Rising interest rates and falling property prices suggest that the outlook for buy-to-let investors is deteriorating.
And while some home buyers 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, average rents for new-lets have increased by 11.1% in the last 12 months.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Zoopla expects rental growth to slow to between 4% and 5% this year, but 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.
“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.”
Data from money.co.uk showed Blackpool, Burnley and Newcastle upon Tyne were the areas with the highest rental yields in the UK.
Blackpool and Burnley were tied for the top place with a yield of 4.7%, but Burnley has the advantage of having the lowest average house price in England and Wales, standing at £117,804.
Newcastle came in third, with a rental yield of 4.5%.
Below is the full list of the areas with the highest rental yield in the UK:
| Area | Average monthly rent 2022 (GBP) | Expected annual rent | Average property price 2022 | Estimated gross rental yield |
| Blackpool | £550 | £6,600 | £139,221 | 4.74% |
| Burnley | £465 | £5,580 | £117,804 | 4.74% |
| Newcastle upon Tyne | £725 | £8,700 | £192,611 | 4.52% |
| Barrow-in-Furness | £575 | £6,900 | £153,690 | 4.49% |
| Manchester | £875 | £10,500 | £237,280 | 4.43% |
| Salford | £795 | £9,540 | £217,931 | 4.38% |
| Hyndburn | £475 | £5,700 | £130,502 | 4.37% |
| Nottingham | £695 | £8,340 | £192,170 | 4.34% |
| Barking and Dagenham | £1,300 | £15,600 | £359,766 | 4.34% |
Source: Zoopla
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.”
Related articles
- Which is best: buy-to-let or shares?
- What the interest rate rise means for your mortgage
- Is now a good time to buy a house?
-
Investing in wine: how Cru Wine is reaching new audiencesTips Gregory Swartberg, founder of fine wine specialist Cru Wine, talks to Chris Carter about how to start a wine collection
-
Small companies with big potential
Michael Taylor of Shifting Shares reviews his 2023 picks and highlights more promising minnows.
-
The MoneyWeek portfolio of investment trusts – July 2023 update
Tips A decade ago we set up the MoneyWeek portfolio of investment trusts. They remain a compelling long-term bet says Rupert Hargreaves
-
Women lead the way with ethical investments
Demand for more ethical investments has soared – and women are more likely to opt for them. Annabelle Williams, personal finance specialist at Nutmeg, takes a look at why.
-
BoE: Mortgage payments to rise by £220 a month for households
Millions of households can expect a mortgage spike of around £200 a month - and some may even reach a extra £1,000 a month, the Bank of England warns
-
What happened to Thames Water?
Thames Water, the UK’s biggest water company could go under due to mismanagement and debt. We look into how the company got itself into this position, and what investors should expect.
-
Where to invest in the metals that will engineer the energy transition
A professional investor tells us where he’d put his money. This week: John Ciampaglia, manager of the Sprott Energy Transition Materials UCITS ETF.
-
How investors can profit from high food prices
The latest furore over grocery prices will die down, says David Stevenson. But the long-term outlook for soft commodities remains bullish. These are the stocks investors can buy to profit from high food prices.
