Is Buy-to-Let a Good Idea in 2023?

Posted on 16th August 2023

For generations, property investment has been a go-to choice for individuals seeking a passive income stream, regardless of economic fluctuations. The onset of the COVID pandemic shed new light on this age-old strategy, showcasing its potential as rental costs skyrocketed and yields surged over two years. Savvy property investors reaped lucrative returns, triggering an investment boom into 2022.

However, the current property market appears to be standing on shaky ground. The landscape has evolved with rising interest rates and a cost of living crisis burdening both existing and aspiring tenants, raising doubts about the reliability of the property market.

Property demand at an all-time high

For years, the UK property sector has experienced an imbalanced ratio between supply and demand. The demand for rental properties has surged by approximately 23% since 2022, leading to general rental inquiries surpassing the national 5-year average by 46%. In contrast, the current housing stock is significantly below the 5-year average by approximately 38%.

This disparity has resulted in a noteworthy rise in the number of deals being agreed upon even before viewings take place. Moreover, an increasing trend has emerged where multiple tenants are compelled to engage in bidding wars to secure their desired homes.

Rental costs on the rise

This demand for property has led to a rise in rental costs across the UK in 2023. Homelet states UK rent prices have reached £1,229 PC on average – a record high for the housing market. Numerous factors contribute to this growth, namely the COVID pandemic and lockdowns allowing tenants to reconsider what they need in their living arrangements and ultimately decide to move home.

Regardless, landlords can enjoy potentially greater rental yields than in previous years. There are companies in the UK such as RWinvest Property Investors who have reported huge rises in buy to let customers.

Understanding the changing legislations

Last June, the Government unveiled its eagerly anticipated White Paper, ‘A Fairer Private Rented Sector,’ outlining progressive proposals that will reshape the rental landscape. Among these proposals is the requirement for new tenancies to meet a minimum ‘C’ Energy Performance Certificate (EPC) rating within the next couple of years. As this new era of regulation approaches, the private rented sector is about to experience a significant transformation.

Keeping abreast of these impending changes presents a unique opportunity for landlords and property investors. Acting now by acquiring properties that already comply with the proposed standards or undertaking necessary upgrades before entering the lettings market can bring about several advantages. It will ensure compliance with future regulations and enhance the property’s appeal to eco-conscious tenants and potentially lead to greater long-term returns.

By proactively embracing these changes, property owners can not only contribute to a fairer rental sector but also secure a promising future in a rapidly evolving market.

Changes to tax relief

In 2020, the UK government implemented significant changes to landlord tax relief, which may affect whether potential investors are willing to dip into the current buy-to-let market.

The traditional system of deducting mortgage interest from rental income was gradually replaced with a 20% tax credit on interest payments. This alteration affected individual landlords, leading to higher tax liabilities for many. However, corporate landlords remained unaffected by these changes.

Additionally, the reforms prompted a shift in property investment strategies, as some landlords sought to incorporate their activities to mitigate the impact of the new tax regulations.

Landlords in the UK now pay tax on rental income directly from revenue, not after deducting mortgage interest. If you’re planning to establish a limited company, you’ll benefit from mortgage interest being treated as a business expense. This allows you to deduct the cost before paying corporation tax. Seek advice from a registered tax expert before making any decisions.

Things to consider about Capital Gains Tax changes

As part of the October 2022 Autumn Statement, UK Chancellor Jeremy Hunt reduced the capital gains tax-free allowance from £12,300 to £6,000. In addition, the allowance will reduce again to £3,000 in 2024.

If you are new to property investment, capital gains tax for residential properties is 28% for higher-rate taxpayers, compared to 18% for those on the basic rate.

As such, buy-to-let investors will face a much larger tax bill when they sell up in the future.

It will then be reduced further the following year from £6,000 to £3,000. This lower tax-free allowance means landlords must pay more capital gains tax when they sell a property in the coming years.

Changes in tax and legislature not necessarily doom and gloom

These changes to tax and legislation may have caused some landlords to sell their properties, while others may have reached their investment goals and planned to sell in 2023 anyway.

Luckily, new investors now have opportunities to purchase properties that meet legal letting requirements or already have sitting tenants. As such, new investors do not have to invest any more funds to ensure the property is ready for tenants. In turn, you could see rental profits straight away.

So, is buy-to-let worth your investment in 2023?

Buy-to-let is a long-term investment with risks, yet it offers good income potential. Recent changes make it less attractive to some, but it remains profitable when approached wisely. Rental yields may have declined, but capital growth makes property investment lucrative.

Ensure you conduct due diligence before approaching any buy-to-let property. Thorough research into the best places to invest and a good understanding of your mortgage costs (there are plenty of mortgage cost calculators) can help avoid any financial issues and ensure potentially lucrative rental yields in 2023, despite uncertainty in the market.