UK Buy-to-Let
Gross vs net yields, Section 24, Limited Company ownership, and the tax regime that broke amateur landlords
Buy-to-let used to be a no-brainer. Buy a second property. Let it out. Mortgage interest came off your tax bill. Rent covered the mortgage. Price appreciation did the rest.
Then in 2017, Section 24 happened — mortgage interest was no longer deductible for individual landlords. Then in 2020, the SDLT surcharge jumped from 3% to 5%. Corporation tax went from 19% to 25%. The old amateur landlord model — a middle-class couple with one or two personally-owned rentals — doesn’t really work anymore.
What works now is different. Serious landlords hold properties through Limited Companies (SPVs). They run it like a business, claim all the interest, pay 19-25% corporation tax on profit, and extract funds through dividends or salary. The numbers are fundamentally different.
This guide covers both models honestly. If you own a personal rental, you’ll see exactly how Section 24 affects you. If you’re considering BTL now, you’ll see the Ltd Co comparison that nobody else does properly. Plus yield math, BTL mortgage stress tests, and the exit strategy most landlords forget until it’s too late.
Answer three quick questions and I’ll highlight the sections most relevant to you.
Quick BTL Return Estimate
How BTL Works in 2026
Buy-to-let is the practice of purchasing a residential property specifically to rent it out for income. The landlord earns two potential returns: monthly rental income (yield), and eventual capital appreciation when the property is sold.
That description hasn’t changed since buy-to-let mortgages were introduced in 1996. What has changed — dramatically — is the tax regime around it.
In 2026, there are essentially two ways to own a UK rental property, and the choice between them affects almost every number on the page:
Personal ownership. You buy the property in your own name (or joint names with a spouse). Rental income is taxed as personal income at your marginal rate (20%, 40%, or 45%). Since 2020, you can no longer deduct mortgage interest from rental income — instead you receive a 20% tax credit on the interest. This is known as Section 24, and it’s the single biggest reason the old model stopped working for higher-rate taxpayers.
Limited Company (SPV) ownership. You form a company — typically a Special Purpose Vehicle (SPV) — and the company buys and owns the property. The company pays Corporation Tax on profit (19% up to £50,000 profit, rising to 25% above £250,000, with marginal relief in between). Crucially, mortgage interest is fully deductible as a business expense. You then extract money from the company as salary, dividends, or directors’ loans.
The numbers look very different depending on which route you take. Section 11 of this guide walks through a worked example comparing both on the same property.
On top of the ownership choice, every BTL purchase involves extra upfront costs that a homeowner doesn’t pay: the SDLT additional property surcharge (currently +5% on top of standard SDLT bands), higher legal fees, and specialist BTL mortgage products with higher rates and tighter lending criteria. These costs typically add £15,000–£40,000 to the purchase of a mid-range property before a tenant has ever paid rent.
Personal vs Limited Company Ownership
The single most important decision in UK buy-to-let is how to hold the property. I’ll be blunt: for higher-rate and additional-rate taxpayers buying BTL with a mortgage today, Limited Company ownership is almost always the right structure. Here’s why.
| Feature | Personal | Limited Company (SPV) |
|---|---|---|
| Mortgage interest | Not deductible. 20% tax credit only (Section 24) | Fully deductible as business expense |
| Rate on profit | 20% / 40% / 45% (marginal income tax) | 19% CT up to £50k, 25% above £250k |
| Dividend tax on withdrawal | N/A — income is taxed at source | 8.75% / 33.75% / 39.35% above £500 allowance |
| CGT on sale | 18% / 24% residential rates | Corporation Tax on company gain (19–25%) |
| Setup cost | None | £50 company formation, plus annual accounts |
| Annual admin | Self Assessment entry | Statutory accounts, CT600, Confirmation Statement |
| Mortgage availability | Wide choice | Narrower, slightly higher rates (~0.4–1% premium) |
| Inheritance tax planning | Property forms part of estate | Shares can be gifted/structured for IHT planning |
The big difference is Section 24. A personally-owned rental with a mortgage on a higher-rate taxpayer is paying tax on revenue rather than profit. If rent is £15,000 and mortgage interest is £10,000, a basic-rate landlord pays tax on £15,000 − allowable expenses, then receives a 20% credit on the £10,000 interest. A higher-rate landlord pays 40% on that £15,000 — and only gets a 20% credit back on the interest. That structural mismatch can wipe out the cashflow entirely, or turn a paper-profitable property into a real-world loss maker.
In a Limited Company, interest is just an expense. You pay Corporation Tax on actual profit after interest. Re-invest that profit into deposits for the next property and you pay no additional tax until you extract dividends personally. That’s why the serious portfolio landlords are running Ltd Cos — they’re running it as a business.
When personal ownership still makes sense
Personal ownership isn’t dead. It still works for: basic-rate taxpayers with unmortgaged or lightly-leveraged properties; couples where one partner has unused personal allowance; landlords planning to hold long-term and live off rental income in retirement when they’ll be back in basic rate; and people buying for a close family member (e.g. a child at university) where commercial returns aren’t the goal.
If you already own BTL properties personally, transferring them into a company triggers SDLT at the higher rate, plus CGT on any gain. Incorporation reliefs exist but are narrow. For most existing landlords it’s not worth transferring — the answer is usually to hold existing properties personally and buy future properties through a Ltd Co.
Section 24 Explained
Section 24 of the Finance (No. 2) Act 2015 is the rule that broke amateur landlords. It was phased in between 2017 and 2020, and it applies exclusively to privately-owned (i.e. not Ltd Co) residential BTL. It does not apply to commercial property, furnished holiday lets (historically, though this is changing), or Ltd Co landlords.
Before Section 24, mortgage interest was a tax-deductible expense. Rent in, minus interest, minus other costs, gave you profit. Profit was taxed.
After Section 24, mortgage interest is no longer deducted from rental income. Instead, the full rent (less other allowable costs) is taxed, and you receive a 20% tax credit on the interest you paid. For a basic-rate taxpayer the math is broadly similar to before. For a higher or additional-rate taxpayer, the math is very different and often painful.
Worked example: basic vs higher rate under Section 24
Assume a personally-owned BTL: £14,400 annual rent, £9,000 mortgage interest, £2,000 other allowable costs (letting agent, insurance, maintenance, licence fees).
The real cashflow on the property is rent minus interest minus costs = £14,400 − £9,000 − £2,000 = £3,400. A higher-rate landlord pays £3,160 tax on £3,400 of real profit — an effective rate of 93%. Before Section 24, the same landlord would have paid around £1,360 (40% of £3,400). Section 24 has cost them roughly £1,800 a year. Multiply that across a leveraged portfolio and it explains why so many amateur landlords have sold up since 2020.
The income-shift trap
Because Section 24 taxes rent as income (rather than profit), it can also push landlords into a higher tax bracket. A landlord earning £45,000 from their day job, plus £14,400 in rent, now has a stated income of £59,400 — above the higher-rate threshold — even if their actual cash take-home from the rental is tiny. That also costs them child benefit (taper begins at £60,000), and reduces their personal allowance if they push past £100,000.
“The amateur BTL model died in 2017. Nobody put up a headstone.”
Understanding Yields
Yield is the single number every landlord fixates on — and the single number most new landlords get wrong. There are three distinct yield metrics, and they answer three very different questions.
Gross Yield
Gross yield is annual rent divided by property price, times 100. It’s the number plastered on every letting agent’s marketing material, because it’s the biggest and most flattering. It tells you nothing about whether you’ll actually make money.
Formula: (Annual rent ÷ Purchase price) × 100
A £250,000 property letting for £1,200/month has a gross yield of (14,400 ÷ 250,000) × 100 = 5.76%. Sounds respectable. Ignores stamp duty, legal fees, mortgage interest, void periods, repairs, insurance, agent fees, tax, and every other real-world cost.
Net Yield
Net yield is annual rent, minus operating costs (not including mortgage or tax), divided by total investment (purchase + SDLT + legals + refurb). It gives a far more honest picture of the property’s raw income-producing power.
Formula: ((Annual rent − operating costs) ÷ Total investment) × 100
Operating costs typically run 20–30% of gross rent once you include letting agent fees (10% full management), insurance, ground rent/service charge (flats), council tax on voids, repairs, periodic refurbs, and licence fees. Net yield on a typical UK BTL sits 1.5–2.5 percentage points below the gross yield.
Cash-on-Cash Return
Cash-on-cash return is the one serious investors actually use. It’s the annual cashflow after everything — operating costs, mortgage interest, tax — divided by the actual cash you’ve put in.
Formula: (Annual post-tax cashflow ÷ Total cash invested) × 100
This is the number that tells you whether the property is a good home for your deposit, compared to other things you could do with it (stocks, bonds, other BTLs, paying off debt). On a typical leveraged UK BTL in 2026, cash-on-cash return ranges from slightly negative (after Section 24 hits a higher-rate landlord) to around 8–10% in strong yield areas held through a Ltd Co.
Typical UK yields by region
| Region | Typical gross yield range |
|---|---|
| Central London (Zone 1–2) | 3.0–4.5% |
| Outer London / Home Counties | 4.0–5.5% |
| South-East (excl. London) | 4.5–6.0% |
| South-West / Midlands | 5.0–7.0% |
| North-East / North-West / Yorkshire | 6.5–9.0% |
| Scotland (central belt) | 6.0–8.0% |
| Wales (urban) | 5.5–8.0% |
| HMOs (any region) | +2–4 percentage points vs single let |
As a rule of thumb, below 5% gross yield the numbers need to rely heavily on capital growth to work. Above 7% gross, you’re typically in a region where rent commands a higher share of property value because capital growth expectations are modest. There’s no free lunch.
SDLT Surcharge & Upfront Costs
Since October 2024, the Stamp Duty Land Tax additional property surcharge is 5% on top of every standard band. Buy a £500,000 second home or BTL and you pay £12,500 of standard SDLT plus £25,000 of surcharge = £37,500 total. That’s the price of entry before you’ve met a tenant.
Scotland applies the equivalent Additional Dwelling Supplement (ADS) at 8%. Wales applies a higher LTT surcharge. Non-resident buyers pay an additional +2% on top of the surcharge. These numbers matter: SDLT can easily consume the first two years of net rental income.
| Property price band | Standard rate | BTL rate (incl. +5% surcharge) |
|---|---|---|
| Up to £125,000 | 0% | 5% |
| £125,001 – £250,000 | 2% | 7% |
| £250,001 – £925,000 | 5% | 10% |
| £925,001 – £1,500,000 | 10% | 15% |
| Over £1,500,000 | 12% | 17% |
The SDLT surcharge applies whether you buy personally or through a company. The only real exemption route is replacing your main residence within 36 months (in which case you can reclaim the surcharge), or buying six or more properties in a single transaction (which counts as commercial for SDLT purposes).
Full upfront cost checklist
- Deposit: typically 25–40% for BTL mortgages
- SDLT surcharge (England/NI): +5% on all bands
- Legal fees (purchase): £1,200–£2,000 (more for Ltd Co)
- Mortgage arrangement fee: £999–£2,999 (or 1–2% of loan)
- Valuation fee: £200–£700
- Broker fee: £0–£1,000
- Initial refurb: £2,000–£15,000+ depending on condition
- Landlord insurance: £150–£400/yr
- Gas/EICR safety certs: £100–£250 each
- Selective licensing (if applicable): £500–£1,500 per 5 years
BTL Mortgages & Stress Tests
BTL mortgages are a different product from residential mortgages. Rates sit typically 0.5–1.5 percentage points above equivalent residential deals. Lending is based on the rent the property can command, not just your personal income. And every lender runs a stress test to make sure the property can still service the loan if rates spike.
Interest Coverage Ratio (ICR)
The key test is the Interest Coverage Ratio (ICR). Lenders require rent to be:
- 125% of mortgage interest at stress rate — for basic-rate personal borrowers and most Ltd Co borrowers (though some require higher)
- 145% of mortgage interest at stress rate — for higher/additional-rate personal borrowers
- Stress rate typically 5.5–8.5% for fixes under 5 years; longer fixes stress at pay rate + 1–2%
This means the rent has to massively over-cover the interest on paper, otherwise the lender won’t lend at your target LTV. In practice, rising interest rates since 2022 have squeezed ICR calculations hard. Properties that met ICR at 3% stress rates no longer do at 8% stress rates, which is why landlords renewing fixed-rate deals have found they must inject extra deposit cash or accept a much smaller loan.
Worked ICR calculation
A £200,000 mortgage at 5.5% interest = £11,000/yr interest. Stressed at 8% = £16,000/yr.
- Basic-rate personal (125% ICR): need rent ≥ £20,000/yr = £1,667/mo
- Higher-rate personal (145% ICR): need rent ≥ £23,200/yr = £1,933/mo
- Ltd Co (125% ICR): need rent ≥ £20,000/yr = £1,667/mo
Interest-only vs repayment
Almost all BTL mortgages are interest-only. The tax treatment means paying down capital typically hurts cashflow and ICR, and most landlords rely on future capital growth or refinancing to pay off the mortgage eventually. Repayment mortgages are rare on BTL and don’t usually make financial sense under the current regime.
Product fee games
Watch the product fees. Many BTL deals quote very low headline rates but charge a 2–5% arrangement fee on the loan amount. On a £200,000 loan, a 3% fee is £6,000 of additional cost. Compare the true cost-of-credit across a 2-year window rather than just the sticker rate.
Tax on Rental Income
For personally-owned BTL, rental income is taxed as income and added to your other income for the year. It is taxed at your marginal rate: 20%, 40%, or 45%. There is no separate tax rate for rental income.
There is a small Property Income Allowance of £1,000. If your gross rental income is under £1,000 for the year, you pay no tax on it and don’t need to declare it. If it’s above £1,000, you can either claim actual expenses or take the £1,000 allowance in lieu of expenses (whichever gives a lower tax bill).
Allowable expenses (personal BTL)
You can deduct from rental income:
- Letting agent fees
- Landlord insurance
- Ground rent / service charge (flats)
- Council tax during voids
- Utility bills you pay (typically HMOs)
- Repairs and maintenance (but not improvements — those add to cost base for CGT)
- Accountant fees
- Advertising for tenants
- Licence fees (selective/mandatory HMO)
- Safety certificates (gas, EICR, EPC)
Capital improvements (new kitchens, extensions, conversions) are not deductible against rental income — they’re added to the cost base of the property and reduce your capital gain when you sell. Repairs that restore the property to its previous condition (boiler replacement, re-painting, re-roofing like-for-like) are deductible.
Mortgage interest (the Section 24 rule)
As covered in section 10, mortgage interest is not deducted from rental income for personally-owned BTL. You receive a 20% tax credit on it instead. For Ltd Co BTL, interest is a standard business expense and fully deductible against rental profit before Corporation Tax.
When do you pay?
Rental income is reported on your Self Assessment return, due by 31 January after the tax year end. Your first BTL return often brings a balancing payment plus two payments-on-account for the next year — which can be a nasty cashflow shock. Set aside the tax as the rent comes in.
CGT on Disposal
When you sell a BTL, you pay Capital Gains Tax on the profit (the gain) rather than on the sale price. The gain is the sale price minus the original purchase price, minus SDLT, minus legal fees on purchase and sale, minus selling agent fees, minus any capital improvements.
Residential property CGT rates were unified in October 2024 and now stand at:
- Basic-rate taxpayers: 18% on gain
- Higher / additional-rate taxpayers: 24% on gain
- Annual Exempt Amount: £3,000 per person per year
No Private Residence Relief on pure BTL
Private Residence Relief (PRR) exempts the gain on your main home. It does not apply to a property that has only ever been a BTL. If you have lived in the property at some point (e.g. first home, later converted to BTL), you may claim partial PRR covering the years you occupied it. Keep good records: HMRC inspectors will want proof of occupation.
The 60-day CGT return
Since April 2020, you must report the disposal and pay the CGT within 60 days of completion. This is separate from your annual Self Assessment. Missing the 60-day deadline triggers automatic late filing penalties that scale aggressively.
Ltd Co CGT position
A Ltd Co does not pay CGT on property sales. It pays Corporation Tax on the company’s gain at the CT rate (19–25%). That sounds better but remember the cash is trapped inside the company — you’ll pay dividend tax again when you extract it personally. The combined effective rate depends on how and when you withdraw.
Common Mistakes I See
- Ignoring Section 24
The single most common mistake among higher-rate landlords. They still model the property with mortgage interest as a deductible expense, as though 2017 never happened. Their real tax bill is two or three times what they expected, and their cashflow turns negative.
- Buying personally when Ltd Co would have worked better
Most new higher-rate landlords should be looking at SPV ownership by default. The setup is cheap, the tax treatment is dramatically better for leveraged investment, and unwinding a personal purchase into a company later triggers SDLT and CGT. Get the structure right on day one.
- Using gross yield as the investment case
A 7% gross yield sounds brilliant until you deduct agent fees, mortgage interest, tax, voids, and insurance — and realise the cashflow is thin or negative. Model net yield and cash-on-cash from day one, and do it with realistic assumptions including a 5% void allowance.
- Missing allowable expenses (and the receipts)
Landlords routinely fail to claim legitimate expenses because they didn’t keep receipts or didn’t realise they were deductible. Insurance, licence fees, safety certs, accountant fees, mileage to the property, landlord association subs — all deductible. Keep a digital folder per property and log everything as it happens.
- Having no exit strategy
BTL is a long-hold asset, but “hold forever” isn’t a strategy. Are you selling at retirement? Passing to children via trust? Refinancing to extract cash? Each has different tax consequences that need to be modelled before purchase, not decided when you’re 65 and tired of tenants. CGT on a £200k gain at higher rate is £48,000. Plan for it.
UK BTL Market
The chart illustrates why BTL got painful fast. Through 2019–2021, average BTL mortgage rates sat at 2–3% while gross yields hovered around 5.5%. The gap — the landlord’s margin — was comfortable. From the 2022 mini-Budget onwards, BTL rates spiked to 5–6% while yields drifted up only modestly. The margin collapsed. Landlords on fixes taken out before 2022 have remortgaged into a different world.
The number of active BTL mortgages peaked around 2017 at just under 2 million. By late 2024 it had fallen to roughly 1.75 million. The UK Finance data is clear: amateur landlords have been leaving the market for the past five years. The landlords staying are increasingly professional, leveraged less, and holding through SPVs.
A Worked Example
A £250,000 terrace in a decent commuter town. £50,000 deposit (20% — tight for BTL, but let’s be optimistic), £200,000 interest-only mortgage at 5.5%. Monthly rent: £1,300. Annual operating costs (agent, insurance, maintenance, voids): £3,400. Let’s compare the same property held personally (higher-rate taxpayer) vs through a Ltd Co.
Both are thin margins — that’s the current reality of leveraged BTL on mid-yield properties at 5.5% mortgage rates. But the structural difference is stark: the Ltd Co keeps £972 in the business, the personally-held property loses £1,480 on cashflow. Over a decade that’s roughly a £25,000 swing, before any capital growth. That’s why structure matters more than property selection for leveraged investors.
| Metric | Personal (higher) | Ltd Co |
|---|---|---|
| Pre-tax cashflow | £1,200 | £1,200 |
| Tax paid | £2,680 | £228 |
| Net cashflow | −£1,480 | £972 |
| Effective tax on real profit | 223% | 19% |
Scenario Comparison
Drop in your own numbers and see how the same property performs across three ownership and tax-band scenarios. All three use identical property fundamentals — the difference is structure and tax treatment.
Interactive Scenario Comparison
What Would It Take to Make BTL Profitable?
Enter your situation and I’ll build a personalised plan showing the levers you can pull to turn a thin or negative-cashflow BTL into something profitable — structure, yield, leverage, and exit.
What’s Changing
The BTL regulatory and tax landscape has shifted more in the past five years than in the previous twenty. Here are the big changes landlords need to plan around.
Renters’ Rights Act (phased from 2026). The Renters’ Rights Act (passed in 2024 and now in phased rollout) abolishes Section 21 “no-fault” evictions. Landlords can only end tenancies for specific statutory reasons (rent arrears, anti-social behaviour, sale, moving family in). Fixed-term ASTs are being replaced with rolling periodic tenancies. Rent increases are limited to once per year and can be challenged at Tribunal. The practical effect: longer, more stable tenancies; less flexibility to remove problem tenants; stronger tenant rights at court. Most professional landlords have adjusted; it’s the part-time landlord with one problem tenant who feels it hardest.
EPC minimum rating rising to ‘C’ by 2028. The government’s confirmed plan is for all new BTL tenancies to require a minimum EPC rating of C from 2028, with all existing tenancies brought up to C by 2030. A significant proportion of the UK private rental stock — particularly Victorian and Edwardian terraces — is currently rated D, E, or F. Bringing a property to C can cost £5,000–£20,000 (insulation, boiler upgrades, windows). There are proposals for a spending cap of roughly £15,000 per property, but this isn’t finalised. Plan refurbishment budgets accordingly.
Section 24 status. Section 24 is unchanged and no political party has credibly suggested reversing it. The pre-2017 model of full interest deduction for personal BTL is not coming back. Strategy assumption: Section 24 is permanent.
Corporation Tax. The CT main rate was raised from 19% to 25% in April 2023, with marginal relief between £50,000 and £250,000 profit. Small SPV companies (under £50k profit) continue to pay 19%. For most single-property or small-portfolio SPVs, 19% is the relevant rate.
Making Tax Digital for Landlords (2026). From April 2026, landlords with gross rental income over £50,000 must keep digital records and submit quarterly updates through MTD-compatible software. The threshold drops to £30,000 in April 2027. This adds admin but doesn’t change the tax liability itself.
Renters’ database / landlord registration. A national landlord database is being established as part of the Renters’ Rights Act. Landlords will need to register properties and face penalties for non-compliance. Scotland and Wales already operate similar schemes; England is catching up.
When to Seek Advice
This guide covers the fundamentals. Consider speaking to a qualified BTL mortgage broker, property tax specialist, or chartered tax adviser if:
- You’re deciding between personal ownership and incorporating a new SPV
- You’re considering transferring existing personal BTLs into a company
- You own five or more properties (portfolio landlord rules apply)
- You’re structuring BTL holdings for IHT planning
- You’re buying HMOs, furnished holiday lets, or commercial-to-residential conversions
- You’re remortgaging at the new higher rates and your ICR calculation is tight
- Your gross rental income exceeds £50,000 (MTD for Landlords applies)
This tool is for guidance only and does not constitute financial, tax, or legal advice.
Glossary
- Gross YieldAnnual rent divided by property price, expressed as a percentage. The headline number but ignores every cost — don’t invest based on this alone.
- Net YieldAnnual rent minus operating costs (not mortgage or tax), divided by total cash invested. A more honest measure of the property’s raw income-producing power.
- Section 24The Finance Act rule phased in 2017–2020 that removed mortgage interest as a deductible rental expense for personally-owned BTL, replacing it with a 20% tax credit.
- SPV (Special Purpose Vehicle)A limited company set up specifically to hold investment property. Standard structure for new BTL purchases due to better tax treatment under Section 24.
- ICR (Interest Coverage Ratio)Ratio of rent to mortgage interest at a stressed rate, required by BTL lenders. Typically 125% (basic-rate / Ltd Co) or 145% (higher-rate personal).
- ADS (Additional Dwelling Supplement)Scotland’s equivalent of the SDLT surcharge, currently 8% on top of LBTT bands when buying a second or investment property.
- EPC (Energy Performance Certificate)A rating from A (most efficient) to G (least). Minimum E currently required for new tenancies; minimum C expected from 2028.
- Void PeriodThe period when a BTL is unlet between tenancies. A 5% void allowance (roughly 2.5 weeks/year) is a realistic planning assumption.
Official Sources
- April 2026 — Guide published. All figures reflect 2026/27 UK tax year.
- SDLT surcharge: +5% (from 31 October 2024). Previously +3% since 2016.
- CGT residential rates: unified to 18% / 24% from 30 October 2024.
- Future updates (Renters’ Rights Act rollout, EPC 2028 consultation, MTD for Landlords thresholds) will be logged here.
