Understanding your tax obligations as a landlord can save you thousands. Here's an overview of how rental income is taxed and the main allowances and reliefs available.
Tax is one of the most significant costs for UK landlords, yet many don't fully understand how their rental income is taxed or what reliefs are available. This guide provides an overview of the key tax considerations — always consult a qualified tax adviser for advice specific to your situation.
Income tax on rental profits
Rental income is subject to income tax after allowable expenses are deducted. The taxable profit is added to your other income (salary, pension, etc.) and taxed at your marginal rate — 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate taxpayers.
Allowable expenses that can be deducted from rental income include letting agent fees, maintenance and repair costs, buildings and landlord insurance, ground rent and service charges (for leaseholds), council tax paid by the landlord, utility costs and accountancy fees. Capital improvements — work that enhances a property beyond its original state — are not deductible as an expense but may reduce capital gains tax when you sell.
Mortgage interest restriction
One of the most significant tax changes of recent years is the restriction on mortgage interest tax relief for individual landlords. Since April 2020, mortgage interest is no longer deductible as an expense. Instead, you receive a basic rate tax credit equal to 20% of your finance costs. This change significantly increases the tax burden for higher rate taxpayer landlords.
Capital Gains Tax
When you sell a rental property, any gain above your cost of purchase (plus allowable improvement costs) is subject to Capital Gains Tax at 18% for basic rate and 24% for higher/additional rate taxpayers (as of 2024). Capital gains on residential property must be reported and paid within 60 days of completion.
Limited company structures
Many higher rate taxpayer landlords now use limited company structures to mitigate the mortgage interest restriction. Corporation tax (currently 25% for profits over £250,000) plus dividend tax is often lower than personal income tax, particularly for landlords who don't need to extract all rental income immediately.
Consult a specialist
Property taxation is complex and the rules change regularly. We always recommend working with a qualified accountant who specialises in property — the cost of professional advice is usually an allowable expense and typically pays for itself many times over.