Buy-to-let in 2025/26: yield, tax and structure
Buy-to-let can still work, but Section 24, higher rates and the ICR stress test have reshaped the maths. This guide walks through yield, the tax that catches higher-rate landlords, whether to use a company, and the costs people forget.
Yield and cash flow
Gross yield is annual rent over the purchase price; net yield subtracts running costs. But the figure that decides whether a property is viable is monthly cash flow after the mortgage and tax. With interest-only BTL mortgages at today's rates, many properties that look fine on gross yield barely break even once costs, interest and tax are counted. Always model the full picture before you buy.
The ICR stress test
Buy-to-let lenders require the rent to cover a multiple of the mortgage interest at a stressed rate (around 5.5%) — typically 125% for basic-rate and 145% for higher-rate landlords. Fail it and you simply won't get the loan at that level; you'll need a bigger deposit, higher rent or a cheaper property. Check the ICR before you make an offer.
ICR uses a notional rate
Section 24 and why higher-rate landlords keep less
Since 2020, individual landlords can no longer deduct mortgage interest as an expense. Instead you're taxed on rent (after other costs) and get only a flat 20% tax credit on the interest. Basic-rate landlords are broadly unaffected; higher and additional-rate landlords pay materially more, and in highly leveraged cases can owe tax on a property that barely breaks even on cash. This single change is why portfolio landlords increasingly use companies.
Personal vs limited company (SPV)
A special purpose vehicle (SPV) limited company keeps full mortgage-interest deductibility, paying corporation tax (19% up to £50,000 profit, rising to 25%) instead of income tax. For higher-rate or portfolio landlords this often leaves more profit in the business to reinvest. The trade-offs: BTL company mortgage rates are usually higher, there's annual accountancy cost and admin, and extracting profit (as dividends or salary) is taxed again. It rarely pays for a single basic-rate landlord — take advice.
Stamp duty surcharge and CGT
Buying an additional property triggers a 5% SDLT surcharge on every band on top of standard rates. When you sell, gains are taxed under capital gains tax at 18% (basic-rate band) and 24% (higher), after the annual exempt amount — higher than the rates on most other assets. Factor both the entry and exit taxes into your return, not just the rental yield.
Common mistakes
- Quoting gross yield only. Costs, voids, interest and tax can turn a 6% gross yield into thin or negative cash flow.
- Forgetting Section 24. Higher-rate landlords can owe tax even when cash flow is barely positive.
- Skipping the ICR check. A purchase that fails the stress test won't get the mortgage you assumed.
- Incorporating without advice. A company isn't automatically better — higher rates, costs and extraction tax can outweigh the saving.
- Ignoring the SDLT surcharge and CGT. The 5% surcharge on entry and CGT on exit materially affect the real return.