Landlords paying the 40 per cent income tax rate would see their annual profits on a mortgaged buy-to-let home wiped out if UK interest rates rise by another two percentage points, according to research underlining the tightness of margins maintained by property investors.

For a higher-rate taxpayer with an average two-year fixed rate and a 75 per cent loan-to-value interest-only mortgage — a common type of buy-to-let loan — a rise of two percentage points would eradicate their profits, while a single percentage point rise would halve them, according to calculations by estate agent Hamptons International.

Soaring UK inflation has lifted expectations that the Bank of England will raise its main interest rate to bring prices under control. It has already lifted it from 0.1 per cent to 0.75 per cent since December 2021 and has warned that further rises are likely. CPI inflation was running at 7 per cent in the 12 months to March, up from 6.2 per cent in February.

Analysing a response to a freedom of information request sent to HM Revenue & Customs, Hamptons found that landlords who filed a self-assessment tax return spent an average of 31 per cent of their rental income on expenses such as maintenance, professional services, insurance and legal costs in the tax year ending April 2021.

This allowed the agent to estimate the threshold at which interest rate rises threatened profitability on an average buy-to-let property, valued at £202,000.

Aneisha Beveridge, research director at Hamptons, said many landlords embraced high levels of mortgage debt as a means of extracting capital from their property assets to buy more homes or reinvest elsewhere. But she warned: “Rates don’t have to go up much to impact profitability. So for heavily leveraged landlords this should serve as a bit of a wake-up call.”

Before 2017, landlords could deduct mortgage expenses from their rental income before calculating how much tax they owed — an effective tax relief of 40 per cent for higher-rate taxpayers. That system was phased out over the four years to 2020. Today, landlords receive a tax credit of 20 per cent of their mortgage payments.

However, landlords who hold properties in a limited company, rather than as individuals, can still declare rental income after deducting mortgage interest costs.

The HMRC response also disclosed the PAYE status of those submitting returns for property income above £1,000 a year over the past decade — and the data suggest more landlords are operating in limited companies. Those not declaring PAYE income — and therefore more likely to be full-time professional landlords in an incorporated structure — rose from 43 per cent of the total in 2012 to 49 per cent in 2021.

However, individual landlords who are weighing a move to company ownership are likely to incur capital gains tax if the home’s value has risen substantially since they bought, since the change of ownership counts as a sale and purchase. Stamp duty will also be payable on transfer of ownership to the company.

Last year, landlords reacted to a stamp duty holiday with a surge in buying. In the year to December, UK Finance said 111,600 new buy-to-let mortgages were lent, compared with 75,100 in the year to December 2019.

Separate research by Hamptons this month suggested the buying spree had continued even after the stamp duty advantage elapsed. In the first quarter of 2022, investors bought more properties than they sold — the first time this had happened since the first quarter of 2016, when landlords rushed to beat the introduction of a stamp duty surcharge. The share of purchases accounted for by landlords in Great Britain was 13.9 per cent, up from 12 per cent in the first three months of 2021.

Mortgage rates have been highly competitive in the sector until recently, and have taken longer than residential rates to rise in response to Bank of England base rate rises. Barclays, for instance, is offering a two-year fix for landlords with a 40 per cent deposit at 2.15 per cent, including a £1,295 fee. For residential borrowers with a 25 per cent deposit and no fee, the two-year rate is 2.45 per cent.

But while some attractive deals are still on offer, they are unlikely to remain in place for long in view of growing expectations of rate rises and inflation. Chris Sykes, technical director at mortgage broker Private Finance, said: “Whether or not you can take advantage now depends on whether you can secure a property, or your remortgage is due. It’s not always simple but if you can move forward now, or you’re on a standard variable rate, I would recommend you do.”