Rental yield expresses annual rental income as a percentage of the property's purchase price. It is the first metric any buy-to-let investor calculates to compare properties and assess return on investment.
Gross yield (quick calculation)
Gross yield = Annual rent / Purchase price × 100
Example: £1,000/month rent on a £200,000 property
Gross yield = £12,000 / £200,000 × 100 = 6%
Net yield (realistic calculation)
Net yield = (Annual rent − Annual costs) / Total purchase cost × 100
Where total purchase cost includes the property price + Stamp Duty + legal fees + refurbishment.
Worked example: UK buy-to-let
| Item | Amount |
|---|---|
| Annual rent | £12,000 |
| Mortgage interest | − £4,800 |
| Letting agent fees (10%) | − £1,200 |
| Insurance + maintenance | − £1,000 |
| Ground rent / service charge | − £500 |
| Net income before tax | £4,500 |
| Income tax (basic rate 20%) | − £900 |
| Net yield (net-net) | (£3,600 ÷ £220,000) = 1.64% |
UK buy-to-let tax changes since 2020
Before 2017, landlords could deduct the full mortgage interest from rental income. Since 2020, the deduction is replaced by a 20% tax credit (regardless of tax band). This significantly reduces returns for higher-rate taxpayers.
| Taxpayer | Effective mortgage interest relief |
|---|---|
| Basic rate (20%) | 20% (no change) |
| Higher rate (40%) | 20% (vs 40% previously) |
| Additional rate (45%) | 20% (vs 45% previously) |