Buy-to-Let: Is It Worth It?
The reality behind property investment in the UK
How Buy-to-Let Works
You buy a property, rent it out, and (hopefully) make a profit from the rental income and/or property value increasing over time. It sounds simple. The reality is more complicated — and more expensive — than many people realise.
The Numbers You Need to Know
Deposit
Buy-to-let mortgages typically require a 25% deposit (compared to 5–10% for residential). On a £200,000 property, that’s £50,000 upfront.
Rental Yield
Gross yield = (annual rent ÷ property price) × 100. A property costing £200,000 with £1,000/month rent has a gross yield of 6%. But gross yield is misleading — you need to calculate net yield after costs.
Key Concept
Gross yield is the headline number estate agents use to make properties look attractive. Net yield — after mortgage, insurance, repairs, management fees, void periods, and tax — is what you actually keep. It’s usually 2–3% lower.
Section 24: The Tax Change That Changed Everything
Before 2020, landlords could deduct mortgage interest from rental income before calculating tax. Now, you’re taxed on the full rent and only get a 20% tax credit on the interest. For higher-rate taxpayers, this massively increased the tax bill.
Real-World Example
£200,000 property, £150,000 mortgage at 5%, rent £1,000/month (£12,000/year). Mortgage interest £7,500/year. A 40% taxpayer used to pay tax on £4,500 (rent minus interest) = £1,800. Now they pay tax on £12,000 (£4,800) minus the 20% credit (£1,500) = £3,300 tax. Nearly double.
Running Costs People Forget
| Cost | Typical Amount |
|---|---|
| Mortgage payments | £625/month (5% on £150k) |
| Landlord insurance | £200–£400/year |
| Maintenance & repairs | 1% of property value/year |
| Letting agent fees | 8–12% of rent |
| Void periods (empty) | 1 month/year average |
| Gas safety, EPC, electrics | £300–£500/year |
| Service charge (if leasehold) | £1,000–£3,000/year |
A Realistic Profit Calculation
£200,000 property, £1,000/month rent, £150,000 mortgage at 5%:
- Gross rent: £12,000
- Mortgage interest: -£7,500
- Letting agent (10%): -£1,200
- Insurance: -£300
- Maintenance: -£2,000
- Void period (1 month): -£1,000
- Net before tax: £0
Yes, you read that correctly. Many buy-to-let properties barely break even on cash flow. The “profit” comes from property value growth over time — which is not guaranteed.
CGT When You Sell
When you sell a buy-to-let, you pay Capital Gains Tax on the profit. The rate is 18% (basic rate) or 24% (higher rate) for residential property. And you must report and pay within 60 days of completion.
Using a Limited Company
Many new landlords buy through a Ltd company to avoid Section 24. The company pays Corporation Tax (25%) on profits and can still deduct mortgage interest. However, company mortgages have higher rates and you’ll pay personal tax when extracting profits as salary or dividends.
Warning
Don’t transfer an existing personal property into a Ltd company — it triggers Stamp Duty, CGT, and potentially higher mortgage rates. Only use a company for new purchases. Take proper tax advice.