Rising interest rates and falling property prices suggest the outlook for buy-to-let investors is deteriorating.
And while some investors might be reconsidering their options, the fundamentals underpinning the buy-to-let market for investors remain robust.
According to Zoopla’s latest Rental Market Report, rents registered double-digit growth for the 15th month in a row in June due to an “ongoing chronic imbalance” between demand and supply.
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Zoopla expects this to continue into the second half of 2023.
Though it expects rental growth to slow to 8% by the end of the year, the supply and demand imbalance that has been an issue for years is unlikely to be resolved any time soon.
The number of privately rented homes has remained largely static since 2021, and the growth in overall rental supply looks set to remain limited in 2023.
Like all investments, if you’re thinking about getting into buy-to-let, you need to think carefully about what you can afford and consider the potential returns available from different properties and different regions.
We look at the best areas for buy-to-let investing in the UK.
The 10 areas with the highest rental yield
Rental yield is the return buyers will see on a property investment through the rental income they receive. Buy-to-let investors should look for a yield of between 6% to 8%.
“Capital growth is possibly the most important factor to consider when buying a property, but investors should not ignore the importance of rental yield,” says Claire Flynn, senior mortgages editor at money.co.uk.
“Making sure your property can pay for itself every month is far more important than picking up a discounted investment or banking on a theoretical profit when you sell.”
The latest data from Zoopla shows buy-to-let investors looking to make an inflation-beating return should look North, and especially in Scotland.
West Dunbartonshire and Renfrewshire in Scotland tied for first place with a yield of 9%.
East Ayrshire, also in Scotland, came in third with a yield of 8.6%.
Below is the full list of the areas with the highest rental yield in the UK:
| Area | Average rent PCM | Average property price | Average gross yield |
|---|---|---|---|
| West Dunbartonshire | £640 | £160,715 | 9.00% |
| Renfrewshire | £678 | £189,236 | 9.00% |
| East Ayrshire | £502 | £161,379 | 8.60% |
| North Lanarkshire | £622 | £155,064 | 8.50% |
| Sunderland District (B) | £582 | £156,593 | 8.40% |
| Inverclyde | £634 | £165,034 | 8.40% |
| Clackmannanshire | £670 | £181,276 | 8.30% |
| Middlesbrough (B) | £586 | £114,191 | 8.20% |
| Burnley District (B) | £521 | £125,714 | 8.10% |
| Hartlepool (B) | £497 | £130,307 | 8.00% |
Source: Zoopla
Yields become far less attractive further south of Burnley. The London boroughs of Kensington and Chelsea and the City of Westminster have the first and third worst rental yields respectively. Derbyshire Dales District came in at second place.
These are the areas with the lowest rental yield in the UK:
| Area | Average rent PCM | Average property price | Average gross yield |
|---|---|---|---|
| New Forest District | £1,154 | £536,392 | 4.20% |
| Richmond upon Thames London Borough | £2,061 | £972,571 | 4.20% |
| South Hams District | £951 | £419699 | 4.20% |
| Torridge District | £757 | Row 3 - Cell 2 | 4.20% |
| Ryedale District | £736 | Row 4 - Cell 2 | 4.10% |
| Rutland | £878 | £419,851 | 4.10% |
| St. Albans District (B) | £1,509 | £673,123 | 4.10% |
| City of Westminster London Boro | £3,097 | £1,812,237 | 4.10% |
| Derbyshire Dales District | £827 | £254,473 | 3.90% |
| Kensington and Chelsea London Boro | £3,422 | £2,435,881 | 3.60% |
Buy-to-let tax - what you will pay
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 land tax (SDLT)
Stamp duty 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.”
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