Financing an investment property

Investing in property can be an excellent way to build long-term wealth, but the financing side can feel complex—especially when you’re navigating tax implications and regulatory requirements. Whether you’re a first-time buy-to-let investor or expanding an existing portfolio, understanding your options and the tax consequences is crucial. At Severn Accounting, we help Worcester-based and national property investors get the financing decisions right from the start.

Mortgage Options and Interest Relief

The most straightforward way to finance an investment property is through a buy-to-let mortgage. These typically require a 20–25% deposit and come with higher interest rates than residential mortgages, reflecting the increased risk to lenders. Before committing, it’s worth knowing that mortgage interest is no longer fully deductible for individual landlords.

From April 2020, the government has been phasing in restrictions on mortgage interest relief. As of the 2024/25 tax year, individual landlords can only claim 20% basic rate relief on mortgage interest paid, regardless of their actual tax rate. This means higher-rate taxpayers receive less relief than they might expect. However, there’s an important exception: if you trade as a limited company, your mortgage interest remains fully deductible as a business expense. This structural difference can significantly impact your bottom line and is worth exploring with an accountant before you borrow.

Alternative Financing Routes

Beyond traditional mortgages, some investors use savings, remortgaging existing property, or bridging finance. Each has different tax and cash-flow implications.

If you withdraw equity from a residential property to fund a buy-to-let purchase, the equity release itself isn’t taxable—but remember the interest on that new debt will be subject to the restrictions mentioned above. Bridging finance, often used in quick acquisitions, can be expensive but is sometimes necessary; the interest is similarly restricted under the relief caps.

Some investors also explore limited company structures specifically for property investment. This requires registering with Companies House and filing separate accounts, but the full mortgage interest deduction can offset the additional compliance burden. The corporation tax rate for the 2024/25 tax year is 19% on profits, and any dividends taken are subject to dividend tax (once you’ve used your £500 annual allowance). It’s a more complex route but worth evaluating if you’re building a sizeable portfolio.

Stamp Duty Land Tax and Acquisition Costs

When you purchase an investment property, Stamp Duty Land Tax (SDLT) applies to the purchase price. As of the 2024/25 tax year, the rates for additional residential properties (which includes buy-to-let) are higher than for first homes: you’ll pay a 5% surcharge on top of the standard SDLT rates, starting from 2% on purchases over £250,000.

For example, buying a £250,000 investment property would cost approximately £10,250 in SDLT (5% on £250,000 = £12,500, less the lower rate bands). This isn’t deductible against rental income—it’s treated as a capital cost—so factor it into your financing plan. Conveyancing fees, surveyor costs, and mortgage arrangement fees also apply and should be budgeted for upfront.

Ongoing Tax Responsibilities

Once your property is financed and acquired, you’ll need to account for rental income and expenses on your Self Assessment tax return. The taxable profit is rental income minus allowable expenses: mortgage interest (at the restricted rate for individuals), repairs, maintenance, insurance, council tax, and letting agent fees.

If you’re a UK resident investing in a UK property, you’ll file through Self Assessment. The deadline for the 2024/25 tax year is 31 January 2026. If you’ve financed the property via a limited company, you’ll file a Company Tax Return (CT600) instead, which has a different deadline structure.

Make sure you register with HMRC as a landlord within three months of first letting the property; failure to do so can result in penalties.

Conclusion

Financing an investment property involves balancing mortgage options, tax efficiency, and regulatory compliance. The right choice depends on your personal circumstances, the scale of your investment ambitions, and your risk tolerance. Whether you opt for a traditional buy-to-let mortgage or explore a limited company structure, professional guidance at the planning stage can save significant money later.

For tailored advice on financing your investment property and optimising your tax position, contact Severn Accounting—we’re here to help.