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Essential guide to UK buy-to-let

Find out about the risks, potential rewards and responsibilities of investing in UK property.

While interest rates for savers remain low in the UK, buy-to-let remains an increasingly popular investment option1.

The buy-to-let market has seen steady growth over the past, as demand for rental properties has increased1. Some 17.3% of the UK population now rent from private landlords, up from 9.5% in 20062, resulting in additional demand for rental properties.

Investors and landlords have also been attracted by rising property prices, which have risen by 4.4% across the UK in the past year3. Of course, this is the past investment performance of property and it is not a reliable indicator of future performance. The value of rental properties has gone down in the past as well as up. 

The size of buy-to-let

Yet despite this promising environment, the UK property investment market faces challenges and returns from buy-to-let is never a guarantee  – remember that it’s a relatively high-risk and illiquid investment.

The Association of Residential Letting Agents (ARLA) says you should think of buy-to-let as a medium to long-term investment5. Before becoming a landlord it is important to get your sums right. Will the rent cover borrowings and maintenance costs, after allowing for void periods, for example?

In Scotland, Wales and Northern Ireland you will need to register with the relevant council as a private landlord for a small fee. In England registration is largely voluntary. But compulsory schemes are being introduced or planned in several London boroughs as well as Croydon in Surrey and Liverpool6.

In addition to this, several soon-to-be implemented tax changes were announced that might reduce the profitability of some buy-to-let properties7.

What to buy?

The UK rental property market is divided into several sectors each with their own features and landlord responsibilities. For example, a ‘house of multiple occupation’ (HMO) requires significant commitments of both time and effort from a landlord. Less effort is likely to be required with a two-bedroom apartment in a city centre rented to a professional couple.

Apartments

Apartments, known as “flats” in the UK, are popular with both first-time buyers and those wanting easy-to-manage second homes. They are most common in city centres either within converted houses or purpose-built blocks. Such properties are generally rented out through Assured Shorthold Tenancy (AST) agreements.

Rents are rising
* Figures are monthly average rent8, % is year on year increase 2014/2015. These figures are a useful guide to past, but not future, performance.

 

Family homes

Families often rent whole houses and these can be let on a much more long-term basis using an Assured Tenancy (AT) agreement, although these are less common.

More information on Assured Tenancies.

Shared houses

These are communal properties where tenants rent the property together and share the facilities. All the tenants sign a single contract that is usually an AST. This is standard in the UK and details both the conditions and minimum term that must run before you can ask a tenant to leave (usually six months). It also sets out the landlord’s and tenants’ responsibilities during the rental period.
 

HMOs

When multiple tenants rent a room in a house singly (rather than together) the property is classified as a ‘house of multiple occupation’ or HMO. These are covered by more stringent safety regulations and different tenancy contracts.

More information on HMOs
 

Prime market

In most UK cities there is also a separate ‘prime’ rental market. Properties are finished to a very high standard and prices are often three or four times those of standard properties.

In central London we define the super prime market as any property on the market for over £5,000 a week, although I act as a single point of contact for applicants and landlords with rents of £9,500 per week and above,
Tom Smith, Head of Knight Frank’s Super Prime Lettings team.

Financing your BTL mortgage

You can get a mortgage for a buy-to-let property if you don’t live in the UK. Investors can acquire buy-to-let either entirely with cash, or with a combination of savings and a buy-to-let mortgage.

Mortgage lenders in the UK treat buy-to-let mortgages differently to residential ones.  The deposit required to secure a buy-to-let mortgage on a UK property is higher than for a mortgage to buy a home you’ll be living in. Also, you’ll need to provide detailed financial information such as full disclosure of your income, outgoings and savings, as well as an estimate of the property’s likely rental income.

But borrowing to buy remains popular among many landlords and the number of buy-to-let loans to purchase property has been on the increase. Landlords who are not based in the UK should check whether their home country regulator permits offshore mortgages.

YOUR BUY-TO-LET PROPERTY MAY BE REPOSSESSED OR A RECEIVER OF RENT APPOINTED IF YOU DO NOT KEEP UP PAYMENTS ON YOUR MORTGAGE.

How do I find tenants?

There are two options. The most popular is to use a letting agent. For a fee they will take pictures of your property, write an advertisement and then upload it to the main UK property portals such as Zoopla.

A letting agent will:

  • Manage enquiries and viewings;
  • Check the personal backgrounds of tenants;
  • Take a deposit (usually six weeks’ rent);
  • Complete an inventory of the property before the tenants move in;
  • Draw up a rental contract.
Online agents are ideal for those who want to get more involved in the letting process rather than asking a traditional agent to handle everything
James Davis, CEO of Upad.co.uk

Lettings agents offer several levels of service. The most basic is just a tenant-finding service but you can also pay for them to collect the rent. The most comprehensive level is ‘fully managed’. Pay for this and the agent will do everything. It’s a popular option among landlords who don’t live in the UK.

To find a letting agent in the UK visit the Association of Residential Letting Agent website.

The most common fees for these services vary but are charged as a percentage of your annual rent, a figure that is often negotiable.

For those who don’t want to use an agent there are ‘self-service’ websites that enable landlords to self-manage their properties and do as few or as many of the tasks as they want themselves.

“Online agents are ideal for those who want to get more involved in the letting process rather than asking a traditional agent to handle everything,” says James Davis, CEO of Upad.co.uk

What laws do I need to know about?

The UK rental market is comprehensively regulated and there are several key pieces of legislation that landlords must comply with. These show when tenants can or cannot be evicted and how tenants’ deposits should be protected or tenancy agreements drawn up.

Also there are strict rules on the safety of gas boilers, fires and electrical goods and the installation of safety equipment such as a carbon monoxide alarm. There is also now a legal requirement to possess a current Energy Performance Certificate (EPC) for a rental property.

More information on landlord rights and responsibilities can be found here

What’s the potential return on investment?

The average year-on-year gross return (before costs and tax are deducted) on buy-to-let property in the UK is currently 5.1% excluding capital growth and 9.3% if you include it, latest figures show9. But remember that past returns are not a reliable indicator of future returns.

Between August 2014 and August 2015 the average landlord in England and Wales saw a return of £16,856 in absolute terms before deductions such as maintenance and mortgage payments
Adrian Gill, of estate agents Reeds Rains and Your Move

“Between August 2014 and August 2015 the average landlord in England and Wales saw a return of £16,856 in absolute terms before deductions such as maintenance and mortgage payments,” says Adrian Gill of estate agents Reeds Rains and Your Move. “Of this, the average capital gain contributed £8,323 while rental income made up £8,533.” But returns aren’t always positive, particularly if you look at the UK’s regions. For example, rents have dropped by 3.1% over the past year (2015/2014) in Wales, which has pushed down yields there too8.

 

How much tax will I pay?

This will depend on your residence status and the guidance of a tax adviser should be sought. Essentially, resident and non-resident landlords are taxed on their annual income from a property and any profit or gain you make when selling a property.

You can claim some expenses to reduce your income tax bill including the costs of finance, but the rules are changing following Chancellor George Osborne’s announcement during his Summer Budget in July 20157.

Capital gains tax (CGT) in the UK is also payable on any profit made on the sale of a buy-to-let property. This is charged at different rates and until recently non-residents did not pay CGT when they sold a UK property, but the rules were changed and CGT is now payable.

More information on tax and CGT can be found here.

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Barclays seeks to ensure that the information published on this website is as accurate as possible. Please note the information on this website does not constitute legal or professional advice. Barclays accepts no responsibility for the contents of any pages referenced by an external link. Any references or links on the website to external organisations or websites are provided for the purposes of ease of access. Such links should not be taken as an endorsement of the contents of those external websites or of those organisations.

Equifax, ‘Buy-to-let sales up 50% year-on-year’, September 2015. http://www.ftadviser.com/2015/09/24/mortgages/mortgage-data/buy-to-let-sales-jump-in-august-6GlQTgyhI7WGphUbVQy3zI/article.html

Eurostat data, ‘Distribution of population by tenure status, type of household and income group’, September 2015.

Land Registry website, ‘House Price Index, August 2015’.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/463599/HPIReport20150924.pdf

Paragon website, ‘18 Years of Buy To Let’ (page 4) http://www.paragon-group.co.uk/file_source/Files/MAIN/pdf/Press%20Releases/2014/18%20Years%20of%20BTL.pdf

ARLA buy-to-let guides, November 2015.
http://www.arla.co.uk/info-guides/info-for-landlords/buy-to-let/

Parliamentary report, ‘Selective Licensing of Privately Rented Housing (England & Wales)’, March 2015. http://researchbriefings.files.parliament.uk/documents/SN04634/SN04634.pdf

HM Treasury website, ‘George Osborne’s Summer 2015 Budget speech’, July 2015. https://www.gov.uk/government/speeches/chancellor-george-osbornes-summer-budget-2015-speech

Countrywide website, ‘Lettings Index, September 2015’. http://www.countrywide.co.uk/news/countrywide-quarterly-lettings-index-q3-2015/

LSL website, YourMove Reeds Rains Buy to Let Index, ‘Rents retreat in August’, September 2015. http://www.lslps.co.uk/documents/buy_to_let_index_aug15.pdf (Annual rises across England and Wales graph on page 1).

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