Navigating Buy-to-Let: Tax Changes, Yields, and Profit Strategies
Despite years of government tinkering with rental laws and how to tax buy-to-let profits, property is still one of the best-performing investments.
Low-interest rates have pushed down yields on many alternative investments, leaving returns from property among the best around.
The leading number landlords look for when weighing up a deal is the gross yield - the annual rental income expressed as a percentage of the property value.
However, this number does not reflect the actual return on investment as the calculation does not consider business expenses or taxes.
The net yield - rent minus costs and taxes as a proportion of a property’s value - gives a more accurate picture of how a buy-to-let investment performs.
So, does the changing regulatory and tax landscape impact all landlords?
Rental profits evaporate
The answer to the question is no - for the most part, only landlords paying income tax at 40 per cent or more are affected.
London estate agents Hamptons has crunched the numbers to reveal higher and additional rate-paying landlords have seen between 10 and 20 per cent of their profits evaporate since the rules about claiming mortgage interest relief have changed.
Before 2016-17, landlords could offset all the loan interest. Landlords cannot claim mortgage interest as a business expense but can offset 20 per cent of their total interest payments as a tax credit.
Here’s how the figures work around the country - the table shows how tax bills have changed for higher-rate tax-paying landlords with a 75 per cent loan-to-value mortgage.
Net profit 2020-21
Change since 2016 rules start
% change since 2016 rules start
Yorkshire & Humber
Profits on selling
On average, landlords leaving buy-to-let last year made an average capital gain of £78,010 after nine years of ownership.
The agency deducted 20 per cent of the gain to cover maintenance costs during the period of ownership while adding back capital gains and stamp duty. This gives the average higher-rate tax-paying landlord a net profit of £43,340 after selling. This figure rises to £154,600 in London due to higher property prices and increased capital gains.
Make the most of buy-to-let
Property investors chasing high-yielding homes to add to their portfolios should consider these points:
- Apartments offer higher yields than houses
- Properties with two beds give the highest returns, while yields drop 0.6 per cent for each additional bedroom.
- Profile your renters and offer homes that give them the space they need. For instance, sharers are likely to want a double bedroom each, while families with children are likelier to want one double and a couple of single rooms.
- Consider already tenanted homes so you can collect rent from day one of ownership.
The buy-to-let market
The buy-to-let market has mushroomed from almost zero to more than 4.4 million privately rented homes in around two decades.
The peak of the market was in 2017. Since then, the market has shrunk by 275,000 homes, says Hamptons.
Adding a three per cent stamp duty surcharge to purchase costs and phasing in mortgage interest relief have forced some mortgaged landlords to sell their investments. Another reason for a shrinking market is that many early investors in their 40s two decades ago are now divesting their assets to pay for retirement.
More change is coming as Levelling Up Secretary Michael Gove plans to put his rent reform bill in front of MPs before the summer.
The bill will likely introduce a national landlord database, basic living standards and the scrapping of Section 21 no-fault notice to quit.
Does buy-to-let still stack up FAQ?
What is a gross yield?
Gross yield expresses a property’s value divided by rental income as a percentage.
What is a net yield?
Net yield expresses a property’s value divided by rental income, less business costs.
What is a Section 21 no-fault eviction?
A Section 21 eviction allows a landlord to repossess a rented home when a tenant has not broken the terms of a tenancy agreement. A standard Section 21 eviction would be to issue the notice so the property can be sold.
Why are London yields higher?
Typically, the more expensive the property, the lower the yield, so landlords in London and the south should expect lower yields because the homes are considerably more costly than those in the north and Scotland.
How many landlords have mortgages?
In December 2020, 2 million landlords held buy-to-let mortgages on almost 5 million privately rented homes. This means around 40 per cent of landlords have a mortgage.
Subscribers get full access to exclusive content, including forms, articles and discounts, plus our time saving Tenancy Builder tool.
Signup for our free weekly digest and get the latest news and guidance straight to your inbox (some content requires a paid subscription).
View Related Handbook Page
Navigate property investment tax complexities with our detailed guide. Make informed decisions about income, capital gains, and inheritance tax.
Investing in a private rented property can be achieved in a variety of ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.