Buy-to-let property has long been a popular investment strategy in the UK, offering the potential for rental income and capital growth. However, tax changes — particularly Section 24 restricting mortgage interest relief — have significantly altered the landscape. Understanding rental yield, tax implications, and cash flow is essential for making informed investment decisions. This guide covers everything you need to know about buy-to-let in 2026.
Gross vs Net Rental Yield
Rental yield is the most important metric for evaluating a buy-to-let investment. It measures the annual rental return as a percentage of the property value or investment:
Gross Rental Yield
Gross yield is the simplest calculation and ignores all costs:
- Gross Yield = (Annual Rental Income / Property Price) × 100
- Example: Property costs £250,000, annual rent = £12,000
- Gross Yield = (£12,000 / £250,000) × 100 = 4.8%
Gross yield gives a quick snapshot but can be misleading because it does not account for the many costs associated with running a rental property. Always compare net yields when making investment decisions.
Net Rental Yield
Net yield accounts for all ongoing costs and gives a more accurate picture of your actual return:
- Annual rent: £12,000
- Less: Management fees (10%): -£1,200
- Less: Insurance: -£400
- Less: Maintenance: -£1,500
- Less: Void periods (1 month): -£1,000
- Less: Mortgage interest (if applicable): varies
- Net income after costs: £7,900
- Net Yield = (£7,900 / (£250,000 + £10,000 purchase costs)) × 100 = 3.04%
As you can see, the net yield is significantly lower than the gross yield. Include purchase costs (SDLT, legal fees, survey) in the denominator for the most accurate return calculation.
Section 24 Mortgage Interest Tax
Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how landlords are taxed on mortgage interest. From April 2020, landlords can no longer deduct mortgage interest from their rental income when calculating their tax bill. Instead, they receive a 20% tax credit on the interest paid.
This means higher rate taxpayers are significantly affected. Here is an example:
| Scenario | Before Section 24 | After Section 24 |
|---|---|---|
| Annual rent | £12,000 | £12,000 |
| Mortgage interest | £4,000 | £4,000 |
| Taxable income (40% taxpayer) | £8,000 (after deduction) | £12,000 (no deduction) |
| Tax bill | £3,200 | £4,800 |
| 20% tax credit | N/A | -£800 |
| Net tax liability | £3,200 | £4,000 |
The higher rate taxpayer now pays £800 more in tax each year. For basic rate taxpayers, the impact is less severe, but Section 24 can push some landlords into the higher rate band by increasing their taxable income. Many landlords now operate through limited companies to mitigate this tax impact, though this comes with its own considerations.
SDLT Additional Property Surcharge
If you already own a residential property and are buying a buy-to-let, you will pay a 5% SDLT surcharge on top of standard rates in England and Northern Ireland. This was introduced in April 2016 and represents a significant upfront cost:
| Property Price | Standard SDLT | With 5% Surcharge | Additional Cost |
|---|---|---|---|
| £150,000 | £500 | £8,000 | £7,500 |
| £250,000 | £2,500 | £12,500 | £10,000 |
| £300,000 | £5,000 | £20,000 | £15,000 |
| £500,000 | £12,500 | £37,500 | £25,000 |
In Scotland, the Additional Dwelling Supplement (ADS) is 8%, making the additional cost even higher. This surcharge must be factored into your investment returns as it increases the total capital required and reduces your initial yield.
Cash Flow Analysis
A thorough cash flow analysis is essential before purchasing a buy-to-let property. Consider all income and expenses:
Income
- Monthly rental income.
- Any other income from the property (parking fees, storage).
Expenses
- Mortgage payments (principal and interest, or interest-only).
- Property management fees (typically 8–12% of rent).
- Buildings and contents insurance.
- Maintenance and repairs (budget 1–2% of property value annually).
- Void periods (budget for 1–2 months without rent per year).
- Service charges and ground rent (for leasehold properties).
- Licensing costs (HMO or selective licensing areas).
Aim for positive cash flow from day one. If your mortgage and costs exceed your rental income, you are relying entirely on capital growth for returns, which adds significant risk. A healthy buy-to-let should generate enough rental income to cover all costs with a buffer.
BTL Mortgage Rates
Buy-to-let mortgages typically have higher interest rates than residential mortgages. In 2026/27, rates range from approximately 4.5% to 7% depending on the lender, loan-to-value ratio, and your circumstances. Most BTL mortgages are interest-only, meaning you only pay the interest each month and repay the capital at the end of the term.
Lenders typically require rental income to cover 125–145% of the mortgage payment (stress-tested at a higher rate, usually around 5.5%). This means your rental income must be sufficient to pass the lender's affordability tests, even if your actual mortgage rate is lower.
Consider whether a fixed or variable rate is more appropriate for your circumstances. Fixed rates provide certainty for budgeting, while variable rates may offer lower initial payments but expose you to interest rate risk.
Capital Growth Potential
While rental yield provides ongoing income, capital growth represents the potential increase in property value over time. UK property has historically appreciated at around 3–5% per year on average, though this varies significantly by location and property type.
Capital growth is particularly important for buy-to-let investors because it builds equity that can be leveraged for future investments. However, relying solely on capital growth is risky — property values can fall as well as rise, as seen during the 2008 financial crisis and other market corrections.
A balanced buy-to-let investment should generate positive cash flow from rental income while also offering reasonable capital growth potential. Location, local employment prospects, transport links, and regeneration plans all influence capital growth potential.
Calculate your buy-to-let returns
Use our free Buy-to-Let Calculator to analyse rental yield, cash flow, and Section 24 tax impact on your investment.
Use Buy-to-Let Calculator →Frequently Asked Questions
What is Section 24 and how does it affect buy-to-let?
Section 24 restricts mortgage interest tax relief for landlords. From 2020/21, you can no longer deduct mortgage interest from rental income. Instead, you receive a 20% tax credit. This means higher rate taxpayers pay significantly more tax on their rental income.
How do I calculate rental yield?
Gross yield = (Annual rent / Property price) × 100. Net yield = (Annual rent minus all costs) / (Property price + purchase costs) × 100. Always use net yield for accurate comparisons as it accounts for ongoing expenses like management fees, insurance, and void periods.
What SDLT surcharge do I pay on a buy-to-let?
In England, you pay a 5% surcharge on top of standard SDLT rates if you already own a residential property. In Scotland, the equivalent is 8% (ADS). This can add £10,000–£25,000+ to your purchase costs depending on the property price.
What is a typical BTL mortgage interest rate?
Buy-to-let mortgage rates in 2026/27 typically range from 4.5% to 7%, depending on the lender, loan-to-value ratio, and your credit profile. BTL mortgages are usually interest-only, and lenders stress-test at around 5.5% to ensure affordability.
Is buy-to-let still profitable after Section 24?
Buy-to-let can still be profitable, but returns depend on your tax band, location, and costs. Higher rate taxpayers are most affected. Many landlords now use limited companies for new purchases to mitigate the tax impact. Always model your cash flow carefully before investing.