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Unlocking the World of Build-to-Rent: A Complete Guide

Published by Susan Basnet
Posted Date: June 7, 2024 , Modified Date: June 7, 2024
Categories: Real Estate

Embark on a journey into the world of Build-to-Rent (BTR) investments with our comprehensive guide. Uncover a spectrum of property options, the tax implications including SDLT, VAT, and more, and explore the advantages of this dynamic real estate sector. The keys to Build to Rent success await you—dive in now!

What is a Build-to-Rent?

Build-to-rent refers to residential developments intentionally designed and constructed for long-term rental purposes. Typically owned by a sole entity, often a corporate landlord, these projects prioritise providing a superior tenant experience. The properties are crafted with precise management and sustainability standards, ensuring tenants access contemporary, well-appointed living spaces.

Build-to-rent properties are also commonly referred to as BTR or purpose-built rental homes.

Types of Build-to-Rent

Spanning various prices, sizes, and styles, build-to-rent homes come in different forms. The expansive build-to-rent real estate market offers many choices, making it easy for tenants to find the right home for their needs. These options include:

Small Lot Homes

Small lot homes are a type of build-to-rent property where multiple individual homes are constructed in close proximity. These homes are known for their compact design, with sizes ranging from 500 to 700 square feet.

Small Lot Homes - Build-to-Rent

Row Homes

Commonly found in urban and downtown areas, row homes are a prevalent build-to-rent option. These homes are constructed in a series, sharing a common wall with the adjacent unit. The compact and connected layout of row homes makes them a popular choice for those seeking a balance between urban living and the comfort of a private residence.

Row Homes - Build-to-Rent

Single Family Homes

Single-family homes are individual residential properties designed for build-to-rent purposes, and each home is situated on its own piece of land. Unlike multi-unit buildings, single-family homes provide separate and independent living spaces for a single household. These homes offer privacy, a dedicated outdoor space, and a sense of ownership for tenants.

Single Family Homes

Duplex

A duplex is a type of property where two separate living units are attached to each other. This arrangement typically consists of two residential units within the same building structure, offering distinct living spaces while sharing a common wall. Each unit in a duplex usually has its own separate entrance, providing a sense of individuality within the overall shared structure.

Duplex - Build-to-Rent

Tax Implications of Build-to-Rent

Navigating the tax landscape in build-to-rent projects involves grappling with Stamp Duty Land Tax (SDLT), Value-Added Tax (VAT), Annual Tax on Enveloped Dwellings (ATED), and Council Tax. In this segment, we shed light on these tax considerations for BTR developers, offering insights for strategic decision-making.

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is a crucial consideration on the BTR projects. For BTR developers, SDLT is applied to land purchases, not constructed homes. However, when a company acquires BTR properties worth over £500,000, a flat 15% SDLT rate is applied on the total value of the property. Although companies may be eligible for the relief from the flat 15% rate, companies will continue to pay SDLT on the 3% surcharge rate. The SDLT rates applicable on such situations are listed below:

Value of the Property

SDLT Rate

Up to £250,000

3%

£250,001 to £925,000

8%

£925,001 to £1.5m

13%

Above £1.5m

15%

Stamp Duty & Land Tax (SDLT) Calculator

Introducing the first of its kind, our in-house SDLT Calculator. Be the first to know a potential savings you could make on the your SDLT!

Value Added Tax (VAT):

Developers venturing into the build-to-rent sector encounter a VAT challenge. While constructing new residential properties is typically zero-rated for VAT, rent from residential renting is exempt from VAT preventing developers from reclaiming VAT on professional fees and land costs.

Annual Tax on Enveloped Dwelling (ATED)

The Annual Tax on Enveloped Dwellings (ATED) is an annual tax imposed on companies that possess residential properties, including newly constructed ones, valued above £500,000.

BTR developing companies falling within the scope of ATED must submit an ATED return within 90 days of the completion date for the property.

ATED is a fixed charge that varies with the companies based on the value of the property, as follows:

Property Value

Annual Charge

£500,001 to £1,000,000

£4,400

£1,000,000 to £2,000,000

£9,000

£2,000,001 to £5,000,000

£30,550

£5,000,001 to £10,000,000

£71,500

£10,000,001 to £20,000,000

£143,550

Above £20,000,000

£287,500

Council Tax

Council Tax for new builds is applicable from the completion date onward. The builder is responsible for notifying the local council authorities about this specific date. Council officials conduct site visits throughout the construction phase to evaluate the ongoing work. The council issues a completion notice only when the property is structurally complete, which serves as the foundation for the property owner's council tax payments.

Council Tax bills commence in April at the beginning of the financial year and are divided into ten monthly instalments. However, individuals responsible for council tax payments can request a 12-month instalment plan from their local council.

Reasons Behind the Popularity of Build-to-Rent Homes

Build-to-rent homes have gained immense popularity among developers and property investors for several compelling reasons. In this section, we will explore some of the appealing aspects of Build to rent homes:

Higher Demand - Higher Rents

Most of the build-to-rent homes come equipped with a range of amenities and services, such as customer services, gyms, pools, and more, all conveniently located within the property. These offerings not only enhance the overall living experience for tenants but also contribute to their willingness to pay higher rents for these properties.

Lower Maintenance

Due to their newness, Build-to-rent properties typically demand minimal maintenance or repairs, providing a convenient option for investors with limited time for such projects. This also enhances their appeal to tenants, sparing them the stress of unexpected issues. Moreover, BTR properties often come with warranties covering appliances and features, offering additional protection.

Steady Income Stream

Build-to-rents are specifically designed and built for long-term rentals. Consequently, build-to-rent homes offer a steady income stream for build-to-rent builders and investors. This allows builders and investors to enjoy peace of mind with the knowledge that their property will remain occupied for the foreseeable future.

Potential Drawbacks of 
Build-to-Rent Homes

Despite the merits, investing in build-to-rent has its drawbacks. The expensive up-front costs, delayed returns of investment, and legal challenges are the major hurdles for investors and developers. The following are the major drawbacks for Build to rent investors:

Higher Upfront Costs

The costs associated with build-to-rent homes, such as site acquisition, design and planning expenses, and construction costs, require a considerable capital commitment, and it becomes the most significant barrier for many investors keen on such ventures. Hence, build-to-rent is not the best choice for every investor.

Delayed Returns

One downside to BTR investors is delayed returns on investment. Since BTR projects require considerable upfront capital and time, investors often face a long waiting period before they start enjoying the benefits of rental income.

Regulatory and Legal Challenges

A significant drawback of Build-to-Rent (BTR) is its heavy regulation, imposing a burden on builders and investors to adhere to a diverse set of rules. Non-compliance with these regulatory obligations can lead to substantial fines, presenting a notable disadvantage for those involved in BTR projects.

Conclusion

In conclusion, BTR properties, ranging from small lot homes to row homes and duplexes, offer diverse long-term rental options. Investors should navigate the complex tax implications, including SDLT, council tax, and ATED. While facing challenges like high upfront costs and regulatory compliance, BTR's appeal lies in steady income streams, higher rents, and lower maintenance. Despite delayed returns, the BTR model remains an enticing opportunity within the real estate market.

Frequently Asked Questions

Explore the top questions about BTR, along with their answers below:

Are there any SDLT reliefs for BTR developers?

Yes, several reliefs could potentially reduce SDLT liability. Below are the two significant reliefs available:

Multiple Dwellings Relief (MDR):

Multiple dwellings relief applies to investors engaging in the build-to-rent venture. MDR is claimable when an individual acquires two or more dwellings from the same vendor as part of the same or linked transactions.

It should be noted that the rates applied still remain subject to the additional 3% surcharge.

Use our MDR Calculator for a prompt calculation!

After the announcement of the abolition of Multiple Dwellings Relief (MDR) in the spring budget of 2024, the relief remains available for transactions completed before June 1, 2024.

The 6-Dwelling Rule:

Whether the buyer is an individual or a company, where six or more separate dwellings are purchased as part of a single transaction, those dwellings are treated as non-residential property, meaning that higher-rate charges are not applicable.

Does the residential property developer tax (RPDT) apply to the profits of BTR developments?

No, the profits from BTR developments will not be subject to RPDT.

How is BTR different from buy-to-let?

Unlike buy-to-let, build-to-rent involves extensive developments of flats designed explicitly for rental purposes. These properties are typically owned and managed by companies, distinguishing them from individually owned buy-to-let investments.

How can I finance my build-to-rent project?

The most common finance option for build to rent projects is the build to let development finance, which is specifically tailored for professional property developers. Nevertheless, build-to-rent landlords and developers have a variety of other mortgage options at their disposal.

Susan Basnet
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