Landlord Tax UK: Complete Guide to Property Income Tax 2025/26

UK landlords pay Income Tax on rental profits at rates of 20%, 40%, or 45%, depending on total income. Since April 2020, mortgage interest is no longer deductible—instead, landlords receive a 20% tax credit under Section 24. You report rental income on the SA105 property income supplement to your Self Assessment tax return.

This guide covers how landlord tax works, allowable expenses, the mortgage interest tax credit, Capital Gains Tax on property sales, and how to reduce your tax bill.

How Rental Income is Taxed

Rental income is treated as unearned income and added to your other earnings. You pay Income Tax on your rental profit at your marginal rate.

Rental Profit = Gross Rent − Allowable Expenses

Income Tax Rates 2025/26

| Band | Taxable Income | Tax Rate | |------|----------------|----------| | Personal Allowance | £0 – £12,570 | 0% | | Basic Rate | £12,571 – £50,270 | 20% | | Higher Rate | £50,271 – £125,140 | 40% | | Additional Rate | Over £125,140 | 45% |

Your rental profit is combined with employment income, self-employment income, pensions, and other sources to determine your tax band.

The Property Income Allowance

If your gross rental income is £1,000 or less, you can use the property income allowance and don't need to report it. If income exceeds £1,000, you must file Self Assessment.

You can either:

• Claim actual expenses (usually better if expenses are significant)
• Use the £1,000 allowance instead of claiming expenses

You cannot use both methods.

Allowable Expenses for Landlords

Allowable expenses reduce your taxable rental profit. You can deduct costs incurred "wholly and exclusively" for the rental business.

Revenue Expenses (Fully Deductible)

Property Management

• Letting agent fees (typically 8-15% of rent)
• Property management costs
• Legal fees for leases under 1 year
• Accountant fees
• Reference checking fees
• Inventory costs

Maintenance and Repairs

• General repairs and maintenance
• Decorating between tenancies
• Replacing like-for-like items (old boiler → new boiler)
• Garden maintenance
• Cleaning costs

Insurance

• Landlord buildings insurance
• Contents insurance (if furnished)
• Rent guarantee insurance
• Public liability insurance

Running Costs

• Ground rent
• Service charges
• Council tax (when property is empty)
• Utility bills (if you pay them)
• Water rates

Compliance

• Gas Safety Certificate (CP12)
• Electrical Installation Condition Report (EICR)
• Energy Performance Certificate (EPC)
• Smoke and CO alarm testing

Other Allowable Costs

• Advertising for tenants
• Travel to the property for inspections/repairs
• Stationery and phone calls
• Landlord association memberships

What You Cannot Claim

• Personal use of the property
• Improvements (adding value, not replacing like-for-like)
• Initial purchase costs (stamp duty, legal fees—these affect CGT)
• Your own labour or time
• Mortgage capital repayments (only interest via tax credit)

Mortgage Interest: Section 24 Tax Credit

Since April 2020, mortgage interest is no longer deductible as an expense. Instead, landlords receive a 20% tax credit on mortgage interest payments.

How the Tax Credit Works

1. Calculate your rental profit without deducting mortgage interest
2. Pay Income Tax on that profit at your marginal rate
3. Receive a 20% tax credit on your mortgage interest
4. Credit is deducted from your final tax bill

Impact by Tax Band

| Tax Band | Old System (Pre-2020) | Current System | Effect | |----------|----------------------|----------------|--------| | Basic (20%) | 20% relief | 20% credit | No change | | Higher (40%) | 40% relief | 20% credit | 20% more tax | | Additional (45%) | 45% relief | 20% credit | 25% more tax |

Section 24 Calculation Example

Higher Rate Landlord

| Item | Amount | |------|--------| | Rental income | £24,000 | | Allowable expenses | £4,000 | | Mortgage interest | £8,000 | | Profit before interest | £20,000 |

Tax Calculation:

• Income Tax at 40%: £20,000 × 40% = £8,000
• Mortgage interest tax credit: £8,000 × 20% = £1,600
• Tax payable: £6,400

Under the old system:

• Profit after interest: £12,000
• Tax at 40%: £4,800
• Extra tax under Section 24: £1,600/year

For higher rate taxpayers, Section 24 significantly increases the tax burden on mortgaged properties.

Furnished vs Unfurnished Properties

Unfurnished Properties

• No wear and tear allowance (abolished April 2016)
• Replacement of Domestic Items Relief: claim like-for-like replacement costs

Furnished Properties

• Same rules apply—no automatic furniture allowance
• Claim actual replacement costs for furnished items

Furnished Holiday Lettings (FHL)

Furnished Holiday Lettings have special tax advantages:

• Mortgage interest is fully deductible (not subject to Section 24)
• Capital allowances available on furniture and equipment
• Profits count as earnings for pension relief
• Business Asset Disposal Relief may apply on sale

FHL Qualifying Conditions:

• Available to let for 210+ days per year
• Actually let for 105+ days per year
• No single letting exceeds 31 consecutive days (155-day rule)

Note: The government announced in the 2024 Autumn Budget that FHL tax benefits will be abolished from April 2025.

Capital Gains Tax for Landlords

When you sell a rental property, you pay Capital Gains Tax (CGT) on the gain.

CGT Rates on Property (2025/26)

| Taxpayer Status | CGT Rate | |-----------------|----------| | Basic rate taxpayer | 18% | | Higher/additional rate taxpayer | 24% |

The annual CGT exemption is £3,000 for 2025/26.

Calculating Your Gain

Gain = Sale Price − Purchase Price − Allowable Costs

Allowable costs include:

• Stamp Duty Land Tax (SDLT) on purchase
• Legal and conveyancing fees (purchase and sale)
• Estate agent fees
• Improvement costs (but not repairs)

60-Day Reporting and Payment

You must report and pay CGT within 60 days of completion when selling UK residential property.

Report via HMRC's Capital Gains Tax on UK property service.

Late reporting incurs automatic penalties.

Private Residence Relief

If the property was ever your main home, you may qualify for partial relief:

• Period as main home: Full relief (no CGT)
• Final 9 months: Full relief (regardless of use)
• Letting Relief: Up to £40,000 if you lived there while letting

Reporting Rental Income

Self Assessment (SA105)

If you earn over £2,500 from property (or any amount if claiming expenses), you must file Self Assessment with the SA105 property income supplement.

The SA105 requires:

• Total rental income
• Allowable expenses by category
• Mortgage interest (for tax credit calculation)
• Any reliefs claimed

Payment Deadlines

| Payment | Deadline | |---------|----------| | Tax owed + first payment on account | 31 January | | Second payment on account | 31 July |

Making Tax Digital for Landlords

From April 2026 (income over £50,000) or April 2027 (income over £30,000), landlords must comply with Making Tax Digital:

• Keep digital records of rental income and expenses
• Submit quarterly updates to HMRC
• Use HMRC-recognised software

Your combined income from self-employment and property determines your MTD threshold.

TaxFolio handles SA105 property income and is MTD-ready.

Tax-Efficient Property Ownership

Should You Use a Limited Company?

Buying property through a company can be more tax-efficient because:

• Mortgage interest is fully deductible for companies
• Corporation Tax (25%) vs Income Tax (40%+)
• Retained profits taxed at company rate
• More flexibility in profit extraction timing

However, consider:

• Higher mortgage rates for limited company purchases
• Dividend tax when extracting profits
• No CGT annual exemption for companies
• Stamp Duty surcharges (3% additional on purchases)
• Annual accounts filing requirements

Generally worth considering for:

• New purchases
• Higher/additional rate taxpayers
• Growing portfolios
• Properties you'll hold long-term

Joint Ownership for Married Couples

Married couples and civil partners can split property income in any proportion (not just 50/50) by making a Form 17 declaration to HMRC.

This helps if one partner:

• Doesn't use their full Personal Allowance
• Is in a lower tax band

The beneficial ownership must actually change—Form 17 makes HMRC recognise a non-50/50 split.

Common Landlord Tax Mistakes

1. Not keeping receipts — you need evidence for all claims
2. Claiming improvements as repairs — only like-for-like replacement qualifies
3. Missing the 60-day CGT deadline — penalties apply automatically
4. Forgetting the mortgage interest credit — it still saves you 20%
5. Not tracking mileage — property visits for inspections/repairs are deductible
6. Mixing personal and rental finances — keep separate records
7. Not registering for Self Assessment — register by 5 October

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• Track rental income from multiple properties
• Record expenses with automatic categorisation
• Calculate Section 24 mortgage interest tax credit correctly
• Real-time tax position shows what you'll owe
• SA105 filing directly to HMRC
• MTD-ready for the April 2026 transition
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