Landlord tax costs explained: October 2026

Private landlords in the UK face a distinct set of tax rules that affect how rental income and property sales are treated. Mortgage interest on residential buy-to-let properties receives relief at the basic rate only, capital gains tax applies when a rental property is sold, and the government announced in November 2025 that income tax rates on rental profit will rise by two percentage points from April 2027. This post sets out the current position and legislated changes.

How is rental income taxed?

Rental income from UK property is treated as property income for tax purposes. HMRC confirmed in December 2025 that property income of less than one thousand pounds does not need to be reported and is tax free. Landlords with annual gross property income above one thousand pounds can benefit from either the tax-free property allowance of one thousand pounds or deducting relevant expenses, whichever is more beneficial.

The Rent a Room Scheme is a separate relief. GOV.UK guidance published in April 2026 states that individuals can earn up to seven thousand five hundred pounds per year tax free from letting out furnished accommodation in their home, or three thousand seven hundred and fifty pounds for joint lettings. This scheme applies only to live-in landlords and cannot be combined with expense claims.

What is the mortgage interest relief rule for landlords?

Since April 2020, individual landlords can no longer deduct all of their mortgage interest from rental income when calculating taxable profit. GOV.UK guidance published in April 2026 explains that the costs of getting a loan or alternative finance to buy a residential property, and any interest on such a loan, can be used to calculate a reduction in your income tax. This is known as finance cost relief.

The government stated in November 2025 that finance cost relief provides unincorporated landlords income tax relief at the basic rate on their mortgage interest costs. The relief is provided at the separate property basic rate, which was 20 per cent until April 2027. From April 2027, the property basic rate will be 22 per cent, meaning the tax credit for mortgage interest will also be calculated at 22 per cent.

The restriction was introduced gradually between April 2017 and April 2020. HMRC guidance from 2015 states that landlords no longer receive a deduction for finance costs from property income to arrive at property profits, but instead receive a basic rate reduction from their income tax liability for their finance costs. This change was designed to ensure that landlords with higher incomes no longer receive the most generous tax treatment.

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If you are a company paying corporation tax, you can claim interest on property loans as an allowable expense. Individual landlords who pay income tax cannot do this and must instead claim finance cost relief.

What expenses can landlords claim?

Landlords can deduct expenses from rental income when working out taxable rental profit, as long as they are wholly and exclusively for the purposes of renting out the property. GOV.UK guidance from December 2025 lists allowable expenses including repairs and maintenance, insurance, letting agent fees, legal and professional fees, utility bills and council tax if paid by the landlord, and advertising costs.

Replacement furniture relief allows all landlords of residential properties to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. The government replaced the wear and tear allowance in April 2016 with this relief. GOV.UK guidance states that the relief is for the cost of a like-for-like or nearest modern equivalent replacement asset, plus any costs incurred in disposing of the asset being replaced, less any proceeds received.

Expenses you cannot claim include enhancements or improvements to the property which are capital expenditure, the full amount of your mortgage payment, and the initial cost of furnishing a property. HMRC guidance from December 2025 confirms that only the interest element of your mortgage payment can be offset against your income, and that is now given as a tax credit rather than a deduction.

What are the new income tax rates on rental profit from April 2027?

The government announced at the Autumn Budget in November 2025 that income tax paid on the property element of someone's income will increase by two percentage points from April 2027. A House of Commons Library briefing published in January 2026 confirmed that the property basic rate will rise from 20 per cent to 22 per cent, the property higher rate from 40 per cent to 42 per cent, and the property additional rate from 45 per cent to 47 per cent.

The changes were legislated in the Finance Act 2026, which received Royal Assent in April 2026. GOV.UK technical notes published in November 2025 state that the property and savings changes will take effect from 6 April 2027. The Office for Budget Responsibility forecast in November 2025 that these measures would raise around half a billion pounds on average from 2028 to 2029 from the changes to property income tax.

The government described the change as narrowing the tax gap between landlords and tenants, noting that property, dividend and saving income currently face no equivalent of National Insurance. The new rates apply to rental profit after allowable expenses have been deducted and finance cost relief has been calculated.

How does capital gains tax apply to rental properties?

Landlords who sell a rental property may be liable for capital gains tax on any gain made. GOV.UK guidance published in April 2026 states that if you dispose of an interest in UK residential property where there is a capital gains tax liability, you should have reported and paid any tax due within 60 days of completion if completion was on or after 27 October 2021.

GOV.UK rates published in April 2025 confirm that the rates of capital gains tax for disposals of interests in residential property in the 2025 to 2026 tax year are 18 per cent and 24 per cent. You pay 18 per cent on gains that fall within the basic rate income tax band, and 24 per cent on gains that exceed that threshold. The capital gains tax annual exempt amount for individuals is three thousand pounds for the 2026 to 2027 tax year, according to HMRC guidance published in April 2026.

When calculating the gain, you can deduct the acquisition cost of the property, the costs of enhancing the property, and the incidental costs of making the disposal such as legal fees. HMRC helpsheet 292 published in April 2026 explains the detailed rules for leases, part disposals and other specific situations involving land and property.

What other tax obligations do landlords have?

Landlords must report rental income on a Self Assessment tax return if it is more than two thousand five hundred pounds after allowable expenses, or if gross rental income is more than ten thousand pounds, according to HMRC community forum guidance from 2024. Those with income between one thousand pounds and two thousand five hundred pounds should contact HMRC.

From April 2026, sole traders and landlords with qualifying income over fifty thousand pounds will need to use Making Tax Digital for Income Tax. HMRC announced in February 2026 that those eligible will need to use recognised software to keep digital records and send quarterly updates of their income and expenses. The threshold will lower to thirty thousand pounds from April 2027 and to twenty thousand pounds from April 2028.

Non-resident landlords have additional obligations. GOV.UK guidance states that letting agents must deduct tax from a non-resident landlord's UK rental income and pay the tax to HMRC, unless the landlord has received written approval from HMRC to receive rent gross. Non-resident landlords can apply for approval if their UK tax affairs are up to date.

What does this mean for landlords?

The combination of restricted mortgage interest relief and higher income tax rates from April 2027 means that landlords with mortgaged properties will see their tax bills increase. Some landlords may find that the tax they pay exceeds the cash profit they make, particularly if they have high levels of borrowing. The Office for Budget Responsibility noted in November 2025 that the measures reduce returns to private landlords and that this successive eroding of returns will likely reduce the supply of rental property over the longer run.

Landlords considering their position may wish to review their rental income and expenses, calculate the impact of the April 2027 rate changes, and consider whether their current structure remains viable. Those thinking about selling a property should factor in capital gains tax and the 60-day reporting requirement. Anyone making decisions about buying, selling or financing rental property should speak to a qualified, regulated tax adviser for personal guidance.

Model buy-to-let cash flow