Buy to Let Property Investment 2023 Guide

The UK rental market continues to offer opportunities for both new and seasoned landlords. Buy-to-let property investments offer a consistent and steady income as well as capital growth the longer you hold onto the property. Although capital prices are expected to fall back this year, this follows high growth in the 2020 pandemic and is expected to recover within the next five years. 

That being said, buy-to-let investment isn’t without its challenges, especially when it comes to new legislation and recent modifications to the taxation side of things.

We’ve put together this buy-to-let guide to cover everything you need to know about investing in buy-to-let in 2023. 


What is buy to let?

Buy to let or BTL is a term used when an investor purchases a residential property with the intention to rent it out. Buy-to-let investors most commonly take out a BTL mortgage to buy a property and collect an income from the rent paid by their tenant. As such, there are certain criteria you need to meet in order to invest in a BTL property.


Can first-time buyers purchase a buy-to-let property?

Although it’s not very common for first-time buyers to become buy-to-let investors before purchasing their first residential property to live in, it’s not impossible. However, you should be aware that there are no schemes available for first-time buy to let investors to help them get on the property ladder. This can make the route to owning your first investment property more of a challenge as lenders often view first-time buyers as a higher risk. As a first-time buyer with a buy-to-let mortgage, you may find that lenders are only willing to lend under certain conditions.


How does a buy-to-let mortgage work?

A buy-to-let mortgage is a type of mortgage that is specifically designed for people who want to purchase a property to rent it out. Here’s how obtaining a  buy-to-let mortgage works:

  • The application process – You’ll need to apply for a buy-to-let mortgage through a lender, such as a bank or building society. The lender will assess your application based on your income, credit history, and other factors to determine whether to offer you a mortgage and how much to lend you. This is very similar to the process to obtain a standard residential mortgage.
  • The deposit – As with a residential mortgage, you’ll need to put down a deposit to secure the mortgage. However, the deposit required for a buy-to-let mortgage is typically higher than for a residential mortgage, typically at least 25% of the property’s value. Some lenders will ask for up to 40%.
  • The interest rate – The interest rate on a buy-to-let mortgage is typically higher than for a residential mortgage, reflecting the increased risk involved in renting out a property. The interest rate may be fixed or variable, depending on the mortgage terms.
  • Rental income – Lenders will typically require that the rental income from the property covers a certain percentage of the mortgage repayments, typically around 125%. This means that the rent you charge your tenants should be enough to cover the mortgage repayments and other costs associated with the property.
  • Fees and charges – In addition to the deposit and interest rate, you’ll need to pay various fees associated with the mortgage, such as arrangement fees, valuation fees, and legal fees.



What deposit do I need for a buy-to-let property in the UK?

The deposit required for a buy-to-let property in the UK varies depending on the lender and the specific circumstances of the purchase. However, as a general rule, the deposit required for a buy-to-let mortgage is typically higher than the deposit required for a residential mortgage.

In most cases, lenders require a deposit of at least 25% of the property’s value for a buy-to-let mortgage. However, some lenders may require a higher deposit, up to 40% or more, particularly if the rental income from the property is not expected to cover the mortgage repayments.

It’s worth noting that the deposit is just one of the costs involved in buying a buy-to-let property. Other costs to consider include stamp duty, legal fees, survey fees, and any necessary repairs or renovations to the property.


Tax on buy-to-let properties

The amount of tax you pay on a buy-to-let property in the UK will depend on several factors, such as your rental income, your expenses, and your personal income tax bracket.

As of the 2021-2022 tax year, you’ll need to pay income tax on your rental income at your marginal income tax rate, which depends on your total income, including your rental income. 

So, for example, if you earn £30,000 per year from your job and £10,000 per year from your rental property, your total income is £40,000. You’ll pay income tax on a total of £40,000 at your marginal tax rate.

In addition, you can deduct some expenses from your rental income before calculating your tax liability. These expenses can include things like mortgage interest, property maintenance costs, letting agent fees, and other allowable expenses.

Finally, you may also be subject to other taxes and fees, such as Stamp Duty Land Tax (SDLT) when you purchase the property and Capital Gains Tax (CGT) when you sell it.

It’s a good idea to consult with a qualified tax professional or accountant who can help you understand your specific tax situation and obligations.



Are there any tax breaks for buy to let investors?

There are several tax breaks available for buy-to-let landlords in the UK. Here are some of the most common ones:

  • Wear and tear allowance – If you let a furnished property, you can claim a deduction for the wear and tear of the furnishings and fittings. However, this allowance was replaced by the Replacement of Domestic Items relief from April 2016.
  • Capital allowances – You can claim capital allowances for items such as equipment and machinery used in your rental property, as long as they meet the conditions for tax relief.
  • Repairs and maintenance – You can claim expenses for repairs and maintenance of your rental property. However, you can’t claim for improvements, such as a new bathroom suite, as these are considered capital expenditures.
  • Letting agent fees – You can claim the cost of fees paid to a letting agent for finding tenants and managing your property.
  • Council tax and utility bills – You can claim the cost of council tax and utility bills if you pay them on behalf of your tenants.


Capital gains tax on buy-to-let

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of an asset, such as a buy-to-let property. The amount of CGT you have to pay on a buy-to-let property depends on several factors, including the money you have made, your annual CGT allowance, and your tax rate.

As of the 2021-2022 tax year, the CGT rates for residential property in the UK are as follows:

  • Basic rate taxpayers (those earning up to £50,270 in 2021/22): 18% on any gain above their annual CGT allowance.
  • Higher rate taxpayers (those earning over £50,270 in 2021/22): 28% on any gain above their annual CGT allowance.

For example, if you sold a buy-to-let property for £300,000 and bought it for £200,000, your gain would be £100,000. If you have not used your annual CGT allowance, you could deduct it from your gain, leaving £87,700. If you are a higher-rate taxpayer, you will pay 28% CGT on this amount, which would be £24,596.


How much is stamp duty on Buy-To-Let?

The stamp duty on buy-to-let properties in the UK depends on the purchase price of the property. As of 2021-2022, the stamp duty rates for buy-to-let properties are as follows:

  • 3% on the first £500,000 of the property’s purchase price.
  • 8% on the next £425,000 of the property’s purchase price.
  • 13% on the next £575,000 of the property’s purchase price.
  • 15% on the remaining amount above £1.5 million.

For example, if you purchase a buy-to-let property for £400,000, you will pay 3% stamp duty on the first £500,000, which would be £12,000. This is because the 3% rate applies to the entire purchase price, up to £500,000.



How to work out the yield on a buy-to-let investment? 

To work out the yield on a buy-to-let investment, you need to follow these steps:

  1. Calculate your annual rental income – This is the amount of rent you receive from your tenant in a year. For example, if your monthly rent is £1,000, your annual rental income would be £12,000.
  2. Calculate your total investment – This is the total amount of money you have invested in the property, including the purchase price, stamp duty, legal fees, renovation costs, and any other associated costs.
  3. Calculate your net rental income – This is your annual rental income minus any annual expenses, such as maintenance costs, insurance, property management fees, and any other costs associated with renting out the property.
  4. Divide your net rental income by your total investment – This will give you your yield as a percentage. For example, if your net rental income is £10,000 and your total investment is £200,000, your yield would be 5% (£10,000 divided by £200,000, multiplied by 100 to get a percentage).

It’s important to note that the yield on a buy-to-let investment can fluctuate over time depending on a variety of factors, including changes in rental prices and expenses. It’s also important to factor in other costs, such as void periods when the property is unoccupied, as these can have an impact on your overall yield.


What are a landlord’s responsibilities in the UK?

As a landlord in the UK, you’ll have a number of legal responsibilities which are designed to protect the health, safety, and rights of any tenants. Here is a list of the key responsibilities that landlords have in the UK:

  • Safety checks – Landlords must ensure that their rental properties are safe for their tenants. This includes conducting annual gas safety checks, ensuring that all electrical equipment is safe, and providing smoke alarms and carbon monoxide detectors.
  • Repairs and maintenance – Landlords are responsible for ensuring that their rental properties are kept in good repair and that any necessary maintenance is carried out in a timely manner.
  • Tenancy agreements – Landlords must provide a written tenancy agreement that sets out the terms of the tenancy, including the amount of rent, the length of the tenancy, and any other important details.
  • Protecting deposits – Landlords must protect their tenants’ deposits in a government-approved deposit protection scheme.
  • Health and hygiene – Landlords must ensure that their rental properties are clean and hygienic and that any necessary steps are taken to prevent the spread of infectious diseases.
  • Tenant privacy – Landlords must respect their tenants’ privacy and give them reasonable notice before entering the property.
  • Discrimination – Landlords must not discriminate against tenants on the basis of their race, gender, religion, or any other protected characteristic.

It’s important for landlords to be aware of their legal responsibilities and to ensure that they are meeting their obligations under UK law. Failure to comply with these responsibilities can result in legal action, fines, or other penalties.



Buy-to-let landlord insurance

Buy-to-let landlords typically need several types of insurance to protect their investments and mitigate risks. Here are some of the key types of insurance that buy-to-let landlords may need:

  • Buildings insurance – This type of insurance covers the physical structure of the property against damage caused by events such as fire, flood, and storm damage. Buildings insurance is usually required by mortgage lenders.
  • Contents insurance – This type of insurance covers the contents of the property, such as furniture and appliances, against damage or theft. However, it’s worth noting that tenants are typically responsible for insuring their own belongings.
  • Landlord insurance – This is a type of insurance that is specifically designed for landlords and covers a range of risks, including loss of rent, liability claims, and damage caused by tenants. It can also cover legal expenses if you need to take legal action against a tenant.
  • Public liability insurance – This type of insurance covers you in the event that a tenant or visitor is injured on the property and makes a claim against you for damages.
  • Rent guarantee insurance – This type of insurance can provide protection in the event that your tenant is unable to pay their rent. It can also cover the cost of legal expenses if you need to evict a tenant.

It’s important to note that insurance requirements can vary depending on the property’s location and the specific terms of your tenancy agreement. 


How to find a buy-to-let property in the UK

There are many ways to research and buy investment properties in the UK market. Using property listing websites – such as Rightmove, Zoopla, and OnTheMarket are popular resources for finding properties for sale or rent in the UK. You can search for properties in specific locations and filter by price, property type, and other relevant criteria.

You could also work with estate agents. Estate agents can help you find properties that meet your specific requirements, and can provide advice on the local property market. You can find estate agents in your area by searching online or in local directories.

Attending property auctions is another way to go and a good way to find buy-to-let properties, particularly those that need refurbishment or renovation. You can find information about upcoming property auctions online or by contacting auction houses directly.



Can I get a Bridging loan for a buy-to-let property?

Yes, it is possible to get a Novellus bridging loan for a buy-to-let property purchase. Our bridging loans offer a short-term solution that is designed to help you bridge the gap between a property purchase and your longer-term financing becoming available.

Bridging loans can be useful for buy-to-let investors who need to secure a property quickly, but don’t have the cash on hand to complete the purchase. For example, if you find a good investment property but need to complete the purchase quickly in order to secure it, a bridging loan can help you to do so. Contact us to find out more.


Is buy to let still a good investment in 2023?

Buy-to-let is still very much a viable investment option for those who have done their research and understand the risks and costs involved. In general, the success of a buy-to-let investment will depend on factors such as the location of the property, the condition of the property, the demand for rental properties in the area, and the ability to generate rental income that covers the costs of the mortgage and other expenses. It’s important to carefully consider the costs and risks involved in buy-to-let investment and to seek advice from a financial professional or mortgage advisor before making any decisions.

Although capital prices are expected to fall slightly during 2023, rents have continued to rise due to low housing stock in the most popular investment areas which is why buy-to-let presents an excellent opportunity for investors looking to take a long-term view.