Buy-to-let costs and taxes explained

This guide breaks down the key costs, taxes, and planning steps every landlord should know.

Key takeaways

• Buy-to-let can be profitable, but only if you understand the costs and taxes.

• Always factor in upfront fees, ongoing expenses, void periods, and compliance costs.

• Buy-to-let tax rules are complex - know your allowable expenses, reliefs, and surcharges.

• Plan cash flow carefully, stress-test your mortgage, and prepare for changes like the property income tax rise announced in the Budget (November 2025).

 

Upfront purchase costs

When you buy a rental property, you’ll face several initial costs:

• Deposit: Typically 20–40% of the property value for buy-to-let mortgages

• Mortgage fees: Arrangement fees and valuation fees

• Conveyancing fees: Legal costs/ solicitor fees for transferring property ownership.

• Surveys and inspections: Structural surveys, homebuyer reports, or other property assessments

• Stamp duty: There is a 5% surcharge on standard rates for second homes (including rental property)

Ongoing costs

Owning a rental property comes with regular expenses that will reduce your profits:

• Maintenance and repairs: Routine upkeep and unexpected issues like plumbing or roof repairs.

• Void periods: Times when the property is empty and not generating rental income.

• Letting agent fees: Usually 8–15% of monthly rent depending on how the property is managed

• Insurance: Buildings insurance, landlord insurance, and optional rent guarantee cover.

• Compliance checks: Legal requirements such as Energy Performance Certificates (EPC), gas safety checks, and electrical inspections.

• Leasehold costs: If you own a leasehold flat, you’ll usually have to pay ground rent and service charges.

Buy-to-let mortgages

You can’t normally let a property owned on a residential mortgage (unless the lender has granted ‘consent to let’).

So, if you need to borrow money to buy a rental property, you’ll need a buy-to-let mortgage. Buy-to-let mortgages differ from standard residential mortgages in several ways:

Deposit requirements

• Typically 20–40% of the property price is required as a deposit.

• Larger deposits can help secure better interest rates.

Higher arrangement fees

• Buy-to-let mortgages usually come with higher setup or arrangement fees than residential loans, often £1,000–£2,000 or more. Some are a percentage of the loan amount.

• Additional fees may include valuation and legal costs.

Higher interest rates

• Interest rates are generally higher than standard residential mortgages, reflecting the higher risk for lenders.

• Most buy-to-let mortgages are interest-only mortgages, meaning you pay only the interest each month and repay the loan at the end of the term.

Affordability based on rental income

• Lenders check whether expected rental income covers mortgage payments, usually requiring rent to cover 125–145% of monthly repayments.

• Other costs like maintenance, insurance, and void periods are factored into the calculation.

Age limits

• Most lenders require you to repay the mortgage by a certain age, often 70–75.

• Some lenders have minimum age limits for applicants, typically 21–25.

Need for a mortgage broker

• Buy-to-let mortgages can be complex with varied criteria across lenders.

• Using a mortgage broker can help you find the best deal, navigate eligibility requirements, and save money when you come to remortgage.

Interest cover ratio (ICR)

• Typically buy to let mortgages are based on rental income and lenders will generally expect it to be at least 125% of the monthly repayments on your mortgage. This is called the Interest Coverage Ratio (ICR).

 

What is a buy-to-let stress test?

A buy-to-let stress test checks whether you could afford mortgage repayments on a rental property if economic conditions worsen. It ensures rental income can cover costs even if interest payments rise or unexpected expenses occur.

How a buy-to-let stress test works

1. Rental income assessment: The lender looks at expected rental income, usually based on market rates or a surveyor’s valuation.

2. Simulated interest rates: They apply a higher interest rate than the current one (often 5–7% above the lender’s standard rate) to see if repayments remain affordable.

3. Expense consideration: Costs like maintenance, letting agent fees, and insurance are included to check that income can cover all outgoings.

In short, the stress test helps ensure your buy-to-let investment remains sustainable, even under tougher financial conditions.

How are buy-to-let properties taxed?

When you rent out a property, the money you earn isn’t just “extra cash” — it’s taxable income. Buy-to-let properties come with specific tax rules that affect your rental profits, mortgage interest, and the eventual sale of the property. Understanding these rules is essential for planning your finances, staying compliant, and making sure your investment remains profitable.

As a landlord, you’ll be taxed in the following ways:

• When you buy a rental property (stamp duty)

• On rental income (income tax)

• When you sell a property (capital gains tax)

Stamp duty

Stamp duty is a one-off tax paid when buying property or land in the UK. In England and Northern Ireland, it’s called Stamp Duty Land Tax (SDLT).

In Scotland similar rules apply under Land and Buildings Transaction Tax (LBTT), and in Wales under Land Transaction Tax (LTT).

In April 2016, the government introduced a 3% surcharge for additional properties in England and Northern Ireland, including buy-to-let and second homes. This surcharge was increased to 5% in 2024.

The surcharge means landlords pay stamp duty rates from 5% to 17%, depending on the purchase price of the property.

Income tax on rental profits

Rental income is taxable, but you only pay tax on your profit — that is, rent received minus allowable expenses like maintenance, letting agent fees, finance costs and insurance.

Rental income is added to your other earnings and taxed according to your income tax band. The Autumn Budget 2025 included a 2% increase in tax on property income – this will take effect in April 2027. The rise is to account for the fact that income from property is not subject to National Insurance.

Before 2016, landlords could deduct all mortgage interest from their rental income in order to pay less tax. Since then, the rules have gradually changed. Since April 2020, landlords receive a 20% tax credit on mortgage interest instead of deducting the full cost. This means higher-rate taxpayers and additional-rate taxpayers pay more tax than under the old system.

Read more about the tax relief you can claim on your rental property, and which expenses are tax deductible.

What are allowable expenses?

When calculating your income tax on rental property, you can deduct costs that are ‘wholly and exclusively for letting’. These include:

• Letting agent or estate agent fees

• Repairs and maintenance

• Legal and accounting fees

• Utility bills you pay as the landlord

But you cannot include:

·         Mortgage capital repayments

·         Improvements to the property

Read more about allowable expenses on the Government website.

Capital gains tax

When you sell a rental property, any profit above the original purchase price may be subject to capital gains tax (CGT).

The gain is calculated as the sale price minus the purchase price and any allowable costs, such as legal fees or certain improvements. CGT rates for residential property are 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers.

Everyone has an annual CGT allowance, which lets you make a certain amount of gains before you start paying tax. The CGT allowance (known as the “annual exempt amount) stands at £3,000 for 2025/26.

If the rental property was your main residence at any point (i.e. you lived there before letting it out), you may be eligible for Private Residence Relief (PPR) which will reduce your tax liability.

Record keeping

All landlords are required to keep accurate records of their rental income and expenses. This includes rent received, maintenance and repair costs, insurance, letting agent fees, and any other allowable deductions.

Proper record-keeping makes it easier to calculate profits, claim tax relief, and submit accurate returns to HMRC, helping you stay compliant and avoid penalties.

What is Making Tax Digital (MTD) for landlords?

Making Tax Digital (MTD) is a government initiative designed to modernise the tax system. It requires landlords to keep digital records of property income and allowable expenses and submit tax information using government-approved, MTD-compatible software.

Key points for landlords:

• MTD will be compulsory for landlords with annual turnover of £50,000 or more from April 2026. The threshold falls to £30,000 in April 2027 and to £20,000 from 2028.

• Landlords must sign up for MTD on the HMRC website and complete the relevant registration.

• You will need to submit quarterly income and expenditure summaries, along with a final declaration each tax year. The final declaration replaces the self assessment tax return.

How to make your buy-to-let profitable

Calculate your return

To make a buy-to-let property profitable, you need to understand your potential returns.

The first step is to calculate rental yield, which gives you a quick sense of how well the property might perform.

A simple way to do this is by working out the gross yield:

• Gross yield: Annual rent ÷ property price × 100

For a more realistic picture, many landlords prefer net yield, which takes costs into account.

• Net yield: (Annual rent – costs) ÷ property price × 100

What is return on investment (ROI)?

Landlords often look at return on investment (ROI). This gives a fuller view of profitability by including mortgage payments, fees, maintenance costs, taxes, and potential capital growth when you sell.

• ROI = (*Annual profit ÷ **Total investment) × 100

*Annual profit = rental income minus all annual costs (mortgage interest, insurance, maintenance, management fees, etc.)

**Total investment = your upfront costs (usually the deposit + legal fees + stamp duty + any refurb costs)

ROI helps you compare different properties and strategies, and shows whether the return is worth the time and money involved.

Budgeting for void periods and unexpected repairs

Landlords should always budget for void periods and unexpected repairs, as both can have a big impact on cash flow.

A void period is any time your property sits empty with no rent coming in, so it’s sensible to set aside at least one to three months of rent each year as a buffer. You will need to pay council tax during any void periods (this is normally paid by the tenant).

Unexpected repairs — such as boiler breakdowns, roof leaks, or electrical faults —can also be costly and often need fixing quickly.

Building a contingency fund helps you cover these expenses without affecting your ability to meet mortgage payments or other ongoing costs, keeping your buy-to-let business stable even when surprises happen.

Cash flow modelling

Cash flow modelling helps landlords understand how much money their property will actually make each month. The simplest way to do this is by creating a basic spreadsheet that lists all your income and costs.

Start by comparing your rental income with your mortgage payments, insurance, maintenance, letting agent fees, and other regular expenses. You should also include expected tax bills and any available tax reliefs, so you can see the true impact on your monthly and annual profits.

It’s also useful to look beyond monthly income and think about the long-term picture. Add in assumptions about capital growth, possible rent increases, and future repair costs.

This helps you model best and worst-case scenarios and plan ahead. A property may look attractive based on headline rent, but it can still produce negative cash flow if costs and taxes aren’t fully accounted for. Cash flow modelling gives you a clear, realistic view of profitability and helps you make confident decisions.

 

FAQs

How much tax do landlords pay on rental income?

The tax on rental income is charged according to your income tax band (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate). These rates will all go up 2 percentage points from April 2027 (to 22%, 42% and 47%).

However, you can minimise the tax you have to pay by deducting certain 'allowable expenses' from your taxable rental income.

What is the 5% buy-to-let stamp duty surcharge?

The 5% buy-to-let stamp duty surcharge is an extra tax that landlords and second-home buyers must pay when purchasing an additional residential property. It sits on top of the standard Stamp Duty Land Tax (SDLT) rates.

This surcharge was originally introduced at 3%, but has since increased to 5%, making the upfront cost of buying a rental property higher.

What insurance do landlords need?

Landlords should consider a range of insurance policies to protect their property and income. The most common types include landlord building insurance, landlord contents insurance, landlord liability cover, rent guarantee insurance, legal expenses cover, and home emergency cover. While not all are required, they can provide valuable protection and peace of mind.

What costs do most landlords forget to budget for?

Many landlords focus on mortgage payments and routine maintenance but forget to budget for other essential costs.

Commonly overlooked expenses include void periods when the property is empty, unexpected repairs or replacements, insurance premiums, letting agent fees, compliance checks (like gas safety and electrical inspections), and legal or professional fees.

You may also incur costs if you need to evict a tenant.

What is the Renters’ Rights Act?

The Renters’ Rights Act is legislation designed to strengthen protections for tenants in the private rental sector. You should read and understand the act before buying a buy-to-let property.

It sets out tenants’ rights and responsibilities, including security of tenure, limits on rent increases, protection from unfair eviction, and requirements for safe, well-maintained properties. The act aims to create a fairer, more transparent rental market while ensuring landlords meet their legal obligations.

How can I estimate the long-term return on my investment?

To estimate the long-term return on a buy-to-let investment, consider both rental income and potential capital growth. Start by calculating your net rental yield (rent minus costs, divided by purchase price) and then factor in mortgage payments, taxes, maintenance, and other ongoing expenses.

Next, estimate the property’s likely appreciation over time based on local market trends.

Combining these figures gives a realistic picture of your total return on investment (ROI) and helps you plan for both short-term cash flow and long-term profit.

What tools or calculators can help me understand affordability and tax?

MoneySuperMarket’s mortgage calculator can help you work out how much your buy-to-let mortgage will cost.

This calculator from Taxfix can help you work out how much income tax you will pay on rental income.

Should I set up a limited company do to buy-to-let?

Setting up a limited company for buy-to-let can reduce tax, as profits are taxed at the lower corporation tax rate and all mortgage interest can be deducted, making highly mortgaged properties more profitable. However, it brings extra costs, administration, and tax on withdrawals, so it’s usually best for larger portfolios rather than a single property.

Can I let out a holiday home?

Furnished holiday lettings come under different rules than buy-to-let where you have an ongoing tenancy agreement. You’ll need a different type of mortgage and to read up on allowable expenses.