Can buy-to-let still fund your retirement? Here’s how Budget changes affect your plans

When Rachel Reeves delivered the Autumn Budget on 30th October, there were notable changes for property investors, mainly the increased stamp duty rates on second homes.

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. Let’s explore how this affects retirement planning, what it takes to generate a steady income from property, and the tax-efficient alternatives you may want to consider.

Can you achieve a £40,000 annual income in retirement through buy-to-let property?

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. Here’s an example of how to work out what you’d need and what it would cost you

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.

How the new stamp duty and mortgage interest rules affect this plan

With the new budget, stamp duty on second homes rises by an additional 2%, 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 the current section 24 rules for buy-to-let rentals bought in your own name, you can no longer deduct mortgage interest as a full expense, which means the interest paid does not reduce your tax liability. Instead, you receive a basic-rate tax credit (20% of the mortgage interest), so if you are a higher-rate taxpayer, you could end up with a big tax bill when you complete your tax return. This could make a big dent in the net income from property if you have a BTL mortgage, making property investments less profitable than before and therefore less reliable if you’re using it as part of your retirement planning, unless you buy the BTL via a company instead.

Should you buy a buy-to-let property using your own name or via a company?

It’s becoming more common for people to buy their buy-to-let property via a company, instead of in their own name. When deciding whether to purchase a property through a company or in your own name, there are pros and cons to consider. Buying through a company can be tax-efficient for higher-rate taxpayers since corporation tax on profits (currently at 25%) is generally lower than the higher rate of personal income tax. It’s also worth considering that mortgage interest is deductible as an expense, which can boost profitability compared to owning BTL property in your own name, where interest is only partially deductible through a 20% tax credit. 

However, owning property in a company comes with costs and complexities, such as annual filing requirements, administrative fees, and sometimes higher mortgage rates or arrangement fees. In contrast, buying in your own name may offer greater simplicity, fewer upfront costs, and a broader range of mortgage products, but it can result in higher tax liabilities, particularly for higher-rate taxpayers. Moreover, extracting funds from a company in the form of dividends or salary incurs additional tax, which personal ownership doesn’t require, though it does subject income to income tax directly via your self assessment.

Pros and cons of BTL property for retirement income and inheritance

Whether you plan on buying a BTL property in your own name or via a company, it’s important to look into the pros and cons of using property to fund your retirement.

Pros

– Regular rental income BTL properties can provide a steady income, helping cover expenses or supplement pension income.

– Potential increase in property value Property value may increase over time, and you will experience growth on the full asset value, when in most cases you’ve only invested around 25% of your own capital. This can add to your wealth and what you can pass on to loved ones.

– Inheritance planning Real estate can be passed down to your loved ones, providing them with income-generating assets or properties with long-term appreciation, but could have large inheritance tax or capital gains tax implications.

Cons

– High upfront and ongoing costs Deposits, maintenance costs, emergency repairs and increased stamp duty make initial and ongoing investments high and they are unpredictable.

– Tax implications If you own in your personal name vs a company, the inability to deduct full mortgage interest and tax on rental income can eat into profits, especially for higher-rate taxpayers. Depending on how you own the property (personal vs company), you could also have certain taxes to contend with when you or your beneficiaries sell the properties or take money from your property business.

– Market and liquidity risks Property values and rental income can fluctuate, and properties may be difficult to sell quickly if you need to free up some cash. You may also need to cover periods where the property isn’t rented out or if you have a large expense to pay (for example, the property needs a new boiler or a new kitchen).

– Hands-on investment Property is a very hands-on investment compared to a pension or ISA. Property investment will require your energy, time and money – even if you use a management company. 

Property vs. ISAs and pensions

Whether you’re looking for property to cover all or some of your retirement income, when it comes to tax efficiency with retirement planning, commercial or split use properties, Individual Savings Accounts (ISAs) and pensions offer advantages over BTL properties. 

ISAs and pensions can offer significant tax advantages and flexibility, making them powerful tools for retirement planning. ISAs allow you to grow your investments tax-free, covering interest, dividends, and capital gains, without the need to pay tax on any growth or withdrawals. With an annual allowance of £20,000, ISAs enable you to build a long-term wealth portfolio with minimal tax implications. You also have access to your cash in an ISA if you need it, unlike property or pensions, where it’s a much harder and longer process to access your money if you need it.

Pensions, on the other hand, offer even more meaningful tax relief at your marginal tax rate, especially beneficial for higher-rate taxpayers. Pension contributions can reduce your taxable income, tax relief from the government is applied and investment growth within your pension remains tax-free. You can also take 25% of your pension tax free from age 55 (rising to 57 in 2028) up to the maximum amount of £268,275. Until the Budget, pensions sat outside of your estate for inheritance tax purposes, allowing you to pass on pension wealth with little to no tax implications, unlike property, which may be subject to both inheritance tax and capital gains tax, unless you own the property within a company. However, from April 2027, pensions will be included in your estate, but all other tax benefits remain.

Together, these tax-efficient products provide a flexible, accessible alternative to property investment, potentially offering a more straightforward and tax-effective path to achieving retirement goals and a secure, comfortable retirement.

Retirement planning with Moneyfarm

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. If you need help, Moneyfarm offers expert guidance to help you build wealth and plan for the future.

You can choose a managed portfolio if you want our experts to guide you through the portfolio creation process and manage your investments for you. Or if you’re a confident investor, you can choose a DIY option, choosing your own investments and self-managing your portfolio.

We can even help Find, Check & Transfer your old pensions, making it easy to consolidate old, lost pensions into one place. We do all the hard work for you and guide you to achieve your retirement goals. Let us help you make the most of your hard-earned money and build the retirement you’ve dreamed of.

As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. A pension may not be right for everyone. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a pension is right for you, please seek financial advice.