Letting property in the UK can generate long-term income, but landlord taxation has become increasingly complex. HMRC expects landlords to correctly declare income, claim only allowable expenses, and comply with strict reporting deadlines.
1. Income Tax on Rental Income
All rental income from UK property is taxable and must be reported to HMRC through Self Assessment.
What HMRC Treats as Rental Income
- Rent received from tenants
- Payments for utilities or services paid by tenants
- Non-refundable deposits
- Lease premiums or lump-sum payments
- Compensation for early termination of a tenancy
Rental income is added to your other earnings (salary, dividends, pensions, etc.) and taxed at your marginal rate.
Income Tax Rates (2024/25)
- 20% – Basic rate
- 40% – Higher rate
- 45% – Additional rate
2. Allowable Expenses What Landlords Can Claim
Landlords are taxed on net rental profits, not gross rent.
Allowable Expenses
- Letting agent and property management fees
- Repairs and maintenance (like-for-like replacement)
- Landlord insurance
- Council tax, water rates, and utilities (if paid by the landlord)
- Legal and professional fees (excluding purchase costs)
- Advertising for tenants
- Replacement of domestic items (furniture, white goods, carpets)
- Travel and mileage incurred wholly and exclusively for property management
Not Allowable Against Rental Income
- Capital improvements (e.g. extensions, new kitchens, loft conversions)
- Mortgage capital repayments
- Private or personal expenses
Important:
Capital improvements are not deductible against rental income, but they may reduce Capital Gains Tax when the property is sold.
3. Mortgage Interest Relief (Section 24 Rules)
Mortgage interest is no longer deductible from rental income.
Instead, landlords receive a tax reducer equal to 20% of eligible mortgage interest and finance costs.
Practical Impact
- Basic-rate taxpayers: usually little or no impact
- Higher and additional-rate taxpayers: significantly higher tax bills
- Some landlords pay tax even when rental cash flow is low
Advice: Highly geared landlords should review profitability and long-term viability under these rules.
4. Capital Gains Tax (CGT) When Selling a Rental Property
CGT applies when a rental property is sold for more than its acquisition cost.
CGT Rates for Residential Property
- 18% – Gains within the basic-rate band
- 24% – Gains above the basic-rate band
Allowable Deductions
- Purchase price
- Stamp Duty Land Tax
- Legal and estate agent fees
- Capital improvements (not repairs)
CGT Allowance
- Annual exemption (2024/25): £3,000
Reporting Requirement
CGT must be reported and paid within 60 days of completion via HMRC’s CGT service.
5. Stamp Duty Land Tax (SDLT) for Landlords
When buying additional properties:
- A 3% SDLT surcharge applies on top of standard rates
- Applies to buy-to-let and second homes
This significantly increases upfront investment costs and affects yield calculations.
6. Furnished Holiday Lettings (FHL) Major Tax Changes
From April 2025, the Furnished Holiday Lettings regime will be abolished.
This removes:
- Full mortgage interest deduction
- Capital allowances
- Business Asset Disposal Relief
FHL income will be taxed under standard rental property rules.
Advice: FHL owners should review ownership structure and exit strategies well in advance.
7. VAT and Rental Income
- Residential rental income is VAT exempt
- Commercial property rent may be subject to VAT if the landlord opts to tax
- VAT registration threshold: £90,000
Incorrect VAT treatment is a common compliance risk, particularly for mixed-use properties.
8. Ownership Structure and Tax Efficiency
Individual Ownership
- Simple administration
- Higher exposure to income tax at higher rates
Joint Ownership
- Income is usually split 50:50 between spouses
- Unequal splits require Form 17 and evidence of beneficial ownership
Limited Company Ownership
- Rental profits subject to corporation tax
- Full mortgage interest deduction available
- Tax applies again when profits are extracted as salary or dividends
Advice: Incorporation requires careful modelling and professional advice.
9. Reporting, Record Keeping, and Penalties
Landlords must:
- Register for Self Assessment
- File tax returns by 31 January
- Keep records for at least 5 years
Penalties
- £100 for late filing
- Daily penalties after 3 months
- Interest charged on late payments
HMRC can investigate undeclared rental income going back several years.
Frequently Asked Questions (FAQs)
1. Do landlords have to pay tax on rental income in the UK?
Yes. All rental income must be declared, regardless of mortgage status or profit level.
2. Can landlords deduct mortgage interest from rental income?
No. Mortgage interest only qualifies for a 20% tax credit, not a deduction.
3. Do landlords need to register for Self Assessment?
Yes, if they receive rental income even if tax is already paid through PAYE.
4. How can landlords legally reduce their tax bill?
By:
- Claiming all allowable expenses correctly
- Structuring ownership efficiently
- Planning CGT before selling
- Using pension contributions
- Reviewing incorporation options
5. What happens if rental income is not declared?
HMRC may impose:
- Penalties
- Interest charges
- Backdated tax assessments
- Investigations covering up to 20 years in serious cases
Final Thoughts
UK landlord taxation is no longer straightforward. With reduced reliefs, tighter reporting deadlines, and upcoming FHL changes, proactive tax planning is essential.
Accurate reporting and professional tax advice can protect profits, avoid penalties, and ensure long-term compliance.