Buy-to-let explained

Buy-to-let is a popular way to grow wealth, but the numbers are easy to flatter. The asking price is only the start — stamp duty, fees, mortgage interest and income tax all take a slice before you see a return. Here’s how to judge a property honestly.

Yield: the income part of the return

Rental yield is the annual rent you receive as a percentage of the property’s value:

• Gross yield = annual rent ÷ property price. For a £200,000 property renting at £1,000 a month, that’s £12,000 ÷ £200,000 = 6%.
• Net yield = (annual rent − running costs) ÷ price. With £2,400 a year of letting fees, insurance and maintenance, the same property nets £9,600, a 4.8% yield.

Net yield is the figure that matters. Gross yield is just a quick screen between properties.

Example. A £200,000 flat rents for £1,000 a month. Gross yield 6%. After £2,400 of costs the net yield is 4.8%. After mortgage interest of £4,000 and basic-rate tax, the after-tax yield drops to roughly 2.6%. Always run the full calculation before you commit.

The purchase costs nobody mentions

Buying an additional property means paying the 5% stamp duty surcharge on top of the normal residential rates — a £200,000 buy-to-let carries about £11,500 in stamp duty. Add legal fees, surveys and a mortgage arrangement fee and the true purchase price is comfortably above the asking price.

How tax eats the income

Rental profit is added to your other income and taxed at your marginal rate. Since 2020, mortgage interest no longer counts as an expense against profit — instead you get a 20% tax credit on the interest. That’s a real difference for higher-rate taxpayers, and one of the main reasons landlords’ post-tax returns are lower than the headline yields suggest.

The full calculation

Run every property through the numbers before you buy:

1. Price — the asking price plus stamp duty, fees and setup costs
2. Rent — realistic monthly rent, not an optimistic listing
3. Costs — letting fees, insurance, maintenance, voids
4. Mortgage — the interest you pay each year
5. Tax — income tax at your marginal rate after interest relief

Only then do you know the after-tax net yield — the number to compare against a savings account or a stocks & shares ISA.

See the maths

Use the buy-to-let calculator for the full after-tax picture, the rental yield calculator for a quick gross/net comparison, and the stamp duty calculator for the true purchase cost.