Best areas for buy-to-let in the UK

The housing market is having a tough time. Interest rates are going up and will likely continue to do so as the Bank of England attempts to rein in rising inflation. If interest rates rise that will translate into higher mortgage rates adding to borrowers’ bills.

Currently, two- and five-year fixed rates sit at over 6%, the highest since the 2008 financial crisis. On top of that, house price growth is beginning to show signs of a slowdown following the huge boom we saw over the last couple of years.

The situation will likely remain precarious in the near-term. But despite that property remains an attractive investment, and on the flip side, those with buy-to-let properties will benefit from the increased demand and lack of supply that is pushing up rents and will likely continue to prop up the market for some time.

But if you are thinking of acquiring a buy-to-let property and want to make sure you’re getting the most out of your investment, you should be strategic about it and look at the areas in the country with the highest rental yields.

The current average rental yield – the return on investment from the rental income of a property – for the UK is 3.63%, according to property advisor Track Capital.

And, according to Natwest, a good rental yield is anywhere between 6% and 8%. However, there are some cities and towns in the UK where you can get a rental yield of over 11%. Here we break them down.

10 places with the best rental yields in the UK

Postcodes in the north of England have typically offered better rental yields than anywhere else. According to data from Track Capital, NG7 and NG1 in Nottingham take the top two spots, with an average yield of 11.30% and 11.10% while the average asking rent per month is £1,598 and £1,473 respectively.

BD1 in Bradford comes third, with an average yield of 10.60% and an average asking rent per month of £483. M14 in Manchester, NE6 in Newcastle Upon Tyne and YO10 in Yorkshire take the next three spots, with average rental yields of 10.10%, 9.80% and 9.20%.

Swansea’s SA1, Cardiff’s CF37 and Southampton’s SO17 are tied for the next spot, with a rental yield of 9.20%. Coming in at number ten is YO31 in Yorkshire, with an average yield of 9.10%.

10 places with the worst rental yields in the UK

Guildford’s GU10 postcode has an average yield of just 1.9%, while HP9 in Hemel Hempstead and Ilford’s IG4 both yield just 2%. Properties in WD7 in Watford yield just 2.1%, while those in M4 in Chelmsford, B93 in Birmingham and AL4 in St Albans yield 2.2%.

Coming in at number eight and nine is KT13 in Kingston and W1 in London, yielding just 2.3%. Slough is the best of the worst performers, with its SL9 postcode yielding 2.4%.

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Buy-to-let tax explained

Now that you know where to purchase your buy-to-let property you need to understand the tax obligations that come with renting it out.

“When making a buy-to-let investment decision, landlords need to be aware of the tax issues and obligations facing them, not only as property investors but also as individuals with other businesses, careers and investments,” says Mortgage Advice Bureau.

Income tax

Like everyone else, landlords get a personal allowance of £12,570. You can also deduct allowable expenses from the rental income to get your exact profit. You will have to pay 20% tax on any buy-to-let income between £12,571 and £50,270, and 40% on anything over that point. The additional rate of 45% applies to any income over £150,000.

Stamp duty tax (SDLT)

This is payable on all property purchases of over £250,000 (except for first-time buyers). Secondary properties, whether they are purchased as second homes or buy-to-lets, incur a 3% surcharge on top of the standard rate of stamp duty tax.

You pay 0% SDLT on the first £250,000 of a property, 5% on the next £675,000 (the portion from £250,0001 to £925,000),10% on the next £575,000 (the portion from £925,001 to £1.5m) and 12% on anything above £1.5m. Your buy-to-let property would be taxed at 8%, 13%, and 15% respectively.

You can use the government’s SDLT calculator to figure out how much you’d pay.

Capital gains tax (CGT)

This is applicable if you sell the property for a higher value than you bought it for. It is only payable on second homes and buy-to-let properties. Basic-rate taxpayers get charged 18% CGT, while higher-rate taxpayers are charged 28%.

“Tax is a very complex area, and the rules can change rapidly. A business structure setup in 2022 may not receive the same tax treatment in 2026,” says Mortgage Advice Bureau.

“It is therefore essential that landlords seek advice from a specialist taxation and accountancy adviser. This will ensure a strategy is devised which best suits your individual needs over the long term.”

Buy-to-let mortgages explained

You’ll need a specialist buy-to-let mortgage to purchase a rental property — you cannot use a standard residential mortgage. These mortgages come with several elements to be aware of.

• All providers will have slightly different lending criteria but for the most part, if you want to secure the best interest rate you’ll need a deposit of at least 20% or 40%.
• To pass a lender’s affordability test you’ll also need to show that your projected monthly rent covers your mortgage repayments by 125%.
• Upfront fees on buy-to-let mortgages also tend to be higher than those on standard mortgages.

Is it better to personally own buy-to-let property or hold it through a limited company?

Before 2020 landlords were able to claim mortgage interest payments as an expense on their rental income and lower their tax bill.

Now, however, anyone with personally owned properties only receives a tax credit based on 20% of their mortgage interest payments, and so pays more tax.

Because private landlords are making more money they’re also more likely to be pushed up into a higher tax bracket.

“From 6 April 2017, there are restrictions on the level of finance and interest costs which can be deducted from residential letting income for tax purposes. When you hold your let property through a company, that company is currently subject to corporation tax,” says Mortgage Advice Bureau.

“However, the profit or loss from letting through a company is calculated without the restriction for interest and finance charges which apply to individual landlords.”

The tax rules around property owned by limited companies are more flexible than they are for individual landlords.

If you’re registered as a limited company you are able to deduct the entire mortgage interest payment from your profit – because it’s classed as a business expense – which decreases the amount of tax you'll pay. In this case, you’d have to pay corporation tax, which is currently 19%, instead of income tax. Additionally, corporation tax isn’t tiered, so you won’t have to pay more – no matter how much profit you’re making.

However, limited companies can be subject to higher mortgage interest rates than private landlords, so may have a heftier mortgage to pay.

“Lenders are aware of the tax advantages of holding property within a company, and there are several mortgage products on the market specifically designed for property letting companies,” says Mortgage Advice Bureau.

You would also need to consider the cost of legal fees, auditing and registering the company at Companies House.

“Don’t rush into anything – running a limited company is a long-term commitment and it benefits from careful planning,” the Mortgage Advice Borough continues. “Before you make the decision to hold your let properties through a company, some serious number crunching is required to work out the potential tax savings and costs, and whether it is the most suitable option for your circumstances.”

Remember to get your tickets for the MoneyWeek Wealth Summit hosted by Merryn Somerset Webb, on 25 November 2022! – we’ve got some brilliant speakers lined up and, given everything that’s going on, we’ll have an awful lot to talk about.

Book your place now at moneyweekwealthsummit.co.uk