UK landlord rental income tax: 2026/27
UK Landlord Rental Income Tax (2026/27): Section 24 + Expenses + IHT
Comprehensive guide for UK residential landlords in 2026/27. Section 24 mortgage interest restriction (Section 272A ITTOIA 2005) - mortgage interest no longer deductible from rental profit, replaced by 20% basic-rate tax credit. Allowable rental expenses (Section 272), Replacement Domestic Items Relief (Section 311A, replaced Wear and Tear Allowance 2016), Furnished Holiday Letting abolition April 2025, £7,500 Rent-a-Room relief, joint ownership Form 17 splitting, IHT on rental property. 3 worked scenarios from single-property basic-rate to small-portfolio full-time landlord.
Section 24 mortgage interest restriction
The biggest UK landlord tax change of the last decade. Section 24 Finance (No.2) Act 2015 phased in 2017-2020 and now fully in effect. Pre-2017: mortgage interest fully deductible from rental income at landlord's marginal rate. Post-2017: mortgage interest is NOT deductible from rental profit at all. Instead, a 20% basic-rate tax credit applies to the disallowed interest amount.
Worked example - higher-rate landlord: £18,000 rent + £8,000 mortgage interest + £3,000 other expenses. Pre-Section-24: rental profit £18k - £8k - £3k = £7k; tax at 40% = £2,800. Post-Section-24: rental profit £18k - £3k = £15k (no mortgage deduction); tax at 40% = £6,000; minus 20% × £8,000 credit = £1,600 credit; net tax £4,400. Section 24 raised this landlord's tax by £1,600/year - effectively the difference between 40% and 20% relief on the £8k mortgage interest.
Who escapes Section 24: basic-rate landlords (already only getting 20% relief, no change), limited company landlords (Section 24 only applies to individual landlords), commercial property landlords. The exclusion of corporates drove the post-2017 "incorporation wave" - though it has its own costs (SDLT on transfer, CGT on transfer, commercial mortgage rates higher).
3 worked landlord scenarios
| Scenario | Rent | Mortgage interest | Rental profit (post-S24) | S24 credit | Net tax |
|---|---|---|---|---|---|
| Single BTL, basic-rate landlord Standard 1-bed flat, mortgage covers ~50% of rent. Basic-rate day job - Section 24 has minimal effect. | £14,400 | £6,000 | £12,000 | £1,200 | £6,286 |
| Single BTL, higher-rate landlord Higher-rate day job - Section 24 hits hard. Mortgage interest only gets 20% credit, not full deduction. | £18,000 | £8,000 | £15,000 | £1,600 | £21,832 |
| Small portfolio (3 properties) Full-time landlord. £24k taxable profit before Section 24 but Section 24 reduces effective expense deduction. | £54,000 | £22,000 | £46,000 | £4,400 | £2,286 |
"Net tax" includes the landlord's day-job tax bill plus rental tax minus the Section 24 credit. Basic-rate landlords are effectively unaffected by Section 24 (they already received only 20% relief). Higher-rate landlords feel the full impact - the gap between their marginal rate (40%) and the 20% credit is the structural tax rise.
Allowable rental expenses (Section 272 ITTOIA 2005)
- Letting agent fees (10-15% of rent typically)
- Insurance premiums - landlord-specific buildings + contents
- Council Tax + utilities during void periods (no tenant)
- Maintenance + revenue repairs - replacing broken items, repainting, but NOT improvements
- Gas safety certificates, EICRs, EPCs - mandatory inspection costs
- Service charges + ground rent for leasehold properties
- Cleaning between tenancies
- Travel to manage the property - 45p/mile first 10k miles, 25p/mile after (own car)
- Professional fees - accountant, legal fees for disputes, debt collection
- Tenancy referencing, Right to Rent checks, deposit protection fees
- Replacement Domestic Items Relief for furnished lets (Section 311A)
- Mortgage arrangement fees (revenue, not capital - HMRC accept this since 2010)
NOT allowable: mortgage CAPITAL repayments; mortgage INTEREST (now Section 24-restricted - 20% credit only); property purchase costs (capital, claim via CGT base cost); improvements / enhancements; personal landlord costs.
Replacement Domestic Items Relief
Section 311A ITTOIA 2005 - introduced April 2016 to replace the abolished Wear and Tear Allowance. For furnished rental properties, landlords deduct the actual cost of REPLACING domestic items: furniture, appliances, kitchen utensils, carpets, curtains, soft furnishings.
- Must be a REPLACEMENT: first installation is NOT allowable (capital).
- Substantially same standard: upgrading from £200 freezer to £600 American fridge - only £200 (equivalent value) allowable; £400 "improvement" portion disallowed.
- Old item must be no longer in use: typically sold, scrapped, or donated.
- Residential only: commercial property follows different capital allowance rules.
- Furnished lets only: not applicable to unfurnished lets where tenant provides items.
FHL abolition April 2025 - what changed
The Furnished Holiday Letting regime was ABOLISHED from 6 April 2025. FHL had previously provided five major tax advantages over standard rental which are now LOST:
- Full mortgage interest deduction (Section 24 didn't apply to FHL)
- Capital allowances on furniture and fixtures
- BADR eligibility on disposal (18% CGT vs standard residential 24%)
- Eligible income for pension contribution purposes
- Flexible profit splitting between spouses regardless of beneficial ownership
From April 2025, former FHL properties are treated as standard residential rentals with full Section 24 restrictions. Transitional rules: existing FHL losses carry forward only against the same property post-abolition; capital allowances continue on existing items until disposal; BADR qualifying period continues for sales completed before April 2026 if held under FHL prior to April 2025. Many holiday-let owners are now reconsidering: incorporate to a Limited Company, sell pre-April-2026 to capture BADR window, or accept lower-margin standard treatment. See our FHL abolition guide for the full transition.
Rent-a-Room scheme - £7,500 tax-free
Section 784 ITTOIA 2005 - up to £7,500 of GROSS rental income tax-free if you let a furnished room in your MAIN residence to a lodger.
- Automatic relief if gross rent under £7,500 - no tax, no SA needed.
- Above £7,500: opt in (£7,500 flat deduction) or out (actual expenses). Choose whichever gives less taxable rent.
- Conditions: property must be your main residence + furnished + lodger shares facilities.
- Joint owners: share ONE £7,500 (per-residence, not per-owner).
- Lodger arrangement: simpler licensing under Section 31 Housing Act 1988 excluded tenancies (not full Assured Shorthold Tenancy).
Worked example: gross room rent £600/month × 12 = £7,200/year. Under £7,500 = automatically tax-free. £800/month × 12 = £9,600/year. £9,600 - £7,500 = £2,100 taxable at marginal rate. Higher-rate £840 tax. Useful for empty-nesters funding higher mortgage costs.
Frequently asked questions
What is Section 24 and how does it work?
Section 24 Finance (No.2) Act 2015 (codified at Section 272A ITTOIA 2005) restricts mortgage interest tax relief for individual residential landlords. Pre-April-2017: mortgage interest was fully deductible from rental income at landlord's marginal rate. Post-April-2017 (fully phased in by April 2020): mortgage interest is NO LONGER deductible from rental profit. Instead, landlords receive a 20% BASIC RATE TAX CREDIT on the disallowed interest amount. Worked example - higher-rate landlord with £18k rental income, £8k mortgage interest, £3k other expenses. Pre-S24: profit £7k, tax at 40% = £2.8k. Post-S24: rental profit £15k (no mortgage deduction), tax at 40% = £6k, minus 20% × £8k = £1.6k credit = £4.4k net tax. Section 24 effectively raised this landlord's tax by £1.6k/year. Hit higher-rate / additional-rate landlords hardest; basic-rate landlords largely unaffected (already getting 20% relief). Limited companies are NOT subject to Section 24 - corporate landlords still fully deduct mortgage interest from rental profit, hence the incorporation wave 2017-onwards.
What expenses can I deduct from rental income?
Section 272 ITTOIA 2005 - "wholly and exclusively for the purposes of the property business" test. Allowable: Letting agent fees (10-15% of rent typically), Insurance premiums (building, contents for furnished lets, landlord-specific), Council Tax and utilities during void periods (when no tenant), Maintenance and revenue repairs (replacing broken boiler, repainting after tenancy, but NOT improvements), Gas safety certificates, EICRs, EPC (mandatory inspections), Service charges + ground rent (leasehold properties), Cleaning costs, Travel to manage the property (using own car: 45p/25p AMAP), Professional fees (accountant, legal fees for tenant disputes, debt collection), Tenancy referencing + Right to Rent checks, Replacement Domestic Items Relief for furnished lets (separate scheme - see below). NOT allowable: mortgage CAPITAL repayments (only interest, and that's now Section 24-restricted), property purchase costs (capital, not revenue), improvements that enhance the property (kitchen extension, new conservatory - capital), personal costs of being a landlord.
What is Replacement Domestic Items Relief?
Section 311A ITTOIA 2005 (introduced April 2016, replacing the abolished Wear and Tear Allowance). For FURNISHED rental properties: landlords can deduct the actual cost of REPLACING domestic items (furniture, appliances, kitchen utensils, carpets, curtains, soft furnishings, fitted carpets). Strict rules: (1) Must be a REPLACEMENT - first installation of an item is NOT allowable (capital). (2) Must be substantially same standard - upgrading from a £200 freezer to a £600 American-style fridge: only £200 (equivalent replacement value) is allowable; the £400 "improvement" portion is disallowed. (3) Old item must be no longer available for use in the property (typically sold, scrapped, or donated). (4) Applies to RESIDENTIAL property only - commercial lets follow different capital allowance rules. (5) Does NOT apply to unfurnished lets (the new tenant brings their own items, no replacement context). The old Wear and Tear 10%-flat-rate allowance was widely abused; the replacement-only rule is much stricter but more economically rational.
What was the Furnished Holiday Letting regime - was it really abolished?
Yes - the Furnished Holiday Letting (FHL) regime was ABOLISHED from 6 April 2025 (Spring Budget 2024 announcement, Finance Act 2024 legislation). FHL had provided three key tax advantages over standard rental: (1) full mortgage interest deduction (NOT subject to Section 24 - this was the biggest loss); (2) capital allowances on furniture and fixtures; (3) BADR eligibility on disposal (10%/14%/18% CGT instead of standard residential 18%/24%); (4) eligible income for pension contribution purposes; (5) profits split flexibly between spouses regardless of beneficial ownership. From April 2025, former FHL properties are treated as standard residential rentals with Section 24 restrictions. Transitional rules in Finance Act 2024: existing FHL losses carry forward only against same-FHL property post-abolition; capital allowances continue on existing items until disposal; BADR disposal qualifying period continues for sales completed before April 2026 if held under FHL prior to April 2025. Many holiday-let owners are now reconsidering: incorporate to a Limited Company (no Section 24), sell pre-April-2026 to capture BADR window, or just accept the lower-margin standard-rental tax treatment.
What is the £7,500 Rent-a-Room scheme?
Section 784 ITTOIA 2005. Up to £7,500 of GROSS rental income tax-free if you let a furnished room in your MAIN residence to a lodger. Two routes: (1) Automatic relief: if gross rent under £7,500, no tax due, no need to declare on SA (technically optional). (2) Optional opt-in for gross rent over £7,500: choose between £7,500 flat deduction OR actual expenses (whichever gives lower taxable rent). Conditions: (a) the property must be YOUR MAIN RESIDENCE; (b) must be furnished; (c) lodger has shared facilities (not a separate self-contained dwelling). Lodger arrangements are NOT formal Assured Shorthold Tenancies - simpler licensing arrangement under Common Law / Section 31 Housing Act 1988 excluded tenancies. Joint owners (couple in same home) share ONE £7,500 - it's per-residence, not per-owner. Above £7,500: only the excess is taxable under the flat-deduction route. £8,500 gross income = £1,000 taxable. Useful for empty-nester with spare room or for those funding higher mortgage costs.
How does joint ownership work for rental tax?
Default 50:50 split for legally-married couples and civil partners (Section 836 ITA 2007), regardless of legal ownership ratios. Form 17 declaration to HMRC overrides the default if you want different splits (e.g. 99:1 favouring the basic-rate spouse to minimise tax). Must be supported by genuine BENEFICIAL ownership reflecting the declared split - a 99:1 income split with 50:50 legal title is challenged by HMRC unless backed by a written Trust Deed or Declaration of Trust. Form 17 must be filed within 60 days of the declaration date. Worked example: husband basic-rate (£40k other income), wife higher-rate (£70k other income). Joint BTL with £12k rental profit, default 50:50 = £6k each. Husband at 20% = £1,200 tax; wife at 40% = £2,400 tax; total £3,600. Form 17 to 90:10 favouring husband: £10,800 to husband × 20% = £2,160 + £1,200 wife × 40% = £480 = £2,640 total. Saving £960. Unmarried co-owners: income flows in proportion to beneficial ownership (not the marriage default 50:50), no Form 17 needed. Single owner: full rental profit taxed at owner's marginal rate.
Do I need to register for Self Assessment as a landlord?
Generally yes. Triggers for SA registration: (1) gross rental income exceeds £1,000 Property Allowance (Section 783BD ITTOIA 2005); (2) net rental profit triggers tax due (e.g. you have other income that uses your Personal Allowance); (3) you receive a notice to file from HMRC. Register by 5 October following the tax year of trigger. Property Allowance: £1,000 flat-rate alternative to actual expenses. Below £1k gross rent: tax-free, no SA needed. £1k-£10k: register but choose £1k Property Allowance OR actual expenses (whichever gives less tax). Above £10k: typically actual expenses win. Rent-a-Room: separate scheme, can stack with Property Allowance if you also have other rental income from a non-main-residence property. SA filing: 31 January after end of tax year for online filing. £100 fixed late-filing penalty plus daily / 6mo / 12mo escalators. See our SA deadlines + POA guide.
What is Capital Gains Tax on rental property?
Selling a UK rental property triggers CGT at residential rates: 18% basic-rate / 24% higher-rate (rates aligned October 2024). £3,000 annual exempt amount applies. Private Residence Relief: NOT available for pure BTL (never your main home). PARTIAL PRR for former main home that became a rental: gain × (PRR period + 9-month final period) / total ownership period. 60-day reporting: from April 2020, UK residential property disposals MUST be reported AND paid within 60 days of completion via HMRC's UK Property Disposal service (in addition to annual SA). Penalties for missed 60-day: £100 fixed + £10/day after 3mo + 5% × 2 at 6/12 months. Letting Relief: was substantially restricted from April 2020 - now only available where landlord shares the property with tenant as main residence (rare). Most BTL sales no longer get any Letting Relief. See our CGT on second home calculator for the full mechanics + worked examples.
How is Inheritance Tax on rental property?
Rental property is fully chargeable to IHT at 40% on death (above NRB + RNRB). Property value at date of death is the asset value used; CGT is "uplifted" to date-of-death value for any subsequent sale by beneficiaries (Section 62 TCGA 1992). The rental property does NOT qualify for Business Property Relief (BPR) - investment properties are excluded from BPR (Section 105 IHTA 1984 + Section 112 IHTA 1984). Holiday-letting businesses pre-April-2025 sometimes qualified for BPR if actively managed; from April 2025 FHL regime abolition this is largely closed (HMRC scrutiny + court precedents suggest holiday lets rarely qualified anyway under the "investment" exclusion). Gift during lifetime: 7-year potentially exempt transfer (Section 3A IHTA 1984), but: (a) gifts of rental properties trigger CGT at full market value disposal; (b) "Gift with Reservation of Benefit" rules (Section 102 FA 1986) apply if you continue to receive rent / use the property after the gift. Specialist tax planning essential for substantial property portfolios. See our IHT couple calculator.
Should I incorporate my rental portfolio?
Strongest argument: Section 24 doesn't apply to companies. Limited-company landlords fully deduct mortgage interest from rental profit at Corporation Tax rates (19% small profits / 25% main). For higher-rate-individual landlords with substantial mortgage debt, incorporation can save 20-30% effective tax annually. But major obstacles: (1) SDLT on transfer to company: typically pay the 5% additional-property surcharge + standard SDLT on full market value. £500k property transfer = £37,500 SDLT or so. (2) CGT on transfer to company: deemed disposal at market value, full CGT due. Incorporation Relief (Section 162 TCGA 1992) can defer CGT but requires transferring "business" not just "investment" - high HMRC scrutiny on portfolio incorporations. (3) Mortgage refinancing: residential BTL mortgages don't transfer to company; must remortgage as commercial BTL (typically 2-3% higher rates). (4) Double tax on extraction: profits taxed at CT in company, then dividend tax 8.75%/33.75%/39.35% when extracted. Crossover point: typically 4-5 properties with substantial mortgage interest, higher-rate landlord. Specialist advice essential - many incorporations end up worse off due to upfront SDLT + CGT costs and mortgage rate hikes.
What records do I need to keep?
Section 12B TMA 1970 + Section 272 ITTOIA 2005 - keep for 6 years after the relevant SA filing. Income records: every rent payment received (date, amount, tenant name), bank statements showing the credit, any non-rent receipts (deposit forfeits, dilapidations claims paid). Expense records: every invoice / receipt for allowable expense, mileage log for property visits, contractor invoices with dates and works descriptions. Property records: purchase contract + completion statement + SDLT receipt (for eventual CGT base cost calculation), title deeds, lease agreements (for leasehold properties), planning permissions (for any improvements - improves CGT base cost), all certificates (gas safety, EICR, EPC). Tenancy records: AST agreements, deposit protection certificates, inventory, condition reports at start and end. Mortgage records: annual interest statements (critical for Section 24 credit calculation), refinancing documents. From April 2026 MTD ITSA mandates DIGITAL record-keeping for landlords earning over £50k gross income; April 2027 for £30k+. See our MTD ITSA guide.
What new landlord regulations apply in 2026/27?
Several regulatory pressures on UK landlords in 2026/27: Renters' Rights Act 2025 abolishes Section 21 "no-fault" evictions, ends fixed-term tenancies in favour of periodic-only, introduces a Landlord Database registration requirement. Major operational change for portfolio landlords. See our Renters' Rights Act 2025 guide. Energy Performance Certificate (EPC) minimum standards: properties let to new tenants must have EPC C from 2028, existing tenancies from 2030 (consultation ongoing). Right to Rent checks: ongoing duty to verify tenants' immigration status (Immigration Act 2014). Tenant Fees Act 2019: deposit cap 5 weeks rent (under £50k/yr) or 6 weeks (above), only specific permitted fees chargeable. Anti-Money Laundering rules: estate agents acting for landlords subject to AML supervision since 2017; landlords themselves not directly subject but indirectly via agent compliance. HMO licensing: mandatory for 5+ occupants in 2+ households (since 2018), some local authorities require additional licensing for smaller HMOs. None of these are direct tax changes but they affect landlord compliance cost + administrative burden.
Related calculators and guides
- Landlord tax guide - existing narrative overview.
- Section 24 calculator - interactive mortgage interest restriction calculator.
- CGT on second home - disposal tax mechanics.
- Rent-a-Room relief guide - £7,500 tax-free scheme detail.
- FHL abolition guide - April 2025 transition rules.
- Renters' Rights Act 2025 - Section 21 abolition + Landlord Database.
- SDLT 2026/27 worked examples - 5% second-home surcharge on BTL purchase.
- MTD ITSA guide - April 2026 mandation for landlords £50k+.
- LTD company closure - if incorporating then closing later.