Buy-to-let (BTL) properties are an enduring investment for landlords looking for long-term returns and regular rental income. However, changes in legislation and increased tax scrutiny mean prospective landlords have a lot to consider right now.

Recently, there have been renewed calls for regulation, particularly around energy efficiency and tenancy rights, which could impact profitability. But as there is still an appetite among would-be renters, properties are still in demand.

If you’re considering investing in a BTL property, you’ll need to understand the latest rules and updates. Here, we look at the key points to be aware of when considering or managing a buy-to-let property.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a specific type of mortgage designed for individuals who want to invest in property to rent it out rather than live in it themselves. Unlike a standard residential mortgage, which doesn’t cover rental properties, a buy-to-let mortgage assumes that the property is an investment, where monthly rental income will cover mortgage repayments and yield a profit.

If you’re a first-time landlord, it’s important to know that a BTL mortgage is needed if you don’t own the property outright. Before you take out a mortgage, it’s advisable to work with a buy-to-let mortgage broker. This is because BTL mortgages come with specific criteria that can vary by lender and a broker will assess your needs and search for competitive rates, saving landlords from potential pitfalls.

Generally, lenders will require a deposit between 20-40%, and landlords must meet affordability and interest cover tests. This means that the projected monthly rental income should cover at least 125% of the mortgage repayments, ensuring that the rental income can comfortably cover mortgage costs.

Additional restrictions can apply, especially if you’re a landlord with multiple properties, as some lenders set limits on the number of properties in a portfolio. These criteria help lenders assess risk and ensure borrowers can manage their repayments sustainably.

Types of tax

Buy-to-let investments come with several tax obligations. Firstly, rental income is subject to income tax. After deducting allowable expenses, such as maintenance, insurance, and management fees, you must pay income tax on any profits. If you’re a landlord who is a higher-rate taxpayer, you’ll need to pay particular attention, as changes in mortgage interest tax relief may significantly impact your tax bills.

Additionally, landlords must be aware of Stamp Duty Land Tax (SDLT). When purchasing a second property, landlords face an additional 5% SDLT surcharge. Upon selling a property, Capital Gains Tax (CGT) applies to any profit made, which can be substantial depending on the property’s increase in value over time. Keeping accurate records and talking to a tax advisor can help manage these costs.

Legal requirements

As a landlord, your properties must meet specific legal standards to protect your tenants’ safety and wellbeing.

This includes the installation and maintenance of gas and electrical systems, and getting an Energy Performance Certificate (EPC), which is mandatory for renting out a property. The new UK government has committed to making sure homes in the private rented sector meet minimum energy efficiency standards by 2030.

Other responsibilities include protecting the tenant’s deposit in a government-approved scheme, providing annual gas safety checks, and meeting local fire safety standards. Failure to meet these requirements can lead to hefty fines or loss of rental privileges, highlighting the need for landlords to stay up to date with legislation.

Rules on fees and deposits

In 2019, legislation was introduced to protect tenants from excessive fees and high deposits. Under the Tenant Fees Act 2019, landlords can only charge rent, a refundable security deposit (capped at five weeks’ rent for tenancies below £50,000 per annum), a refundable holding deposit, and specific fees related to tenant requests, such as ending a tenancy early. There is also a cap on charges related to changes in the tenancy agreement.

Deposits must be protected under a tenancy deposit protection scheme, which ensures that tenants receive their deposits back unless legitimate deductions are made. These measures aim to make renting fairer and more affordable for tenants, and as a landlord, you must comply fully to avoid penalties.

With the change in government, there have been some important updates to rules around how landlords operate in the UK. It’s important to be aware of these changes if you plan to invest in BTL properties.