Summary
UK landlords pay income tax on net rental profits, with mortgage interest now only eligible for a 20% tax credit (not a full deduction). Capital gains on residential property are taxed at 18% or 24% depending on your income tax band. A 5% SDLT surcharge applies on additional residential properties.
Rental Income Tax: The Basics
Rental income is subject to income tax in the same way as employment income — added to your total income and taxed at your marginal rate. For 2025/26, the rates are 20% (basic rate, £12,571–£50,270), 40% (higher rate, £50,271–£125,140), and 45% above £125,140.
However, the taxable amount is your net rental profit — gross rental income minus allowable expenses. Getting your expenses right is where most landlords either leave money on the table or inadvertently overclaim.
The £1,000 property income allowance lets landlords with up to £1,000 of gross rental income pay no tax at all. Above that, it is worth comparing the gross income approach (deduct the full £1,000 instead of actual expenses) against the standard approach of deducting actual costs.
Allowable Expenses for Landlords
The following are deductible against rental income — provided they are wholly and exclusively incurred for letting purposes:
Note: capital improvements (converting a loft, adding an extension) are not deductible against income, but they reduce your capital gains when you sell.
Section 24: The Mortgage Interest Restriction
Section 24 of the Finance (No. 2) Act 2015 is arguably the most impactful change to landlord taxation in a generation. Fully phased in since April 2020, it prevents residential landlords from deducting mortgage interest as an expense against rental income.
Instead, you receive a tax credit equal to 20% of the mortgage interest paid. For a basic-rate taxpayer this is broadly equivalent to the old deduction. For a higher-rate or additional-rate taxpayer, it is materially worse.
Example: Higher-Rate Taxpayer
Under the pre-2017 rules, the same landlord would have paid tax on £10,000 of profit (£24k − £4k expenses − £10k interest) = £4,000. Section 24 has doubled the tax bill in this example.
Capital Gains Tax on Property
When you sell a residential investment property, capital gains tax applies to the gain (sale price minus purchase cost minus allowable deductions). The CGT rates from 30 October 2024 are:
| Taxpayer | CGT Rate (Residential) |
|---|---|
| Basic-rate taxpayer | 18% |
| Higher or additional-rate taxpayer | 24% |
The annual CGT exempt amount for 2025/26 is £3,000 — significantly reduced from the £12,300 available in 2022/23. This means more landlords now face CGT on smaller gains.
Deductible costs include: purchase price, Stamp Duty Land Tax paid on acquisition, solicitors' and estate agents' fees on both purchase and sale, and the cost of capital improvements (extensions, conversions — not maintenance).
You must report and pay CGT on a residential property disposal within 60 days of completion — not at the following January 31st self-assessment deadline. Missing this window incurs late penalties even if you have no tax to pay.
SDLT Surcharge on Additional Properties
Since October 2024, a 5% Stamp Duty Land Tax surcharge applies to purchases of additional residential properties in England and Northern Ireland (on top of the standard rates). This applies to second homes, buy-to-let properties, and most company purchases of residential property.
The surcharge substantially increases the upfront cost of portfolio expansion and needs to be factored into any acquisition model. Refunds are available if the surcharge-paying property is sold within three years and it was a replacement main residence.
Should You Own Property in a Limited Company?
The question of incorporating a property portfolio is one of the most common we are asked. The short answer: it depends heavily on your personal circumstances, and is rarely as simple as advisors on social media suggest.
Potential advantages of a limited company
- →Corporation tax (25% for profits over £250k; 19% for small profits under £50k) may be lower than your personal income tax rate
- →Section 24 does not apply — companies can still deduct mortgage interest as a business expense
- →Profits retained in the company are not subject to personal income tax until extracted as salary or dividends
- →Easier to pass shares to family members for inheritance tax purposes
Disadvantages and risks
- →Transferring existing properties into a company triggers CGT and SDLT on the transfer — which can be prohibitive
- →Extracting profits as dividends attracts dividend tax (8.75% / 33.75% / 39.35% for basic/higher/additional rate)
- →More complex accounting and Companies House filings
- →Mortgage products for limited companies are less competitive and often require personal guarantees
For landlords building new portfolios from scratch — particularly higher-rate taxpayers intending to retain profits — a company structure often makes sense. For landlords with existing properties, the transfer costs usually outweigh the benefits unless the portfolio is large.Speak to us before making any structural decision.