UK Landlord Tax Guide: Section 24, MTD, Income Tax & News

How rental income is taxed

Rental profits from UK residential property are taxed as income. For individual landlords, profits are added to other personal income and taxed at the marginal rate — 20%, 40%, or 45% depending on the band the total falls into.

A landlord computes profit by deducting allowable expenses from gross rental income. Allowable expenses include letting agent fees, repairs and maintenance, ground rent and service charges, accountancy fees, building and contents insurance, and the cost of replacing certain domestic items in furnished lets under the replacement of domestic items relief.

Capital improvements are not deductible against income. They are added to the property’s cost base and reduce the capital gain on disposal. The line between repairs and improvements is the most-disputed area of landlord taxation, and HMRC has detailed guidance on what each side of the line looks like.

Section 24 mortgage interest restriction

Section 24 of the Finance (No. 2) Act 2015 phased out mortgage interest as an allowable rental expense for individual landlords with residential property. Since the 2020-21 tax year, no mortgage interest can be deducted from rental income.

In its place, landlords receive a basic-rate (20%) tax reducer equal to the lower of: 20% of finance costs, 20% of profits before finance costs, or 20% of total taxable income above the personal allowance. For higher- and additional-rate taxpayers this leaves a permanent gap between the gross interest paid and the relief received.

Two practical effects: rental profits before interest are now what determines tax band placement, which can drag landlords into higher bands they would not otherwise sit in; and highly geared individual portfolios can show a positive taxable profit while running a cash loss. Limited company structures are taxed differently — see the next section.

Limited company structures

A property company pays Corporation Tax on its rental profits. Mortgage interest is fully deductible as a business expense — Section 24 does not apply to companies. Corporation Tax is currently a 25% main rate (with marginal relief between £50,000 and £250,000 of profits, taking the effective rate from 19% to 25%).

Extracting profits to the shareholder triggers a second layer of tax — dividend tax at 8.75% / 33.75% / 39.35% above a small dividend allowance, or income tax on salary. The combined company-plus-shareholder tax rate is typically higher than the rate an unincorporated landlord would pay on the same profit, except where the landlord is at the additional rate or has high gearing.

Incorporating an existing portfolio can trigger Stamp Duty Land Tax and Capital Gains Tax on transfer. Specific reliefs (incorporation relief, partnership reliefs) are available where the activity meets HMRC’s tests for a property business — typically by demonstrating significant active management and time commitment. Professional advice is essential before any transfer.

Capital Gains Tax on disposal

When a residential investment property is sold, the gain is subject to Capital Gains Tax. Individual rates are 18% (basic rate band) and 24% (higher rate) on residential property gains since the 2024 reduction from 28%. Companies pay Corporation Tax on disposal gains.

The annual CGT exempt amount for individuals is £3,000 from 2024-25 — a small fraction of its level a few years earlier. Allowable deductions include the original purchase price, acquisition costs, capital improvements during ownership, and disposal costs (estate agent fees, legal fees).

Disposals must be reported and the tax paid within 60 days of completion via HMRC’s online property disposal return. Late filing carries automatic penalties and the deadline is significantly tighter than the annual self-assessment cycle landlords are used to.

Stamp Duty Land Tax for landlords

Buy-to-let and second-home purchases attract a Stamp Duty Land Tax surcharge above the standard residential rates. The surcharge is currently 5 percentage points above the standard rate at every band, with the standard nil-rate threshold also lower for additional dwellings.

Companies face the same surcharge on residential acquisitions, plus a 15% flat rate on properties above £500,000 acquired by certain corporate entities (typically caught when the property is occupied by a connected individual rather than let on the open market).

Mixed-use properties (e.g. a flat above a shop) are taxed at the lower non-residential rates. The boundary is a frequent subject of HMRC challenge and tribunal litigation, and landlords should not assume mixed-use rates apply without specific advice.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) requires affected landlords to keep digital records and submit quarterly updates to HMRC through compatible software, replacing the current annual self-assessment cycle.

The threshold is gross self-employment plus property income above £50,000 from April 2026, dropping to £30,000 from April 2027 and £20,000 from April 2028. Landlords whose qualifying income falls below the threshold remain on the annual self-assessment cycle.

In practice this means four quarterly submissions plus a final declaration, all from MTD-compatible software. Landlords without an accountant typically need to adopt a property accounting tool with HMRC certification. Early adoption is sensible — the deadline for the £50,000 threshold is in the next tax year and the software learning curve is steeper than HMRC literature suggests.

Practical planning for landlords

Run an annual tax model. Project the year’s rental income, deductible expenses, mortgage interest, and other personal income. Identify whether Section 24 will push you into a higher band and whether early action — increased pension contributions, charitable giving, salary sacrifice — can keep you in your current band.

Document the repair-versus-improvement boundary. Keep contractor invoices, before-and-after photographs, and a written rationale for treating each item as one or the other. This is the file HMRC asks for in an enquiry.

Plan for MTD before the deadline. Choose software, set up bank feeds, and run a parallel quarter or two on the digital records before HMRC requires them. Switching mid-year under deadline pressure is the most expensive way to onboard.