Is Buy-to-Let Still a Good Investment? Tax, Costs, & Risks Explained

In this article, we take a look at buy-to-let (BTL) property as an investment – relevant to the CII R01, R02, R04, R06, AF4, AF5, CF1, CF6 and R07 exams.

This article is correct as at 28 February 2025.

Why invest?

Investors may consider BTL as a way to:

• Generate rental income for immediate cash flow.
• Benefit from long-term capital growth as property values increase.
• Diversify investments away from traditional assets such as pensions and ISAs.
• Provide additional income in retirement.

Tax Considerations

Taxation is a major factor when considering BTL investment. Investors must account for additional Stamp Duty Land Tax (SDLT) on purchase, Income Tax on rental income and Capital Gains Tax (CGT) on a later disposal,  while also remembering that the property may be subject to Inheritance Tax (IHT) upon death.

Stamp Duty Land Tax (SDLT) Surcharge

• Investors must pay a 5% surcharge on top of standard SDLT rates when buying a BTL property.
• If a client owns multiple properties, they need to factor in these higher upfront costs.

Income Tax on Rental Income

• Rental income is taxed at a client’s marginal Income Tax rate:
  • 20% for basic-rate taxpayers
  • 40% for higher-rate taxpayers
  • 45% for additional-rate taxpayers
• Deductible expenses include letting agent fees, maintenance costs, and landlord insurance.
• Mortgage interest relief is restricted – landlords now receive a 20% tax credit rather than full relief. 

Capital Gains Tax (CGT) on Disposal

• When a BTL property is sold, the CGT annual exempt amount of £3,000 can be used to reduce taxable gains.
• CGT then applies to any profit made at:
  • 18% for gains within the basic-rate tax band; and
  • 24% for gains above the basic-rate tax band. 

Mortgages

BTL investors typically use specialist buy-to-let mortgages, which differ from standard residential mortgages in a number of ways:

• Higher deposits (usually 25%+).
• Interest-only is common, meaning monthly repayments are lower, but the capital must be repaid at the end of the term.
• Lenders require a minimum rental income – typically 125% of the mortgage interest payments at a stress-tested rate.

Potential Risks

While BTL can generate attractive returns, risks include:

• Falling property prices – clients could face capital losses if house prices fall.
• Liquidity issues – property is an illiquid asset, unlike stocks or ISAs.
• Regulatory changes – future tax or policy changes could affect profitability.
• Unexpected costs – maintenance, void periods, and potential non-paying tenants.
• Mortgage rate increases – higher interest rates impact affordability.

BTL vs. Other Investment Options

When comparing BTL with other investments, one key factor to consider is liquidity. Buy-to-let properties are illiquid assets, meaning they can take time to sell, whereas Stocks & Shares ISAs offer much greater liquidity, allowing investors to access their funds at any time. Pensions, while offering tax advantages, are also relatively illiquid as funds are usually inaccessible before age 55 (rising to 57 in 2028).

From a tax efficiency perspective, ISAs and pensions often provide greater advantages than buy-to-let properties. Stocks & Shares ISAs grow free of Capital Gains Tax (CGT) and Income Tax, making them highly tax-efficient. Pensions benefit from tax relief on contributions, and upon retirement, 25% of the pension fund can be withdrawn tax-free. In contrast, buy-to-let properties are subject to a 5% SDLT surcharge on purchase, Income Tax on rental profits, and usually CGT on sale.

Diversification is another important consideration. A buy-to-let investment is a single, concentrated asset, meaning the investor’s wealth is exposed to fluctuations in the property market. In contrast, investing in a diversified portfolio through an ISA or pension can spread risk across multiple asset classes, such as equities, bonds, and funds. Property funds are available, should the investor prefer property as an asset class.

The level of involvement required is also a key difference. Buy-to-let properties require active management, including dealing with tenants, maintenance, and regulatory requirements. In comparison, ISAs and pensions are largely passive investments that require little day-to-day management.

In summary, buy-to-let remains a popular investment choice, offering the potential for steady rental income and long-term capital growth. However, it comes with significant tax implications, upfront costs, and ongoing management responsibilities. Investors must carefully weigh these factors against alternative investment options, such as ISAs and pensions, which often provide greater liquidity, diversification, and tax efficiency.

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