Buy-to-Let Rules - What Are the Rules on Buy-to-Let Mortgages?

Whether you are new to buy-to-let investing or an experienced investor with a portfolio of investment properties, keeping track of the current buy-to-let rules can be confusing and complicated.

Things are constantly changing in the buy-to-let market, and this includes the taxes you pay and the rules on buy-to-let mortgages.

Look no further than this blog, where we break down all the latest information you need to know as a property investor.

We’ll break down what taxes you need to pay on buy-to-let properties, what rules you need to follow when owning a buy-to-let investment, and the buy-to-let mortgage rules that you should be aware of.

Keep reading for more details.

When owning buy-to-let property, even if you are using the services of a property management company, you have to perform the duties of a landlord and ensure your tenants are properly looked after.

You don’t want to earn a reputation as an untrustworthy landlord, as this will push away potential tenants and make it harder to fill your properties to keep collecting rental income.

With this in mind, it’s vital that you are aware of what buy-to-let rules you need to follow when owning investment properties.

• The Tenant Fees Act 2019

The Tenant Fees Act covers what you can and cannot charge your tenants during their residence in your property.

Under the act, you can only charge money for:

• Rent.
• A refundable security deposit.
• A refundable holdings deposit.
• An early end to the tenancy agreement (at the tenant’s request).
• For requesting changes to the tenancy agreement during a fixed term (capped at £50).
• A fee for loss of keys or late payment of rent.

The Tenant Act also covers buy-to-let rules for deposits that you need to be aware of. Since 2019, landlords must:

1. Ensure their deposits are protected through one of three government-registered schemes (The Deposit Protection Service, My Deposits or The Tenancy Deposit Scheme) within 30 days of receiving it.
2. Provide tenants with a list of prescribed information, which includes the amount of the deposit, where it is being protected and the contact details of the scheme, the address of the property and your contact details as the landlord.

You also cannot charge:

• A deposit of more than five weeks’ rent if the annual rent is under £50,000.
• A deposit of more than six weeks’ rent if the annual rent is over £50,000.
• More than one weeks’ rent as a holding deposit.

2. Minimum Energy Efficiency Standards

Another buy-to-let rule you need to follow as a property investor is to make sure your investment properties meet the minimum energy efficiency standards required by the government.

With the effects of climate change becoming more and more apparent, the UK government requires all landlords to ensure their properties meet an Energy Performance Certificate (EPC) rating of an E at least.

EPCs are ranked A (most efficient) through G (least efficient), and last for ten years. There are heavy fines involved if you fail to get an EPC certificate.

There are several ways you can improve your existing buy-to-let property’s energy rating:

• Eco-friendly insulation is a great and easy way of helping to improve a property’s energy efficiency. It’s estimated that up to one-third of a home’s heat is lost through poor insulation, so ensuring the floor and roof insulation is fresh is a quick way of improving energy efficiency.
• Smart meters may be common in the UK right now, but this is for good reason. They are great at managing and monitoring energy usage and making smaller regular payments is often better for tenants than expensive monthly bills.
• Solar panels are really useful for creating renewable energy. While initially, they are a steep expense, they make up for this in the amount you save in the long run. They can also raise the value of a property while making it more energy efficient.

3. Electrical and Gas Safety Checks

On top of ensuring buy-to-let properties are energy efficient, landlords also need to check that the electricity and gas connections are safe for their tenants.

EICRs

Every landlord needs to have an Electrical Installation Condition Report (EICR) carried out, which involves a registered electrician inspecting all electrical installations, including wiring and sockets.

A certificate is then handed to new tenants, which is updated every five years.

Gas Safety Inspections

Every year, an annual gas safety inspection must be carried out by a Gas Safe engineer, and the certificate for this must be given to tenants within 28 days of it being carried out.

Smoke and Carbon Monoxide Alarms

• Discuss briefly the legal requirement of having working smoke and carbon monoxide alarms

It is vital to keep on top of these, as not only will it potentially result in fines, but it could be unsafe for your tenants.

4. Right to Rent Checks

Before agreeing to terms with any tenants, buy-to-let landlords have to ensure they know who will be living in their property.

You have to check that any tenants over 18 are eligible to rent in the UK, which you can do by requesting documents like a British or Irish passport or proof of citizenry, or immigration documents if this is not possible.

If you own student buy-to-let property, you will likely need to ensure your tenants are registered students of the closest universities, as well as the basic Right to Rent checks.

5. Evictions and Notice Periods

If you want to end the tenancy early, for whatever reason, it’s not as simple as showing up and telling your tenants to pack their bags. You need to follow the proper eviction procedures or open yourself up to legal action from your tenants.

There are two kinds of eviction notices you can serve to tenants, and these fall under very specific circumstances.

Section 8 notices can be served to tenants when they are in breach of the tenancy agreement, such as repeatedly late rent payments. The notice period will depend upon the reason why you are seeking to evict the tenants.

For serious repeated arrears of rent, you can give a notice period of two weeks, whereas severe antisocial behaviour may mean you can give four weeks’ notice.

Section 21 notices can be served when the tenant is not at fault, and may be served when the fixed term of a tenancy agreement is coming to an end, allowing you to regain possession of the property. You need to give a minimum of two months’ notice when serving a Section 21 notice.

6. HMO Licensing

Houses of Multiple Occupancy (HMOs for short) are a type of buy-to-let property where multiple tenants rent out rooms in the same property, sharing common areas like bathrooms, kitchens and living rooms.

To rent out an HMO, you might need to have a license to legally let your property out to tenants.

If the property is rented out to five or more tenants, an HMO license is mandatory. These are known as ‘large’ HMOs.

While you may not need a license for an HMO if you are renting to less than five tenants, you should check with your local authorities, as some areas require all HMOs to have a license, regardless of size.

7. Pets

As part of the new Renters Rights Bill brought in in 2024, landlords are no longer allowed to issue a blanket ban on pets within their property.

This new standard tenancy agreement makes it easier than in the past for tenants with ‘well-behaved’ pets to secure a lease within rental properties. 

Just 7% of property investors and landlords allow pets within their properties. Hopefully, with these new rules in place, demand for rental properties will rise even further in the UK.

This is always good news for investors who want to reduce potential void periods and keep up a steady stream of tenant interest. However, it is still up to the landlord whether or not they allow a tenant to house a pet within their rental property. 

8. Property Maintenance and Repair

Investment properties also need maintenance and repair work to be undertaken by the landlord. Repairs are essential to keep the tenants safe and secure living in the rental home. Improvement however is a different term and it is not always necessary to do this. 

Landlords are responsible for up keeping the property under Government legislation, including the exteriors, plumbing fixtures, electrical wiring and more. Tenants can make repairs if agreed and in the contract but the landlord is ultimately responsible. Doing these early can halt any further potential damage and legal action being taken. 

The main benefit of buying a new build investment is there is less likely a chance of anything going wrong vs and older property, as all the fittings and structure is new. Hands-off property investment also removes the day-to-day hassle for investors as repairs can be sorted by the management company. 

You will pay tax on any buy-to-let property you own in several different ways and at several different stages of the process of buying and owning an investment property.

It can be confusing to know what tax you’ll pay and when, so we’ve broken down what to expect in this section of the blog.

For more details about buy-to-let tax rules, try reading our blog where we go into detail about what you’ll pay.

• Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is the first buy-to-let tax you’ll pay when investing in buy-to-let property, and potentially one of the most expensive.

This is a tax you pay to HMRC when purchasing any land or property in the UK, added to the purchase price when you pay. You need to pay stamp duty within 30 days of buying the property.

How much stamp duty you pay rises with the property price, with you paying increased amounts on each portion of the property’s value.

Buy-to-let investors pay a higher rate of stamp duty, as anyone purchasing an additional property needs to pay a 3% surcharge on the stamp duty that they pay. Those investing from overseas will pay a further 2% on any UK property they buy, even if they are UK citizens.

We’ll show you an example of how stamp duty works to help you understand what to expect.

Stamp Duty breakdown

Here is a breakdown of the current SDLT rates for England and Northern Ireland. For Scotland and Wales’ rates, try our blog on buy-to-let stamp duty.

For example, if you buy a buy-to-let property for £300,000, this is the stamp duty you would pay:

5% on the first £250,000 of the property = £12,500

10% on the next £50,000 of the property = £5,000

For a total of £17,500 worth of stamp duty.

How does Income Tax affect buy-to-let earnings?

Rental income is one of the main ways you earn money from buy-to-let investments, so being aware of how income tax affects your returns from it is essential.

You are charged rental income on any earnings you make in a year, so the passive income you make from buy-to-let properties falls under this.

The amount you earn from all your incomes, including any day jobs you have as well as investments, decides what threshold of income tax you will fall under, in turn deciding how much income tax you will pay each year.

While the bulk of your income will come from the rent you collect regularly from your tenants, there are other ways you might make money, such as if your tenants provide payments for repairs or bills.

If you charge non-refundable deposits or have money that’s been kept over from a returnable deposit following the end of tenancy, this can also get factored into your total income.

You need to report this income, if it’s more than £2,500, on a self-assessment tax return. 

Every year, you get a personal allowance of £12,570 which is tax-free, and any income you make above this threshold is eligible to be taxed.

Current income tax rates for England and Northern Ireland

The current rates for income tax in England and Northern Ireland for 2024/25 are as follows:

• 20% tax on buy-to-let income between £12,571 and £50,270.
• 40% tax on buy-to-let income of £50,271 and over.

With this in mind, here is a breakdown of what you might expect to pay annually through income tax:

Salary from work = £50,000

Income from a buy-to-let property = £14,000

For a total income of £64,000

After the tax-free personal allowance is deducted, this leaves you with a taxable income of £51,430. This puts you in the higher-rate threshold, meaning you will pay an income tax of 40% on your earnings.

In total, this would mean you pay £20,572 in income tax every year while you make this amount of money. Naturally, this would change if your income changes, or if the tax rates vary in the new year.

• Capital Gains Tax

The final main way you will pay tax on buy-to-let properties is through capital gains tax, which is paid when you sell an investment property.

Another way you make money from buy-to-let is through capital growth, where the value of property rises over time so that when you are ready to sell, you can make substantial profits.

Per Land Registry data, house prices have risen by 27.7% in the past five years, so there is serious potential for some major profits right now!

Capital gains tax is charged on the profit you make from the sale of any physical asset, which property falls under. You don’t need to pay tax on the overall price of the sale, just the profit you make from when you first bought the property.

Much like income tax, the amount you pay is determined by the tax bracket you fall under, but this is more simple to understand.

Basic-rate taxpayers pay 18% on the sale of any residential property, while anyone in a higher tax bracket will pay 28%.

So if you bought a buy-to-let property for £200,000 and sell it for £250,000, you would pay tax on the £50,000 profit.

If you are a higher-rate taxpayer, you would pay 28% of the profit, which comes to £14,000.

The other major set of rules you need to be aware of is regarding buy-to-let mortgages. You might likely want to borrow a buy-to-let mortgage to help you get started with property investment, so you need to know what to expect if you decide to borrow one.

Buy-to-let mortgage rules are different from traditional residential mortgages in several ways, so you need to go in knowing what to expect.

• The deposit for a buy-to-let mortgage is normally higher than for residential mortgages, with lenders often requiring a minimum deposit of 25% or higher.
• Rather than paying off the amount you borrowed, you instead pay back the accrued interest during the terms of the mortgage and pay the total cost of the mortgage at the end of the term.
• Buy-to-let mortgages have higher rates of interest than residential mortgages, with the current average fixed rate for BTL mortgages being 5.91% according to Which.co.uk, as compared to the average fixed rate for residential mortgages, which comes to 4.79% per Rightmove.
• Most buy-to-let mortgages are not covered by the Financial Conduct Authority (FCA), so neither lender nor borrower has as much protection.
• First-time buyers may struggle to borrow a buy-to-let mortgage, as mortgage brokers will want borrowers to have experience owning property and paying back mortgages due to the lack of protection. You should own your own home before trying to borrow a BTL mortgage.

There are other differences, but those are the main ones to be aware of. Because of the higher interest rates, the repayments on buy-to-let mortgages are often higher than what you would pay with a regular mortgage.

Estate agents and lettings agents may have recommended mortgage providers they can set you up with, but if the option is there to choose your own, it is best to research mortgage lenders to see who can give you the best mortgage deal.

As mortgage repayments are interest-only, lenders will assess the property to make sure you can make enough money from it to make the interest payments. They will use a Loan to Value ratio for this, also known as an LTV ratio. This is a common way of testing the affordability of a mortgage.

Most lenders will want your rental income to be at least 125% higher than your mortgage monthly payments, to ensure you can consistently pay back the interest. If your chosen investment property has assured rental yields, then this process is easier.

Some lenders may ask for a higher LTV of 145%, however, so be aware of this when shopping around for mortgages.

Buy-to-Let Mortgage Rules for Portfolio Landlords

Those who own four or more buy-to-let properties are known as portfolio landlords. Often, these investors use buy-to-let properties as their main source of income.

The Bank of England introduced new rules several years ago which makes it more difficult for these kinds of landlords to borrow more money through mortgages. These are more rigorous stress tests to make sure you can still afford to make your repayments.

Portfolio landlords will have to provide details of any current mortgage terms, cash flow projections and business models for their properties when applying. If you already have several BTL mortgages, it may be more difficult to borrow another.

Buy-to-Let Mortgage Tax Relief

Previously, investors could use buy-to-let mortgage repayments to help gain extra tax relief. This was done by deducting your interest repayments from your rental income, so you would pay less income tax.

This is no longer available to landlords, though. Instead, you receive a 20% tax credit based on the interest on your mortgage repayments. Be careful, as this may mean you pay far more in tax than you would have done before.

When Do New Buy-to-Let Rules Come In?

New buy-to-let rules come in periodically. Tax rates change every financial year, and new legislation is introduced regularly. Keep track of the news as new buy-to-let rules may come in at any time.

What Are The New Tax Rules on Buy-to-Let?.

In an investment residential property for £300,000, the SDLT you owe on the purchase will be calculated as follows:

5% on the first £250,000 = £12,500

10% on the final £50,000 = £5,000

Total stamp duty tax = £17,500.

See our full breakdown on stamp duty buy to let properties.

Accurate in England & Northern Ireland 31st October 2024.

Do I Need to be Licensed as a Landlord?

The private rental sector does require a license depending on the area the property is in or if it is an HMO. Local authorities have the power to implement a licensing system, so it is always best to contact them when looking at a potential buy-to-let property. Failing to have a license could result in a fine.  The National statistic of private rental properties is currently 19% and local authorities can implement a selective licensing scheme based on varying socioeconomic statistics, such as crime, deprivation and migration. 

Landlord registration and a landlord license are two different matters, and you should seek advice on what you need to become a landlord. 

• Discuss whether a licence is required to become a landlord.

Now you have a solid grasp of what buy-to-let rules you need to follow, why not consider getting into buy-to-let investing with RWInvest?

With over 18 years of experience in the UK property investment market, we are experts in guiding would-be investors towards financial freedom through property investment, helping you every step of the way.

With high-quality new-build investment properties in top UK cities like Liverpool, Manchester and London, we have a range of buy-to-let properties on offer to meet a variety of price points.

Contact us today to find out more! Alternatively, read our guide on how to become a landlord in the UK for more information.