When Rachel Reeves delivered the Autumn Budget, there were notable changes for property investors, mainly the increased stamp duty rates on second homes, so for those planning to use buy-to-let (BTL) property as a significant part of their retirement income, these changes could significantly impact their financial planning for the future.
For retirees aiming for a “comfortable” retirement, the Retirement Living Standards says you would need an annual income of around £40,000. So if you want to achieve this income solely from your buy-to-let property investments, a good starting point is estimating the number of properties you would need to achieve this.
Carina Chambers of wealth management consultancy Moneyfarm has worked out an example of what you would need, and how much it would cost:
1. Average rental income: Each property generates £10,000 per year in rental income after expenses, including property management, mortgage payments and maintenance
2. Total properties required: To achieve £40,000 annual income, you would need at least four properties that were rented out all year.
3. Purchase cost estimate: Assuming an average property price of £200,000 per property, purchasing four properties would cost £800,000 in cash if purchasing outright. Or you would need at least 25% cash deposit for each BTL property, totalling approximately £200,000 upfront, and a BTL mortgage on the remaining £600,000. You would also have to factor in other costs, like legal fees, surveys and stamp duty and have the cash to pay for those fees.
Chambers cautions: “And let’s not forget stamp duty. With the new budget, this rises by an additional 2% on second homes, adding to the existing 3% surcharge on stamp duty that was already in place.
“For our example, the stamp duty on a £200,000 property will now be 5% (£10,000), up from £6,000 before the budget.
“And more bad news, stamp duty is set to rise again in April 2025, so your stamp duty bill will be £11,500 for the same £200,000 property. For all four properties, this would mean a stamp duty bill of over £40,000 – a £16,000 increase from the autumn budget.”
Under current Section 24 rules, you can’t fully deduct mortgage interest for buy-to-let properties bought in your own name. Instead, you get a 20% tax credit on the interest, which can lead to higher tax bills for higher-rate taxpayers. This reduces net income from property investments, making them less profitable and reliable for retirement planning unless purchased through a company.
Should you buy a buy-to-let property using your own name or via a company?
Chambers explains: “More people are buying buy-to-let properties through companies instead of in their own name. This can be tax-efficient for higher-rate taxpayers, as corporation tax is lower than personal income tax, and mortgage interest is deductible as an expense. However, it involves costs and complexities like annual filings, administrative fees and sometimes higher mortgage rates or arrangement fees.
“In contrast, buying in your own name may be simpler, fewer upfront costs and a broader range of mortgage products, but can lead to higher tax liabilities, particularly for higher-rate taxpayers. Moreover, extracting funds from a company incurs additional taxes, unlike personal ownership, though it does subject income to income tax directly via your self-assessment.”
Property v ISAs and pensions
For tax-efficient retirement planning, ISAs and pensions offer significant advantages over buy-to-let properties. ISAs provide tax-free growth on investments and easy access to funds, while pensions offer substantial tax relief and tax-free growth, especially beneficial for higher-rate taxpayers. Both products offer flexibility and accessibility, making them powerful tools for building a secure retirement.
Chambers concludes: “Given the changing rules for investment property, from tax to regulations, and the potential drawbacks and hands-on nature of buy-to-let property for your retirement, it may no longer make sense to rely on it solely to fund your retirement. Tax-efficient products like pensions and ISAs may be a better fit for long-term financial planning and to help you reach your goals.”