What Are the New Tax Rules for Rental Property?

Understanding the current UK tax rules for rental property is essential for landlords operating in an increasingly regulated and digital tax environment. Over recent years, reforms to mortgage interest relief, capital gains tax reporting, corporation tax, stamp duty and digital compliance have significantly reshaped landlord tax liabilities.

This guide explains the 2026 position on rental property taxation, how taxable rental income is calculated, and what landlords must do to remain compliant while managing their overall tax exposure.

Income Tax on Rental Income

Rental income is treated as property income for tax purposes. Individual landlords must declare rental profits through self-assessment and pay income tax on their taxable rental profit, not on gross rental income.

Taxable rental profit is calculated by deducting allowable expenses from rental income. Rental profits are added to other income (such as salary, pensions or dividends) and taxed at the individual’s marginal income tax rate.

For 2026, income tax bands remain:

• 20% (basic rate)
  
  
• 40% (higher rate)
  
  
• 45% (additional rate)
  

The amount of tax payable depends on total taxable income in the relevant tax year.

Small landlords with gross rental income below £1,000 may be eligible to use the property allowance instead of claiming actual expenses.

Mortgage Interest Relief Restrictions (Section 24)

One of the most significant changes affecting individual landlords is the restriction of mortgage interest relief.

Landlords can no longer deduct mortgage interest from rental income when calculating taxable profit. Instead, they receive a basic rate (20%) tax credit on qualifying finance costs.

This has had the greatest impact on higher and additional rate taxpayers, as relief is capped at 20% regardless of income tax bracket. In some cases, this can push landlords into higher tax bands because mortgage interest is no longer deducted before calculating total income.

By contrast, limited companies can still deduct mortgage interest as a normal business expense.

Allowable Expenses and Landlord Deductions

Despite mortgage interest restrictions, landlords can reduce their taxable rental profit by claiming allowable expenses, including:

• Letting and management fees
  
  
• Landlord insurance
  
  
• Repairs and maintenance (but not capital improvements)
  
  
• Legal fees relating to tenancies
  
  
• Council tax and utilities paid on behalf of tenants
  
  
• Accounting fees
  

Under Replacement of Domestic Items Relief, landlords may claim the cost of replacing furnishings such as sofas, beds and white goods in residential properties. Initial furnishing costs are not deductible.

Capital improvements (for example, extensions or structural upgrades) are not allowable against income tax but may reduce capital gains tax on disposal.

Making Tax Digital (MTD) for Landlords

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) represents a major structural shift in tax administration.

From April 2026, landlords and sole traders with gross income over £50,000 must:

• Maintain digital records
  
  
• Submit quarterly updates to HMRC using compatible software
  
  
• File an end-of-year final declaration
  

From April 2027, the threshold reduces to £30,000.

This reform increases administrative responsibilities and requires landlords to adopt compliant accounting software. Landlords below the threshold remain within the traditional self-assessment system for now.

Capital Gains Tax (CGT) on Rental Property

When a rental property is sold, capital gains tax may be payable on the chargeable gain.

The gain is calculated as:

Sale price
minus
Purchase price
minus
Allowable costs (legal fees, stamp duty, estate agent fees and qualifying capital improvements).

For UK residential property (2026 rates):

• 18% for gains within the basic rate band
  
  
• 24% for gains above the basic rate band
  

UK residential property disposals must be reported to HMRC within 60 days of completion, and CGT must be paid within that period.

Private Residence Relief generally does not apply to investment property unless the property was previously the landlord’s only or main residence and qualifying conditions are met.

Corporation Tax and Limited Company Landlords

Some landlords operate through a limited company structure.

Companies pay corporation tax, currently:

• 25% main rate (profits above £250,000)
  
  
• 19% small profits rate (profits up to £50,000)
  
  
• Marginal relief between £50,000 and £250,000
  

Within a company structure:

• Mortgage interest remains fully deductible
  
  
• Profits are taxed at corporation tax rates
  
  
• Additional tax may arise when extracting profits as salary or dividends
  

Operating through a limited company can be tax-efficient in some scenarios, particularly where profits are retained for reinvestment, but it involves additional compliance, filing requirements and professional costs.

Stamp Duty Land Tax (SDLT) on Additional Properties

Landlords purchasing buy-to-let or second properties in England and Northern Ireland pay a 3% surcharge on top of standard SDLT rates.

The total SDLT payable depends on the purchase price and prevailing thresholds at the time of completion. This surcharge materially increases acquisition costs and should be factored into investment viability calculations.

Different rules apply in Scotland (LBTT) and Wales (LTT).

Furnished Holiday Lettings (FHL) Regime Abolition

The Furnished Holiday Lettings tax regime was abolished from April 2025.

Previously, FHL properties benefited from:

• Capital allowances on furniture and fixtures
  
  
• Business Asset Disposal Relief
  
  
• Pension-relevant earnings status
  
  
• More favourable CGT treatment
  

Following abolition, furnished holiday properties are now taxed under the standard property income and capital gains rules. Landlords operating short-term holiday lets should review their structure and tax planning strategy in light of these changes.

Managing Landlord Tax in 2026

Rental property remains commercially attractive in many areas due to sustained demand. However, the tax landscape has become more complex.

Landlords must now navigate:

• Income tax or corporation tax
  
  
• Mortgage interest relief restrictions
  
  
• 60-day CGT reporting
  
  
• SDLT surcharges
  
  
• Making Tax Digital compliance
  
  
• Post-FHL regime adjustments
  

The amount of tax payable depends on overall income, ownership structure, financing arrangements and long-term exit planning.

Regular tax reviews and professional advice are increasingly important in managing risk and avoiding unexpected liabilities.

Conclusion

The UK tax rules for rental property have undergone substantial reform in recent years. Restrictions on mortgage interest relief, the rollout of Making Tax Digital from April 2026, revised CGT rates, the abolition of the Furnished Holiday Lettings regime and higher stamp duty surcharges have significantly altered the financial profile of buy-to-let investment.

Landlords must understand how taxable rental profit is calculated, which deductions remain available, and how their broader income position affects the tax payable.

In a more regulated and digitally administered tax system, informed decision-making and proactive planning are essential. For more advice, get in touch with Parkgate.

Disclaimer

This article is provided for general information only and does not constitute tax or financial advice. Tax legislation, thresholds and rates are subject to change, and individual circumstances vary. Landlords should consult HM Revenue & Customs guidance and seek advice from a qualified tax adviser before making decisions relating to rental property and tax obligations.