Is it still worth investing in buy-to-let?

A buy-to-let property has the potential to supplement income and rise in value – but changes to tax rules have significantly reduced its appeal over recent years.

Here we run through whether it still makes sense to invest in buy-to-let, and other options.

What are the tax implications?

Investing in buy-to-let requires careful consideration to avoid profits turning into a loss after tax.

You will pay a 3% stamp duty surcharge on second homes in the UK. This is charged as a flat rate on the entire cost of the property – or a hefty £9,000 on a £300,000 property.

By April 2020, you will not be able to deduct mortgage interest from your rental income before paying tax, but the mortgage interest will instead qualify for a 20% tax credit. Higher and additional-rate taxpayers are likely to pay significantly more tax as a result of the changes, as they will now pay tax on the total rental income, with the mortgage interest only being eligible for 20% tax relief.

Pros and cons

Rental income from a buy-to-let property may supplement income from other sources, and over the long term, property investments should increase in value.

However, unless you’re buying without a mortgage, you’ll need to borrow to invest. When interest rates are low and the rental market is doing well, this can increase returns – but there’s always the risk things could change.

As with all investments, it is impossible to know what lies ahead for the property market. As a landlord, you also have substantial commitments to your tenants, which can be time-consuming and expensive.

You probably won’t be able to access your money in a hurry if you need the funds, unlike more liquid investments such as equities and bonds.

Selling up may also involve tax bills. Buy-to-let properties are subject to capital gains tax, which could eat into any profits.

What are the other options?

Landlords appear to be a target for tax changes – and depending on your situation, you may want to consider other options. There are plenty of tax-efficient investments that can provide an income as part of a diversified investment portfolio.

We can help you find investment choices that reflect your investment goals and priorities.

To find out which long-term investment strategies are right for you, request a callback today.

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The value of investments and any income from them can fall and you may get back less than you invested.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

Past performance is not a guide to future performance.

The information contained in this publication is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.