UK landlord tax guide: income, capital gains, and SDLT

Income tax on rental profits

Rental income is taxable in the year it arises (not when leases are signed). If a tenant pays January rent in late December, it counts as income in the December tax year.

Your rental profit is calculated as: gross rental income minus allowable expenses. The profit is added to your other income (salary, dividends, etc.) and taxed at your marginal income tax rate.

Income tax rates for 2025/26: - Personal allowance: £12,570 (no tax below this) - Basic rate: 20% on income from £12,571 to £50,270 - Higher rate: 40% on income from £50,271 to £125,140 - Additional rate: 45% above £125,140

Note: the personal allowance reduces by £1 for every £2 of income above £100,000, disappearing entirely at £125,140. If your rental income pushes your total income into this zone, the effective marginal tax rate on that band is 60%.

Rental income is reported on your self-assessment tax return. You must register for self-assessment if you receive any rental income. Failure to register and pay tax on time results in penalties from HMRC.

Section 24: the mortgage interest restriction

Section 24 of the Finance Act 2015 is fully phased in and applies to all individual landlords (not limited companies) holding residential property for letting.

The rule: you cannot deduct mortgage interest directly from rental income to arrive at profit. Instead, you add the gross rental income to your taxable income and calculate the tax, then claim a 20% tax credit on the lower of: your mortgage interest, your rental income, or your adjusted total income.

The impact is most severe for higher-rate taxpayers:

Example. Rental income: £18,000. Mortgage interest: £12,000. Other expenses: £3,000. Pre-S24 net profit: £3,000.

Old system (pre-S24): - Taxable profit: £3,000 - Higher rate tax at 40%: £1,200

S24 system: - Add £18,000 rental income to other income - Total income increases (pushing into 40% band) - Tax on £18,000 rental income at 40%: £7,200 - Less 20% tax credit on mortgage interest: -£2,400 - Net additional tax: £4,800 - Plus tax on £18,000 at marginal rate, less the portion covered by personal allowance

In practice, this often results in landlords paying tax on a profit that does not exist on a cashflow basis. A portfolio producing small positive cashflow can show a significant tax liability under S24, leaving the landlord facing a tax bill larger than their actual income.

Allowable expenses

To arrive at taxable rental profit, you deduct all allowable expenses from gross rent. HMRC allows deductions for expenses that are "wholly and exclusively" for the rental business.

Allowable expenses include: - Letting agent fees and management charges - Buildings and contents insurance - Maintenance, repairs, and redecoration (not improvements - see below) - Ground rent and service charges (leasehold) - Accountancy and legal fees directly related to the rental business - Advertising costs for finding tenants - Landlord licensing fees - Gas safety certificates, EICR, EPC costs - Void period costs (council tax, utilities during voids) - Travel costs to and from the property for genuine business purposes

Not allowable: - Capital improvements (adding a conservatory, converting a loft, installing double glazing for the first time) - The capital repayment element of a repayment mortgage - Personal expenses unrelated to the property - Mortgage interest (deductible as a 20% credit, not an expense, for personal name landlords)

The distinction between a repair (allowable) and an improvement (not allowable) matters. Replacing a broken kitchen like-for-like is a repair. Upgrading from a basic kitchen to a fitted kitchen with new units is an improvement. HMRC guidance and a good accountant will help you classify correctly.

Capital gains tax on disposal

When you sell a residential investment property, the gain (sale price minus purchase price minus allowable costs) is subject to Capital Gains Tax.

CGT rates for residential property (2025/26): - Basic rate taxpayer: 18% - Higher rate taxpayer: 24%

The annual CGT exemption is £3,000. Gains above this threshold are taxable.

Allowable costs you can deduct when calculating the gain: - Original purchase price - Stamp duty paid on purchase - Legal and professional fees on purchase - Capital improvements made during ownership (not repairs) - Legal and agent fees on sale

60-day reporting rule: CGT on UK residential property must be reported to HMRC and the tax paid within 60 days of the completion date. This applies even if your self-assessment return is not yet due. Missing the 60-day window results in automatic penalties.

A common mistake: selling a property in March and waiting until January to report it via self-assessment. This is now incorrect - you must report and pay within 60 days, using HMRC's dedicated CGT service.

Main residence relief does not apply to investment properties unless you have lived in them at some point. If you have previously lived in a property you are now selling as an investment, partial relief may be available. A specialist accountant should calculate this.

SDLT on purchase

Stamp Duty Land Tax (SDLT) applies to the purchase of residential property in England and Northern Ireland. Separate taxes apply in Scotland (LBTT) and Wales (LTT) with different rates.

For investment properties (second homes and buy-to-let), the SDLT rates include a 5% surcharge on every band, on top of the standard rates:

SDLT rates for additional residential property (2026): - Up to £125,000: 5% (standard 0% + 5% surcharge) - £125,001-£250,000: 7% (standard 2% + 5% surcharge) - £250,001-£925,000: 10% (standard 5% + 5% surcharge) - £925,001-£1,500,000: 15% (standard 10% + 5% surcharge) - Above £1,500,000: 17% (standard 12% + 5% surcharge)

For limited companies purchasing residential property, the same additional property rates apply regardless of whether it is the company's first property purchase.

SDLT is a cost of purchase and is not deductible against rental income. It can be added to the allowable costs base for CGT purposes when you eventually sell.

Use the Proppys SDLT calculator to get the exact figure for any purchase price.

Making Tax Digital

Making Tax Digital (MTD) for Income Tax is HMRC's programme to move landlords (and self-employed people) from annual self-assessment to quarterly digital reporting.

Timeline: - From April 2026: mandatory for landlords and self-employed with gross income over £50,000 - From April 2027: extends to those with income over £30,000 - From April 2028: extends to those with income over £20,000

Under MTD, landlords will need to: - Keep digital records of all income and expenses - Submit quarterly digital updates to HMRC via approved software - Submit an end-of-period statement annually - Submit a final declaration consolidating all income

The quarterly reporting requirement does not change the amount of tax you pay. It changes when and how you report it, moving from annual to quarterly.

MTD-compatible software includes Xero, QuickBooks, FreeAgent, and various specialist property accounting tools. If your portfolio is already being managed by an accountant, they will handle the MTD transition. If you are self-managing your tax affairs, you will need to adopt compatible software before the deadline.

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