Buy-to-let property vs an investment portfolio

According to Savills estate agency an estimated 53,000 buy-to-let properties have been sold over the past 12 months which is the lowest number since 2007

by Simon Wong

Senior Wealth Planner

According to Savills estate agency an estimated 53,000 buy-to-let properties have been sold over the past 12 months which is the lowest number since 2007.

Although the number of new loans approved for purchases of rental properties in June 2018 was nearly 20 per cent lower than the preceding year, according to trade body UK Finance, there are still about 1.9 million outstanding buy-to-let mortgages.

Tax changes have made buy-to-lets less economical for some landlords who are highly leveraged. From April 2017, landlords have faced a gradual tapering of the amount of mortgage interest on which they can claim tax relief. In this tax year, 2018-19, they can claim only 50 per cent of the mortgage interest against their tax bill. For 2019- 20 this will fall to 25 per cent, with the relief withdrawn altogether in 2020-21. The tax relief is being replaced by a new tax credit of 20%, making buy-to-let mortgages less attractive to tax payers who fall into the higher rate of income tax. Previously all mortgage financing costs could be deducted from the rent received before landlords could calculate tax.

Since April 2016, the 10% Wear and Tear Allowance has been replaced by the less generous Replacement Relief.

Since 31st March 2016, an extra 3% of stamp duty has been payable by residential property owners purchasing an additional residential property.

The new lower Capital Gains Tax rates of 10% and 20% introduced for disposals from 6 April 2016 do not apply to disposals of residential property. CGT rates for these transactions remain at 18% and 28%.

The income tax rates for investment income is generally lower than that of buy-to-let properties. For a basic rate tax payer, the tax on dividend income is only 7.5% whereas the tax on rental income is 20%.

There are still about 1.9 million outstanding buy-to-let mortgages.

From April 2015, non-UK residents have to pay CGT on gains realised on UK residential property. The gain taxable is restricted to any growth from the April 2015 value. Alternatively the seller can elect to pay on a time apportionment basis if doing so would be beneficial. For example: where Principal Private Residence would be available.


Tax Year Percentage or mortgage interest payments deductible from rental income Percentage or mortgage interest payments qualifying for the new 20% tax credit
Before April 2017 100% 0%
2017-2018 75% 25%
2018-2019 50% 50%
2019-2020 25% 75%
After April 2020 0% 100%


Although residential property has been a popular investment in the past, not only are the returns now being affected by an increased rate of tax, but they can also be high risk because of a lack of diversification.

One of the problems with buy-to-let investments is that large amounts of capital have to be held in one single asset and landlords are often vulnerable because they hold a number of properties within one region.

The lack of diversification a single buy-to-let property represents on an investment level and tax-efficiency level should not be underestimated. For example, instead of a single buy-to-let property worth £500,000, a basket of 20+ stocks and shares might be held which provides options to withdraw future capital as well as take an income from the portfolio. A diversified portfolio of assets would allow a discretionary investment manager to use an investor’s annual tax-free allowances of Capital Gains exemption (worth approx. £11,700 pa) and tax-free ISA allowances (worth £20,000 pa), which would be otherwise lost if a buy-to-let property was owned.


Tax Year Buy-to-let property Portfolio of Stocks and shares
Capital Gains Tax within the Basic Rate Band 18% 10%
Capital Gains Tax within the Higher Rate Band 28% 20%


Tax Year Buy-to-let property Portfolio of Stocks and shares
Income Tax within the Basic Rate Band 20% 7.5%
Income Tax within the Higher Rate Band 40% 32.5%
Income Tax within the Additional Rate Band 45% 38.1%


Buy-to-let properties require much more involvement from an investor. A landlord has to factor in void periods, the income tax due on rental income, property management fees, legal fees, insurance, the need to keep up to date with future legislation affecting landlords, the landlord’s own time and effort etc.

What might initially appear a good return on paper, in reality may turn out to be not so advantageous after tax, expenses, time and hassle is taken into account. Also if the ultimate aim is to pass on the value of the buy-to-let to children to help them on the property ladder, it may not be as exible or liquid as one might hope.

In summary, buying property is a good idea if it is to purchase a home, e.g. helping children to buy their first home. But viewing property as an investment is becoming increasingly less attractive because of i) the lower income yields attained after taking into account taxes, fees, void periods and ii) lower capital returns achievable because of the various taxes that now apply.

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