Is Buy To Let Still Worth The Bother?

Income tax changes and stricter borrowing rules are leading many property investors to ask if shifting a buy-to-let business from private ownership into a company is worth the bother. Buy to let is all about crunching the numbers and understanding net yields. 

But with no one-size-fits-all solution and conflicting advice from tax professionals, now is the time to sit down and look at the options.

Surrender to yield calculations

A successful buy-to-let business – and by successful, most landlords would read profitable – depends on understanding the underlying finances of buying and renting a property. 

The property industry is great at quoting gross yields, but the figures are often meaningless. The gross yield is the annual rental income expressed as a proportion of property value. 

The figure ignores the numbers that count – a landlord’s day-to-day business running costs and taxes on profits or gains. Net yield is annual rent plus business costs as a proportion of property value. 

Property firm Hamptons International has published research that is a great help for landlords lost in a chaos of spreadsheets and formulas hunting for the most profitable way to own and manage the property. 

First, look at how the tax breaks down for three different types of ownership on the assumption a landlord owns a £250,000 property with a 75% loan-to-value (LTV) mortgage:

 CompanyBasic rate (20%) taxpayerHigher rate (40%) taxpayer
Property value£250,000
Mortgage interest£6,563£4,688£4,688
Gross profit£5,438£7,313£7,313
Net profit£4,404£5,850£3,450

Source: Hamptons International 

The table is good for a straight comparison, but not when house prices, rents and yields vary between regions.

Why net yield is the best performance measure

The next table looks at how higher rate taxpayers with 75% LTV mortgages against an average-priced home see their net yields plummet when mortgage tax relief changes that first came into force in April 2016 are included in the calculations. Higher rate taxpayers have seen the amount of mortgage interest they can offset against tax fall by half - from 40% in 2016 to 20% in 2020. 

To calculate net yield, a !0% of rent cost is included to reflect repairs and expenses, like insurance. Basic rate taxpayers see no change in their profit of £5,740 as the new mortgage interest relief rules do not affect them.

RegionProperty valueGross yieldNet profit 2020-21Net profit 2016-17Change in profit from 2016-17 (£)Change in profit from 2016-17 (%)Net yield
East Midlands£137,9706.1%£2,810£2,385-£425-13%2.0%
East of England£225,5505.3%£3,650£2,956-£694-16%1.6%
North East£90,9208.4%£3,030£2,752-£278-8%3.3%
North West£115,9507.1%£3,000£2,642-£358-11%2.6%
South East£252,2305.2%£4,000£3,225-£775-16%1.6%
South West£210,7605.4%£3,550£2,902-£648-15%1.7%
West Midlands£167,8306.0%£3,370£2,854-£516-13%2.0%
Yorkshire & Humber£123,4706.9%£3,100£2,718-£382-11%2.5%

Source: Hamptons International

What the figures reveal about buy to let

The difference between gross and net yields is stark and often comes down to how an individual runs a buy-to-let business. It’s easy for two landlords with identical houses on the same street to have different net yields because they charge a higher rent or have more control over costs. 

Landlords are still making a profit, but moving property into a limited company would seem an unnecessary and false economy for many that come with a cost that does not outweigh any tax saving. 

For property investors at the lower end of the high rate tax bracket, divesting some ownership to a spouse paying basic rate tax is cheaper and just as tax effective. The table shows the regions with the most inexpensive homes return the best net yields – 3.3% in the North-East, 2.6% in the North West and 2.5% in Yorkshire & Humber.

The golden rules of buy to let

Three golden rules emerged from the Hamptons International research:

  1. The poorest areas offer the best yields – in 2020, average yields in the 10% of most affluent areas averaged 4.6%, while yields in the 10% of least well-off areas averaged 8%
  2. An average home on an average road is better value than the worst house on the best road
  3. Don’t compete with first-time buyers or movers – they will pay more for a home ready to move into but are less likely to go for a cheaper home needing a complete refurbishment.

The research also notes flats often show higher gross yields, but extra expenses, such as ground rents and service charges, can eat into net yields.

Personal v corporate ownership

The research shows switching buy to lets into a company tends to favour landlords in London and the South East because they are most likely to have mortgages. This means they gain more from incorporating and is probably why nearly half of the 229,000 buy-to-let companies in England and Wales are based in the capital and home counties.

Hybrid property businesses are also becoming more common. A hybrid leaves buy to lets owned personally as they are while adding a new property to a portfolio with a corporate structure. Both business strategies come with pros and cons, says the Hamptons research.

For incorporating

  • 100% of mortgage interest is tax deductible
  • Corporation Tax is due to rise from 19% to 23% in April 2023 with taper relief for companies with profits between £50,000 and £250,000
  • Corporation Tax is charged against property disposals rather than Capital Gains Tax (CGT) at 18%/28%

Against incorporating

  • Companies are more regulated than individuals and cost more to administrate, i.e. increased accounting costs.
  • Stamp duty is due if transferring property into a company, and CGT may be payable.
  • Fewer lenders will offer corporate buy-to-let mortgages, and the rates are likely higher than for individual landlords.
  • Higher rate taxpayers may pay income tax at 32.5% on drawing dividends from a company.

Find out more

Check out more about the Hamptons International data:

View Related Handbook Page


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