For a long time now, residential property has been viewed as one of the safest and most reliable ways to build long-term wealth as well creating passive income. A combination of steady rental income and rising property values has made buy-to-let an attractive investment strategy for many landlords.
However, the landscape has shifted significantly in the past few years.
Tax reforms, higher borrowing costs, an increase in regulation and changing market dynamics mean that owning investment property may not be as effective a wealth-building and income generating tool as it once was.
Many rental portfolios are generating lower returns than landlords expected. Some may even operate at a monthly loss, especially when factoring in the tax implications of rental income.
This does not mean that property investment is no longer worthwhile. Property can still play an important role within a diversified investment portfolio.
The key is understanding the financial realities, the tax implications, and whether your current strategy still aligns with your long-term objectives.
Is property still a good investment in 2026?
Whether or not you should consider adding property to your investment portfolio is entirely dependent on your circumstances.
As Kevin Parsons, Managing Director of Accountancy, says:
“For some people, rental property remains an attractive long-term investment. For others, pensions, ISAs or investment portfolios may be more suitable. The right approach will depend on your financial circumstances, objectives and attitude to risk.”
Property has several tangible assets that may continue to appeal to investors:
- A tangible asset that is easy to understand.
- The potential for long-term capital growth.
- Rental income that can supplement earnings or retirement income.
- The ability to use borrowing (leverage) to enhance returns.
- Greater control over the investment and less volatility than many financial assets.
However, successful property investment is no longer as simple as buying a house and collecting rent.
Today, landlords must carefully consider financing costs, tax liabilities, maintenance expenses and regulatory obligations before assessing whether a potential investment could be genuinely profitable.
The hidden costs that many landlords overlook
One of the biggest mistakes that those new to property investment make is to focus solely on rental income.
It’s easy to assume that your investment is profitable when the rental income exceeds the mortgage payment.
However, it’s important not to just look at these headline figures, but to take all associated costs into consideration.
These costs commonly include:
- Mortgage interest.
- Letting agent fees (if using an agency).
- Repairs and property maintenance.
- Insurance premiums.
- Service charges or ground rent (if applicable).
- Periods of lost income when property is vacant.
- Income Tax.
- Capital Gains Tax (CGT) on disposal.
Kevin Parsons says:
“When you look beyond the headline figures and consider the complete financial picture, you can see how an investment that seems to offer high returns on initial glance can offer very small returns or may in fact lose money each month. In these cases, landlords must rely on property market growth alone to justify their investment.”
Section 24: The tax reform that transformed buy-to-let
One of the biggest changes affecting landlords in recent years has been the introduction of Section 24 mortgage interest relief restrictions.
In the past, landlords had the ability to deduct their mortgage interest and finance costs from rental income before calculating taxable profits. This often allowed for their tax bill to be reduced significantly.
However, legislation introduced in 2015 and phased in up to 2020 means that mortgage interest costs can no longer be deducted in full before calculating taxable rental profits, although basic-rate tax credit may still be available.
This includes mortgage arrangement fees, interest on loans used for property renovations, and early repayment charges (ERCs).
However, landlords can still claim a 20% tax credit on interest payments.
Consider an example of a landlord with £15,000 rental income.
| Basic-rate taxpayer (20%) | Higher-rate taxpayer |
| Tax due on £15,000 = £3,000 | Tax due on £15,000 = £6,000 |
| Less 20% credit on mortgage interest = £1,000 | Less 20% credit on mortgage interest = £1,000 |
| Final tax bill = £2,000 | Final tax bill = £5,000 |
For higher-rate and additional-rate taxpayers, this has likely had a significant impact on their effective tax burden.
In some cases, landlords may find they are paying tax despite making very little actual profit after financing costs have been deducted.
Higher rental income tax rates reduce overall returns
Rental income is generally taxed as income, not as investment gains.
This means that landlords currently pay tax at:
- 20% (basic rate).
- 40% (higher rate).
- 45% (additional rate).
This means that an increase in rental income often comes hand-in-hand with an increase in tax payable.
Combined with Section 24, many landlords are often surprised at how much of their rental income goes towards tax payments.
In addition to this, the government has announced that, from April 2027, the rates of Income Tax applied to property income are set to increase by 2%.
As a result:
| Tax Band | Rate before April 2027 | Rate after April 2027 |
| Basic Rate | 20% | 22% |
| Higher Rate | 40% | 42% |
| Additional Rate | 45% | 47% |
Compounding this issue, Income Tax thresholds are due to remain frozen until 2030/31, potentially bringing more landlords into higher tax bands.
Kevin Parsons explains:
“Whichever ownership structure you choose, rental property will usually have tax implications. Rental profits are taxable during ownership, and there may also be Capital Gains Tax considerations when the property is eventually sold. Understanding these considerations early can help you make more informed decisions and avoid unexpected surprises later on.”
While ongoing taxation can affect annual returns, landlords should also consider the potential tax implications when they eventually sell the property.
How does Capital Gains Tax impact property investment?
When considering whether to add property investments to their portfolio, many focus on rental income while overlooking the potential tax implications of selling the property later.
If an investment property increases in value, selling it may trigger a Capital Gains Tax (CGT) liability.
The amount payable will depend on factors including:
- The property’s acquisition cost.
- Allowable expenses.
- Improvements made.
- Your taxable income.
- CGT legislation at the time of sale.
Without careful planning, a significant portion of any gain could be lost to tax.
For investors considering selling one or more investment properties, professional tax and financial planning advice can help to ensure decisions are made and executed in the most tax-efficient manner.
Should you own a buy-to-let property personally or through a limited company?
There is no single ‘best’ ownership structure as the most suitable option will depend on your income, tax position, and long-term objectives.
One of the first decisions prospective landlords often face is whether to purchase a rental property personally or through a limited company (often referred to as a Special Purpose Vehicle or SPV).
| Personal ownership | Limited company ownership |
| Rental profits are generally subject to Income Tax. | Rental profits are subject to Corporation Tax. |
| Often simpler to set up and administer. | Greater administration and reporting responsibilities. |
| Capital Gains Tax may apply when the property is sold. | Different tax considerations apply when profits are extracted from the company. |
| Often suitable for landlords with smaller portfolios. | May be suitable for higher earners or individuals with larger property portfolios. |
The right structure will depend on factors, such as:
- Your current income.
- Your Income Tax band.
- Whether you plan to own one property or several.
- Your long-term investment objectives.
- How you intend to use any rental profits.
Kevin Parsons explains:
“Whether a property should be owned personally or through a limited company depends on factors such as an individual’s income, future plans and investment objectives.
There is no one-size fits all solution, but choosing the right ownership structure before purchasing can influence both how your rental profits are taxed each year and how tax is paid when the property is eventually sold.”
Property investment remains valuable, but only with the right strategy
For many investors, property investment continues to provide reliable long-term growth, diversification and steady income.
However, the days of assuming healthy profits are guaranteed are no more.
Today’s property investors need to understand the full picture. Taxation, changing reliefs, financing costs and projected market growth must all be considered to determine how property investment fits into your long-term financial objectives.
Kevin Parsons surmises:
“Buying the property is only one part of the picture. It’s important to consider how the investment fits your wider financial plans and whether you have budgeted for the ongoing costs that come with being a landlord.”
How can Cooper Associates Accountancy help?
Buying a rental property is a significant financial decision, and understanding the tax implications before you invest can make a meaningful difference.
Our team can help you understand the tax implications of buy-to-let ownership, whether that’s through personal ownership or through a limited company and can help ensure your investment fits within your wider financial plans. We can also advise on the tax implications should you be looking to sell a rental property.
As part of the wider Cooper Associates Group, we can also work alongside our mortgage and wealth management teams to provide holistic advice that supports your long-term financial and homeownership goals.
If you are considering investing in a rental property, we are here to help. Get in touch to book a fee-free, no-obligation initial meeting.
