Buy-To-Let Uk: Where To Invest For Long-Term Returns

The UK property market is performing highly, with a 17.9% expected growth for house prices by 2028. Rental costs are also rising, with a 9.9% annual increase from April 2023. This, along with the UK's strong housing market, makes the UK an attractive prospect for investors.

When it comes to choosing where to invest, the best areas to look at have a combination of high rental yields, affordable property prices, and high tenant demand. Liverpool and Manchester are widely considered the two best cities to invest in, with high rental yields and affordable prices. Liverpool has an average rental yield of 7.92%, far above the UK average of 4.93%.

Other cities like Sheffield, Nottingham, and Birmingham are also solid options due to their affordable prices and high tenant demand. London is ranked as the most stable and lucrative property market region globally, but investors need to be aware of the sky-high entry prices.

Rental yield

In 2019, Liverpool was the top-performing city for buy-to-let yields in the UK, with landlords enjoying 10% yields. In second and third place were Falkirk (9.51%) and Glasgow (8.71%). Glasgow had five postcodes in the top 25, with the best-performing being G52, covering areas such as Hillington, Cardonald, Penilee and Mosspark.

In 2024, Southampton was named the number one buy-to-let hotspot in England and Wales, with average rental yields of 7.82%. Bristol, Leeds, and Newcastle also offer strong yields, with Bristol and Newcastle both offering yields of around 6%.

London has the highest rental yields in the UK, with an average of 4.1%. However, its high property prices mean that investors may struggle to see strong returns on their investments.

When considering rental yields, it is important to remember that they can be affected by various factors such as location, fees, taxes, and maintenance costs.

Location

When it comes to investing in buy-to-let property, location is key. Here are some things to consider when choosing the right location for your investment:

Rental Yields

One of the main factors to consider when choosing a location for your buy-to-let property is the potential rental yield. Rental yield is the annual income you can expect to earn from your investment, expressed as a percentage. A rental yield of 5-6% or above is generally considered desirable. The UK average rental yield is currently 4.93%, but some areas offer higher yields. For example, Liverpool has an average rental yield of 7.92%, while Scotland delivers the highest yields in the country at 6.1%.

Property Prices

When investing in buy-to-let, it's important to consider the cost of the property. While areas with high rental yields may be tempting, they often come with higher property prices. For example, a three-bedroom house in Headington, Oxford, will cost between £500,000 and £700,000, but you can expect rental yields of around 4%. On the other hand, property prices in Newcastle are more accessible, with an average of £201,000, and you can still achieve yields of 6%.

Demand from Tenants

Another crucial factor to consider is the demand for rental properties in the area. Look for areas with a growing population, strong economy, and high occupancy levels. For example, cities with a large student population, such as Bristol and Glasgow, can be a good choice for buy-to-let investments. Additionally, consider areas with good transport links, schools, and local amenities, as these will always be in high demand.

Future Growth Potential

When choosing a location for your buy-to-let investment, it's not just about the current market but also the potential for future growth. Look for areas with regeneration schemes, improving infrastructure, and plans for future development. For example, the city of Birmingham is undergoing major regeneration, and Leeds is seeing continued investment, making them attractive options for buy-to-let investors.

Tax Implications

Don't forget to consider the tax implications of different locations. Additional taxes and charges, such as stamp duty and capital gains tax, can eat into your profits. For example, buying a second property will incur an additional 3% surcharge on stamp duty. Additionally, changes in government policy can impact the attractiveness of buy-to-let investments, such as the introduction of additional stamp duty surcharges in 2015.

In summary, when choosing a location for your buy-to-let investment, look for areas with high rental yields, affordable property prices, strong tenant demand, and future growth potential. By carefully considering these factors, you can maximise your returns and make a profitable investment decision.

Tax obligations

When investing in buy-to-let properties in the UK, there are several tax obligations to be aware of. Here is a detailed overview:

Stamp Duty Tax

Stamp duty is a tax payable when purchasing a property, including buy-to-let properties. The amount of stamp duty owed depends on the price of the property and whether it is your first or second property. If you are purchasing a second property, such as a buy-to-let, you will be subject to a stamp duty surcharge. The current rates for stamp duty on a second property in the UK are 3% on the first £125,000, 13% up to £1.5 million, and 15% on anything over. It is important to note that mobile homes and houseboats are exempt from stamp duty.

Capital Gains Tax

If you sell your buy-to-let property for a profit, you may be liable for capital gains tax (CGT). CGT is typically payable if the gains from the sale exceed the annual threshold, which is £12,000 for individuals and £24,000 for couples with joint ownership. The CGT rate depends on your tax bracket, with basic-rate taxpayers paying 18% and higher-rate taxpayers paying 28%. It is possible to reduce CGT obligations by offsetting certain costs, such as estate agent fees and stamp duty, so it is advisable to consult an independent adviser.

Income Tax

As a buy-to-let landlord, you must pay income tax on the rental income you receive. The amount of income tax owed depends on your total income and tax bracket. You must declare any rent received in your Self Assessment Tax Return. It is worth noting that if your rental income is your only source of income, you may be able to take advantage of the property allowance, which allows you to earn up to £1,000 per year tax-free. However, if you claim this allowance, you cannot claim deductions for expenses.

When calculating your taxable rental profit, you can deduct certain expenses from your rental income. These deductible expenses include property maintenance, repairs, council tax, insurance, letting agent fees, legal fees, and more. It is essential to keep accurate records of your income and expenses, as HMRC may impose penalties for inaccurate or incomplete records.

Mortgage Interest Tax Relief

Since 2020, there have been changes to the mortgage interest tax relief system for buy-to-let property owners. Previously, landlords could deduct a portion of their interest payments from their taxable income. Now, landlords can claim a 20% tax credit for the entire amount of interest paid. This change may impact your tax obligations, so it is advisable to consult an independent broker for more information.

Property management

Self-management can be rewarding as it allows you to build a relationship with your tenants and gives you more control over decisions. However, it also requires a significant time investment and a thorough understanding of landlord responsibilities and regulations.

Hiring a letting agent can be beneficial, especially if you have multiple properties or properties in different locations. They can help you navigate the evolving buy-to-let landscape and ensure you stay compliant with regulations. However, this convenience comes at a cost, and you should carefully weigh the benefits against the expense.

• Responsiveness and communication: Being responsive to tenants' issues and maintaining good communication are essential. Tenants value quick turnaround times for repairs and appreciate being kept informed.
• Maintenance and upkeep: Regular maintenance and upkeep of the property, including communal areas and gardens, are crucial for tenant satisfaction.
• Tenant satisfaction: Ultimately, property management is about providing a positive experience for your tenants. Happy tenants are more likely to stay longer, pay rent on time, and take better care of the property.
• Location and demand: The location of your property will impact the demand for rentals. Consider areas with strong economic growth, a growing population, and a high demand for rental properties, such as cities with a large student population or young professional demographic.
• Rental yields: Rental yields indicate the return on investment you can expect. A rental yield of 5-6% or above is generally considered desirable, and this is a key factor when deciding where to invest.
• Taxes and costs: Be mindful of the various taxes and costs associated with buy-to-let properties, such as stamp duty, capital gains tax, and income tax on rental returns.
• Furnishings and renovations: Equipping your property with appropriate furnishings and cost-effective renovations can help secure the best tenants and maximise rental yields.

Remember, successful property management is about building a positive relationship with your tenants and ensuring their satisfaction. By staying responsive, communicative, and proactive in addressing their needs, you can create a positive rental experience and maximise the potential of your buy-to-let investment.

Capital growth

The UK property market has been performing highly, with an expected growth of 17.9% for UK house prices by 2028, according to Savills. This natural increase in property value can deliver huge profits for buy-to-let investors when they're ready to sell.

The UK property market is resilient, and historically it has shown consistent growth. Even in times of adversity, the property market has always recovered and exceeded previous levels. This makes buy-to-let properties a relatively safe long-term investment strategy.

When deciding where to invest in buy-to-let properties in the UK, it is recommended to consider locations with high rental yields, affordable property prices, and high tenant demand. Major cities are a good place to start, with Liverpool and Manchester widely considered the two best cities to invest in due to their high rental yields and affordable prices. Other cities like Sheffield, Nottingham, and Birmingham are also solid options due to their affordable prices and high tenant demand.

When investing in buy-to-let properties, it is important to keep in mind that capital gains tax (CGT) may apply when you sell the property if it has increased in value since you bought it. CGT is paid on the profit made from selling or disposing of an asset, and the rate depends on your taxable income. Basic rate taxpayers pay 18% CGT, while higher rate taxpayers pay 28%. There are, however, certain tax reliefs and allowances available that can help minimise your CGT bill.

Frequently asked questions