Buy to let in 2026: the complete guide
Buy to let in 2026 is a business, not a passive investment. Between the 5% stamp duty surcharge, Section 24 tax treatment and interest cover ratio tests at stressed rates, deals that looked routine a decade ago no longer pass. This guide covers the arithmetic that decides whether a property works.
In this guide
The interest cover ratio test
Buy-to-let lending is not assessed on your salary. It is assessed on whether the rent covers the mortgage interest with a margin, at a rate higher than the one you will actually pay.
ICR = monthly rent ÷ (loan × stress rate ÷ 12)
The required ratio depends on your tax position: 125% for basic-rate taxpayers and limited companies, 145% for higher-rate taxpayers, and up to 165% at some lenders for additional-rate taxpayers. The stress rate is typically the higher of around 5.5% or your product rate plus a margin.
The five-year exception matters. Lenders generally apply a softer stress test to five-year fixed products, often stressing at the pay rate rather than a notional higher one. This is why so much buy-to-let lending is written on five-year fixes, because it is frequently the only way a deal passes.
Worked example. A £200,000 property, £150,000 loan, £1,100 monthly rent, stressed at 5.5%:
- Stressed monthly interest: £150,000 × 5.5% ÷ 12 = £688
- ICR: £1,100 ÷ £688 = 160%
- Passes 125% and 145%, but falls just short of 165%, so a higher-rate taxpayer is fine here while an additional-rate taxpayer at a strict lender is not.
Test your own figures on the buy to let calculator, which runs the ICR alongside the profit calculation.
Yields: gross, net and what to ignore
Gross yield is annual rent divided by purchase price. It ignores every cost and is useful only for comparing properties against each other quickly.
Net yield is annual rent minus running costs and voids, divided by the purchase price plus buying costs. This is the number that means something.
| Area type | Typical gross yield | Trade-off |
|---|---|---|
| Northern cities | 7 to 8% | Strong cash flow, slower capital growth |
| Midlands | 6 to 7% | Reasonable balance of both |
| Regional England | 5 to 6% | The market average |
| Outer London / South East | 4 to 5% | Often fails ICR without a large deposit |
| Central London | 3 to 4% | Growth play only; rarely cash-flow positive |
The practical constraint is that a 4% gross yield will usually fail a 145% ICR test at current rates unless you put in a very large deposit. Low-yield areas are increasingly a cash-rich game.
Section 24 and why higher-rate landlords do different maths
Since 2020, individual landlords cannot deduct mortgage interest from rental income. Instead you are taxed on the full rent less other allowable costs, and receive a 20% tax credit on the interest.
For a basic-rate taxpayer this is broadly neutral. For a higher-rate taxpayer it is a substantial hit, because you are taxed at 40% on income you never received, then credited back at only 20%.
| Basic rate | Higher rate | |
|---|---|---|
| Annual rent | £13,200 | £13,200 |
| Mortgage interest | £8,175 | £8,175 |
| Other costs | £1,800 | £1,800 |
| Taxable profit (Section 24 basis) | £11,400 | £11,400 |
| Tax before credit | £2,280 | £4,560 |
| Less 20% interest credit | −£1,635 | −£1,635 |
| Tax due | £645 | £2,925 |
| Net profit after tax | £2,580 | £300 |
The same property, the same rent, the same mortgage, and a higher-rate landlord keeps £300 a year against a basic-rate landlord's £2,580. There is also a second-order effect: the rental income can push you into a higher band or erode your personal allowance, so a property can cost you tax elsewhere.
Limited company or personal name?
Inside a company, mortgage interest remains a fully deductible business expense and profits are subject to corporation tax rather than income tax. That is why a large share of new buy-to-let lending now goes to limited companies.
| Factor | Personal name | Limited company |
|---|---|---|
| Mortgage interest | 20% credit only | Fully deductible |
| Mortgage rates | Lower | Typically 0.3 to 0.8pp higher |
| Product fees | Lower | Often higher, sometimes percentage-based |
| Extracting profit | Already yours | Taxed again as dividend or salary |
| Annual admin | Self assessment | Accounts, corporation tax return, accountancy fees |
| Transferring existing property in | Not applicable | Triggers stamp duty and possibly CGT |
The rough rule: a higher or additional-rate taxpayer building a portfolio and reinvesting profits usually benefits. A basic-rate taxpayer with one or two properties who needs the income now usually does not. This is a decision to take with an accountant before you buy, because moving properties later is expensive.
The full cost list
- Deposit: 25% minimum for decent rates. 40% unlocks the best pricing and makes the ICR test comfortable.
- Stamp duty with the 5% surcharge. On £200,000 in England that is £11,500 rather than £1,500. Scotland charges 8% ADS on the full price; Wales uses separate higher-rate bands. Check on the stamp duty calculator.
- Product fee. Buy-to-let fees are often 1 to 3% of the loan rather than a flat £999, so on £150,000 that can be £3,000.
- Letting agent: 10 to 15% of rent for full management, or 8 to 10% for tenant-find only.
- Landlord insurance, which is not the same as standard buildings cover.
- Compliance: annual gas safety certificate, EICR every five years, EPC, deposit protection, right to rent checks.
- Maintenance: budget 1% of the property value annually. Boilers, roofs and bathrooms do not care about your spreadsheet.
- Voids: assume at least one empty month a year, more between tenancies.
A worked deal, start to finish
£200,000 property, £50,000 deposit, £150,000 loan at 5.45% interest only, £1,100 monthly rent, higher-rate taxpayer.
| Item | Annual |
|---|---|
| Rent | £13,200 |
| Less voids (8%) | −£1,056 |
| Less mortgage interest | −£8,175 |
| Less running costs | −£1,800 |
| Profit before tax | £2,169 |
| Less tax (Section 24, higher rate) | −£2,503 |
| Net profit | −£334 |
A loss of £334 a year, on a deal that passes the lender's ICR test comfortably. That is the point: passing the lender's test and making money are different questions entirely. This deal only works as a capital growth play, or through a limited company, or with a larger deposit. A basic-rate taxpayer would make £1,735 on exactly the same property.
The risks people underestimate
- Rate risk at refinance. Interest-only means the balance never falls, so every refinance is at the full original loan. A rate rise hits the whole debt.
- Void periods. Three empty months wipes out most of a year's profit on a thin deal.
- Bad tenants. Rent arrears plus a possession process can run to thousands and take months. Rent guarantee insurance is worth pricing.
- Regulatory change. EPC requirements, licensing schemes and tenancy law have all moved repeatedly. Assume more change, not less.
- Illiquidity. Selling takes months and costs several per cent. This is not money you can reach quickly.
- Concentration. One property in one street is a very undiversified investment compared with the same money in a global index fund.
Do this next: run the deal on the buy to let calculator, which applies the ICR test, Section 24 tax treatment and the stamp duty surcharge in one place. Then take the output to an accountant before you offer.