Over the past 10 years, the UK government has consistently introduced tax measures that have steadily reduced the profitability of buy-to-let property investing.
The latest change is a 2 per cent increase in the rates of income tax that apply to property income, due to take effect from April this year.
That raises an increasingly pressing question: is buy-to-let still worth the headache?
Let’s recap some of the more recent changes:
Mortgage interest relief
Introduced in 2015 and phased in between 2017 and 2020, this is widely regarded as one of the most damaging changes for individual landlords.
Previously, landlords could deduct 100 per cent of their mortgage interest from rental income before paying tax. Now, they receive only a 20 per cent tax credit on mortgage interest. Why does this matter? Higher-rate (40 per cent) and additional-rate (45 per cent) taxpayers effectively saw their tax relief halved.
Stamp duty land tax surcharges
The cost of acquiring new rental properties in England and Northern Ireland has risen sharply through three major increases (Wales and Scotland have their own stamp duty rules).
· In 2016, an additional 3 per cent second home surcharge was added to every stamp duty band.
· In the Autumn Budget 2024, this surcharge was increased from 3 per cent to 5 per cent.
· In 2021, a 2 per cent non-resident surcharge was introduced, which applies in addition to the second home surcharge.
Wear and tear allowance
Before 2016, landlords of fully furnished properties could automatically deduct 10 per cent of their annual rent for “wear and tear”, regardless of whether they actually spent any money on maintenance.
Now, landlords can only deduct the actual cost of replacing items. This increased the tax bill for many and added a significant administrative burden of keeping receipts.
Capital gains tax for non-residents
In 2015, UK property came within the charge to UK capital gains tax for non-residents for the first time. Before that, UK non-resident landlords were exempt from capital gains tax on their UK property portfolio.
While headline capital gains tax rates have fluctuated, the buffer that protects capital gains has been slashed from £12,300 to £3,000 ($16,946 to $4,133).
Renters’ Rights Act
The Renters' Rights Act comes into force on May 1 this year and fundamentally shifts the power balance toward tenants.
The abolition of Section 21 no-fault evictions means landlords must now navigate a lengthier, more complex Section 8 process to regain possession, representing a significant loss of control.
Furthermore, the mandatory shift to periodic tenancies and the introduction of a landlord ombudsman add layers of administrative burden and regulatory oversight, demanding a more professional, hands-on approach.
Landlords must also meet the coming decent homes standard, requiring increased capital expenditure on maintenance.
In short, the buy-to-let model is facing a perfect storm of higher costs, tighter regulation and reduced control. This environment requires landlords to re-evaluate their portfolios. The days of treating property as a passive, tax-efficient investment are over. It is now a highly active, heavily regulated business with thinner margins.
Property may still have a place
Despite the various tax changes introduced in recent years, many investors still view UK property as a long-term safe haven.
While property is clearly not risk-free, it behaves very differently from listed investments. The absence of daily pricing means that short-term market movements are less visible, which, for many investors, reduces anxiety and creates a sense of stability, even during uncertain periods.
Property’s appeal is also rooted in its tangibility. Owning a physical asset continues to feel reassuring for many people. Even when values fall, as they inevitably do from time to time, the fact that the asset can be seen and used often reinforces a perception of long-term resilience and durability.
How much property is enough
From a portfolio perspective, property and rental income can play a useful role in diversification, but only within sensible limits.
We often see clients approaching retirement with a significant proportion of their wealth in property. In many cases, about 25 per cent – 33 per cent of their net worth.
For younger clients, they may have a higher percentage of their net worth in property as they are still building their other assets. When property forms more than 50 per cent of an individual's net worth, you do need to be careful, given the concentration of your portfolio and reliance on property price and rent stability. It may be worth investing in assets which offer greater flexibility and global diversification.
Inheritance tax concerns
One of the most overlooked issues in UK property is inheritance tax. Directly-owned UK property remains fully subject to UK inheritance tax. As a result, we frequently see a pattern where clients accumulate property throughout their working lives, only to later face difficult decisions about how to restructure these holdings in a tax-efficient way. For anyone considering building or expanding a UK buy-to-let portfolio, inheritance tax should be part of the conversation from the outset, not an afterthought.
Should you make the switch from UK property being the core of your investment strategy to investments that are more tax efficient, more liquid and with less hands-on day-to-day management?
This depends on your own circumstances and your current approach. You should seek qualified and regulated advice to understand the best route for you.
The question is no longer about high returns, but whether the increasing headache justifies a diminishing reward.
Peter Webb is head of tax and Christopher Davies is head of financial planning at Metis
