Being a property landlord in the UK means you are running a business, even if you only own one rental property. HMRC treats rental income as taxable income, and the accounting requirements – while not as complex as a large company – still demand proper record-keeping and tax planning.
The tax landscape for landlords has changed significantly in recent years, particularly around mortgage interest relief. Understanding the current rules is essential to making sound investment decisions.
How rental income is taxed
Rental income is taxed as property income on your Self Assessment return. Your taxable profit is calculated as:
Rental income - Allowable expenses = Taxable profit
This profit is added to your other income (employment, self-employment, pensions, savings) and taxed at your marginal rate:
Rental profit is taxed in the same bands as your other income, starting with the personal allowance, then the basic, higher and additional rates. The government can set separate rates for property income, and the band limits and allowance are set at each Budget, so check the current figures on GOV.UK when you estimate your bill.
If you own property jointly (for example, with a spouse), the income is usually split equally for tax purposes. You can change this split by filing a Form 17 with HMRC, but only if you own the property in unequal shares.
Allowable expenses
Landlords can deduct the following expenses from their rental income:
| Expense | Deductible? | Notes |
|---|---|---|
| Letting agent fees | Yes | Management fees, tenant finding |
| Insurance | Yes | Buildings, contents, landlord liability |
| Council tax | Yes | If paid by the landlord |
| Water rates | Yes | If paid by the landlord |
| Ground rent and service charges | Yes | Leasehold properties |
| Repairs and maintenance | Yes | Like-for-like replacement; not improvements |
| Professional fees | Yes | Accountant, solicitor (for lease renewals, not purchase) |
| Advertising for tenants | Yes | Online listings, signs |
| Travel costs | Yes | Visiting properties for management purposes |
| Stationery and phone costs | Yes | Business proportion |
| Bad debts | Yes | Rent written off as uncollectable |
Repairs vs improvements
This distinction is critical. A repair restores something to its original condition and is fully deductible. An improvement enhances the property beyond its original state and is capital expenditure (not deductible from rental income but may reduce Capital Gains Tax when you sell).
| Work done | Classification |
|---|---|
| Replacing a broken boiler with an equivalent | Repair |
| Replacing a standard boiler with a smart system | Improvement |
| Repainting walls | Repair |
| Knocking through walls to create open plan | Improvement |
| Replacing rotten window frames (like for like) | Repair |
| Upgrading single glazing to double glazing | Improvement |
Replacement of domestic items relief
Since April 2016, you can claim the cost of replacing domestic items (furniture, appliances, kitchenware) provided to tenants. The deduction is the cost of the replacement item minus any proceeds from selling the old item. If the replacement is an upgrade, you can only deduct the cost of a like-for-like replacement.
Letting one property or twenty? Start your free trial and track each one separately.
Mortgage interest changes
Before April 2020, landlords could deduct mortgage interest as an expense, reducing their taxable profit. This has been phased out entirely for individual landlords.
Now, individual landlords receive a tax credit at the basic rate of tax on the lower of:
- Finance costs (mortgage interest, loan interest)
- Property income (after deducting other allowable expenses)
- Total income exceeding the personal allowance
For basic rate taxpayers, the net effect is the same as the old system. For higher and additional rate taxpayers, it means a significantly higher effective tax rate on rental profits.
Example
A higher rate taxpayer receives £20,000 rent, has £5,000 allowable expenses and £8,000 mortgage interest:
| Old system | New system |
|---|---|
| Taxable profit: £20,000 - £5,000 - £8,000 = £7,000 | Taxable profit: £20,000 - £5,000 = £15,000 |
| Tax at 40%: £2,800 | Tax at 40%: £6,000 |
| Tax credit at 20% of £8,000: -£1,600 | |
| Tax due: £2,800 | Tax due: £4,400 |
This change has made holding property in a limited company more attractive for higher rate taxpayers, since companies can still deduct mortgage interest as a business expense against Corporation Tax.
Personal vs company ownership
| Factor | Personal ownership | Company ownership |
|---|---|---|
| Income tax rate | Income Tax at your marginal rate | Corporation Tax 19-25% |
| Mortgage interest | Basic rate tax credit only | Fully deductible |
| CGT on sale | Residential CGT rates for individuals | Corporation Tax rate, then tax on extraction |
| Stamp Duty surcharge | Higher rates on additional properties | Higher rates apply |
| Mortgage availability | Wider range of lenders | Buy-to-let limited company mortgages (higher rates) |
| Privacy | Ownership is public via Land Registry | Ownership is via the company; more layers |
| Flexibility | Simple to manage | Annual accounts, Corporation Tax return, confirmation statement |
For new purchases by higher rate taxpayers, a company structure often makes sense. Transferring existing properties into a company triggers Stamp Duty Land Tax and potentially Capital Gains Tax, which can outweigh the benefits.
Capital Gains Tax
When you sell a rental property, you pay CGT on the gain (sale price minus purchase price, minus allowable costs).
The rate depends on your Income Tax band: basic rate taxpayers pay the lower residential rate on gains that fit within their unused basic rate band, and the higher rate on the rest. An annual exempt amount is deducted first. Both rates and the exempt amount are set at the Budget; check GOV.UK for the current figures.
Allowable costs that reduce the gain include:
- Purchase price and selling price (estate agent fees, legal fees)
- Stamp Duty paid on purchase
- Capital improvements (not repairs)
- Survey and valuation costs
You must report and pay CGT on UK residential property disposals within 60 days of completion using the HMRC Capital Gains Tax on UK property service.
Record-keeping
Keep records of all rental income and expenses for at least 5 years after the Self Assessment filing deadline. Digital records are acceptable and recommended.
Essential records include:
- Tenancy agreements and rent schedules
- Rent receipts or bank statements showing rent received
- Invoices and receipts for all expenses
- Mortgage statements showing interest paid
- Insurance policies and premiums
- Property purchase documentation (for CGT calculations when you sell)
Making Tax Digital for landlords
Since 6 April 2026, landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC under Making Tax Digital for Income Tax Self Assessment. The threshold falls to £30,000 from 6 April 2027 and £20,000 from 6 April 2028.
This means investing in compatible accounting software before you cross the threshold is advisable.
Common landlord accounting mistakes
- Claiming improvements as repairs – HMRC will disallow the deduction and charge penalties
- Forgetting to report rental income – even if you make a loss, you should file
- Not keeping mortgage interest separate – needed for the tax credit calculation
- Ignoring the 60-day CGT reporting window – penalties for late reporting start at £100
- Not claiming all allowable expenses – particularly travel, professional fees and replacement domestic items
- Failing to plan for the mortgage interest restriction – higher rate taxpayers need to model the real tax cost before purchasing
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