the property, investors could be left in “negative equity” which means owing more than the property is worth.

  • Investing in a buy to let property can be a good option as part of an existing portfolio, as overall risk can be reduced because the movement in property prices is not directly correlated to movements in the stock market.

  • Can provide a steady and likely rising, income stream via rental income (subject to constant tenant occupancy).

  • Occupancy and the level of rental income are directly driven by demand. Demand in the current climate has been high, particularly in light of the lending restrictions on mortgages and difficulty for first time buyers in finding affordable housing.


  • Direct investment in property is expensive, with a substantial initial capital outlay.

  • Costs of acquisition and management can be high – stamp duty, legal fees, agency fees, letting management fees and maintenance costs.

  • In current market conditions, obtaining finance can be difficult or costly.

  • Management can be time consuming and hard work, unless left to a letting agency

  • Buy to let is poor diversification and carries high risks, if you are relying solely on a rental property as an investment.

  • Risks are associated with liquidity – your money is tied up in the property and it can be slow and difficult to release funds, should you need access to money.

  • Your income stream and ability to cover the mortgage will be affected during periods when you cannot find a tenant, or the tenant fails to pay the rent.

  • Capital gains beyond the annual exemption are taxed at 18% (basic rate) or 28% (higher rate) and you cannot sell the property in stages to reduce this tax, as you can with most investments.