Tax is one of the least glamorous parts of letting a property, but it is also one of the most consequential. Get it wrong and you either overpay HMRC year after year or land yourself with penalties and interest. Get it right and you keep more of the profit your property is generating. This guide sets out, in plain terms, what landlords owe, what can legitimately be deducted, and the compliance changes now reshaping how rental income is reported.
How rental profit is actually taxed
Landlords pay Income Tax on rental profit, not on the rent they collect. Your income tax bill depends on your total rental income minus the expenses you can deduct from your property income. The test HMRC applies to any cost is whether it is incurred wholly and exclusively for the rental business. A landlord can deduct costs only if they are wholly and exclusively for the rental business, as required by the test under Section 34 of the Income Tax (Trading and Other Income) Act 2005, applied to property businesses through Section 272. Anything with a personal element, or anything capital in nature, generally falls outside this test.
What you can deduct
The list of allowable revenue expenses is broader than many landlords realise. Fully deductible revenue expenses include repairs and maintenance, landlord insurance, letting agent fees, accountancy fees, ground rent and service charges, advertising, and travel to the property, claimed at 45p per mile for the first 10,000 miles. Beyond the obvious running costs, HMRC also recognises more specific expenses. The licence fee for Houses of Multiple Occupation can be claimed as part of property costs, alongside subscriptions to landlord associations, training courses related to property management, and professional advice directly connected to the rental business. Service charges for shared buildings also count. Service charge costs incurred by landlords in relation to their rental properties can be claimed too, including cleaning of communal areas, maintenance of shared facilities, and building security fees.
Not every cost is a straightforward deduction against income, though. Anything that improves or adds to the property, rather than simply keeping it in its existing condition, is capital expenditure and treated differently. Capital improvements, personal use, your own labour, mortgage capital repayments, fines and penalties, and the costs of buying or selling the property are not deductible as revenue expenses; several of these instead feed your Capital Gains Tax base cost when you eventually sell. The distinction matters because getting it wrong in either direction, claiming a capital cost as revenue or missing a genuine revenue deduction, can trigger an HMRC enquiry or simply cost you money.
Mortgage interest and Section 24
The single biggest change to landlord tax in the last decade is the restriction on mortgage interest relief, commonly known as Section 24. Section 24 is a UK tax rule, introduced by the Finance (No. 2) Act 2015, that stops individual landlords deducting mortgage interest and other finance costs from their rental income. Since April 2020 landlords pay income tax on their full rental income and instead claim a flat 20% basic-rate tax credit on finance costs. This applies whatever tax band you fall into. Section 24 applies to individuals only, meaning limited companies can still deduct mortgage interest in full.
The impact is most severe for higher and additional rate taxpayers, because the relief they receive no longer matches the rate of tax they pay on their profit. A higher-rate taxpayer with £10,000 of mortgage interest would previously have saved £4,000 in tax through 40% relief; under Section 24 they receive only a £2,000 tax credit, an effective increase of £2,000 in tax. There is a further sting for landlords sitting near the higher rate threshold. The restriction can also push some basic-rate taxpayers into the higher-rate band because gross rental income, not net profit, is what counts towards your taxable income before the credit is applied. If your finance costs exceed your rental profit in a given year, the position gets more complex still. The 20% tax credit cannot create or increase a property loss, though if your rental profit is less than your finance costs, part of the tax credit may be restricted and carried forward to future years. Landlords with significant borrowing sometimes look at incorporation as a way around this, since companies are taxed differently, but any transfer of a property into a company triggers its own tax and refinancing costs and should not be decided without professional advice.
Capital Gains Tax when you sell
When a rental property is eventually sold, a separate tax applies to the profit made on the sale itself. For UK individual landlords the rates are 18% basic and 24% higher, with a £3,000 annual exempt amount, and UK residents disposing of property where CGT is due must file a return and pay within 60 days of completion. Where your income and gain together straddle the two rate bands, the calculation is split proportionately. Someone with a £30,000 salary and a £15,000 gain on a buy-to-let property would have part of the gain in the basic rate band taxed at 18% and the remainder in the higher rate band taxed at 24%.
Joint ownership can work in your favour here. Each individual owner gets their own annual exemption, so joint ownership can use two allowances. The 60-day deadline is strict and applies regardless of whether the return will also appear on your annual Self Assessment. You must file a 60-day return for any disposal of a UK residential property even if no CGT is due, for example because the gain is within the annual exempt amount or because of losses, and if you are unsure whether a return is required, report it, since the penalty for failing to report when required is the same regardless of whether tax was owed. Keep every receipt for improvement works, stamp duty and selling costs throughout your ownership, since these all reduce the taxable gain at the point of sale.
Making Tax Digital: the reporting shift landlords need to prepare for
How rental income gets reported to HMRC is changing, and the change is being phased in by income level. From 6 April 2026, landlords whose combined gross income from property and self-employment is over £50,000 must comply; from April 2027 the threshold falls to £30,000; and from April 2028 it falls again to £20,000. Once in scope, the annual tax return is replaced by a more frequent cycle. Landlords in scope have to keep their income and expense records digitally, send HMRC a summary update every three months, and confirm the year with a final declaration.
Two details catch people out. Qualifying income is gross rent before expenses, not profit, so you can be in scope even if your actual profit is modest. And if you run any other self-employed work alongside letting, both income streams are added together for the threshold test. Property held in a limited company sits outside this regime entirely. Property held through a limited company is outside these rules, because companies pay Corporation Tax rather than Income Tax. If your gross rental income is anywhere near these thresholds, it is worth setting up compatible digital record-keeping well before your mandatory start date rather than scrambling in the final months.
Practical steps for staying compliant and efficient
Good tax management starts with good habits, not clever schemes. Keep a dedicated bank account for rental income and expenses so personal and property costs never mix, since HMRC will query anything that looks like a personal cost dressed up as a business one. Retain invoices, mileage logs and bank statements for at least the period HMRC can enquire into your return, and log capital costs separately from revenue costs from day one, because that distinction becomes far harder to reconstruct years later when you come to sell. If you are close to a Making Tax Digital threshold, a Section 24 tax band, or a Capital Gains Tax reporting deadline, speak to an accountant or tax adviser before you act, not after. The rules reward landlords who plan ahead and penalise those who leave everything until the return is due.