Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Buy-to-let property vs pensions

The Chancellor has had buy-to-let property investors in his sights this year, announcing plans to remove the ability to offset mortgage interest from rental income in his July Budget and adding an additional 3% Stamp Duty levy on buy-to-let investments in the Autumn Statement. These measures together reduce the attractions of buy-to-let investing and how it stacks up against pensions.

David Smith David Smith
07 December 2015

Brits have a longstanding love affair with residential property, so with the advent of pension freedoms there has been an expectation that some pension savers might scramble to release the value of their pots to fund the purchase of investment property. However, doing so means they could potentially suffer tax bills of up to 60% to buy their ‘perceived’ preferred retirement vehicle. Similarly, those approaching retirement would often consider using accumulated savings to buy a buy-to-let rather than consider investing a lump sum into a pension to boost their benefits in retirement. Indeed, research carried out by Tilney Bestinvest earlier this year showed that 38% of all respondents considered buy-to-let as an attractive long term investment, whilst only 34% believed a pension to be so*. Drawing down a pension fund in full to purchase a buy-to-let was already a contentious strategy. Now, with the additional Stamp Duty tax levy, there is even greater evidence to think twice about this plan of action. The impact of the additional Stamp Duty is unknown, but a 3% hike on the cost of buying a second home (with effect from April 2016) is likely to not only reduce profit margins on subsequent sales but also dampen buyers’ demand, thus potentially reducing property values. It could be that buy-to-let investors may look to simply pass on the additional cost by increasing rents, but there is a very strong argument that rents, especially in London, have already pushed affordability to the limit. It was also announced in the Summer Budget that with effect from the 2017/18 tax-year, the ability to offset buy-to-let mortgage interest against rental income for tax purposes will gradually reduce, with no offset from April 2020 onwards. Instead, a simple relief of 20% of the mortgage costs will be offered as a tax reducer. Whilst, on the face of it, this might seem like a small change, it will in fact result in an additional tax bill of many thousands of pounds for higher-rate taxpayers. The impact will be even more serious if, as expected, interest rates are significantly higher by this time – a proverbial ‘double-whammy’. As a result, it seems there is now an even greater argument for those approaching retirement to consider retaining their pensions to fund their retirement – especially so while generous tax reliefs on contributions for higher and additional rate taxpayers remain available, the days of which could be numbered given the Government is currently consulting on their future. For every £80 you put in to a pension plan, you get a further £20 put in by the Government – a 25% immediate uplift in value. Furthermore, with the potential for higher rate tax relief, tax efficient withdrawals and with pensions, unlike property, not forming part of your estate for Inheritance Tax (a further potential 40% saving) purposes, it would seem that pensions are the clear victor of this particular battle. However, whilst the status quo for pension tax relief remains, it is almost certain that it will change in the near future; tax relief on pension contributions is likely to be reduced or indeed withdrawn altogether, should the Chancellor get his way. It is potentially a ‘now or never’ situation with pensions – consider contributing before the Budget next year, to ensure you get maximum relief. *YouGov survey of 2,311 GB adults aged 50+. Research carried out 25th – 27th March 2015


The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Current or past yield figures provided should not be considered a reliable indicator of future performance. This article is not advice to invest or to use our services. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice. If you are unsure of your options you should seek professional financial advice or visit