6. Tax & Ownership Considerations
Educational information only. This section does not constitute tax or financial advice.
Tax has a significant impact on buy-to-let outcomes. Property performance is usually discussed in terms of rent and mortgages, but post-tax results ultimately determine whether an investment is sustainable. This is also the area of buy-to-let that has changed most in the last decade — and more change is already scheduled.
All figures below are for the 2025/26 tax year (England, Wales and Northern Ireland) and are correct as of July 2026. Announced future changes are dated and flagged. Always confirm against current HMRC guidance or with a qualified accountant.
6.1 How rental income is taxed (personal ownership)
Held in your own name, rental profit is added to your other income and taxed at your income tax rate. The first £1,000 of rental income is covered by the property allowance; above that, profit is taxed at these bands:
| Band | Taxable income (2025/26) | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Two things catch landlords out: the personal allowance is reduced by £1 for every £2 of income over £100,000, and these thresholds are frozen until April 2031 — so as rents rise, more landlords are pulled into higher bands without any real increase in wealth ("fiscal drag").
6.2 Section 24 — the mortgage interest restriction
This is the single most important tax rule in personal buy-to-let. Since April 2020, individual landlords can no longer deduct mortgage interest from rental income before calculating tax. Instead, you receive a 20% basic-rate tax credit on the interest — regardless of your actual tax band.
The practical effect: tax is charged on a profit figure that ignores your biggest cost, so your taxable profit can look far larger than your real cash profit. Basic-rate taxpayers are broadly unaffected (20% credit ≈ 20% deduction). Higher- and additional-rate taxpayers lose out significantly.
Worked example — a higher-rate landlord
Illustrative figures. Landlord already pays tax at the higher (40%) rate on other income.
| Line | Old rules (pre-2017) | Section 24 (now) |
|---|---|---|
| Rent received | £15,000 | £15,000 |
| Less: other allowable expenses | −£3,000 | −£3,000 |
| Less: mortgage interest | −£6,000 | not deducted |
| Taxable rental profit | £6,000 | £12,000 |
| Tax at 40% | £2,400 | £4,800 |
| Less: 20% credit on £6,000 interest | — | −£1,200 |
| Tax due | £2,400 | £3,600 |
The landlord's real cash profit is unchanged at £6,000 — but the tax bill rises from £2,400 to £3,600, a 50% increase, purely because of how the interest is treated. After tax, £3,600 of a £6,000 profit is now taken. This is why pre-tax cashflow analysis (Module 4) is never enough on its own, and why highly leveraged personal portfolios are the most exposed.
6.3 The April 2027 changes (already announced)
The Autumn 2025 Budget (legislated in the Finance Act 2026) introduced a separate set of property income tax rates, 2 percentage points above the equivalent rates on earned income, effective 6 April 2027 for individual landlords in England, Wales and NI:
| Band | Now (to 5 Apr 2027) | From 6 Apr 2027 |
|---|---|---|
| Basic rate | 20% | 22% |
| Higher rate | 40% | 42% |
| Additional rate | 45% | 47% |
| Section 24 interest credit | 20% | 22% |
The Section 24 credit rises to 22% too, which partly softens the blow for landlords with large mortgages. There's also a quieter change: from April 2027 your personal allowance must be set against earned income first, which can push more rental profit into a taxable band. In the worked example above, the 2027 rates would lift the tax due from £3,600 to about £3,720. It's modest per property but compounds across a portfolio — and it's a clear signal of the policy direction. Limited companies are not affected by these new rates.
6.4 Personal vs company — the tax mechanics
The interest restriction is the main reason many higher-rate landlords now use a limited company (SPV), where mortgage interest remains fully deductible. But a company is not a free lunch — profit is taxed again when you take it out.
| Personal name | Limited company (SPV) | |
|---|---|---|
| Profits taxed at | 20/40/45% (22/42/47% from Apr 2027) | Corporation tax: 19% up to £50k profit, 25% over £250k, tapered between |
| Mortgage interest | 20% credit only (22% from 2027) | Fully deductible before tax |
| Section 24 applies? | Yes | No |
| Extracting profit | Already yours | Taxed again as dividends (10.75% / 35.75% from Apr 2026) |
| Moving an existing property in | — | Can trigger SDLT (5% surcharge) and CGT on the way in |
Companies suit landlords reinvesting profits to grow a portfolio; personal ownership suits basic-rate taxpayers or those who need the income now. The decision interacts with Module 2 (structure) and Module 3 (company mortgages price higher but stress-test at 125%). Incorporating an existing portfolio is a major, costly step — take advice first.
6.5 Capital Gains Tax (CGT)
CGT applies when you sell for more than you paid, on the gain — not the sale price. For residential property the rates (2025/26) are 18% on any part of the gain falling within your unused basic-rate band and 24% above it. The tax-free annual exempt amount is now just £3,000 (down from £12,300 a few years ago).
Worked example
| Line | Amount |
|---|---|
| Sale price | £330,000 |
| Less: original purchase price | −£250,000 |
| Gross gain | £80,000 |
| Less: allowable costs (SDLT paid, legal, agent fees, capital improvements) | −£20,000 |
| Net gain | £60,000 |
| Less: annual exempt amount | −£3,000 |
| Taxable gain | £57,000 |
| CGT at 24% (higher-rate) | £13,680 |
Two rules catch people out. The gain must be reported and the tax paid within 60 days of completion — a tight deadline with unsympathetic penalties. And if the property was ever your main home, Private Residence Relief may reduce the gain. Ignoring CGT is one of the easiest ways to overstate your long-term return.
6.6 Allowable expenses: revenue vs capital
Allowable expenses are costs incurred wholly and exclusively for running the rental. The critical distinction is between revenue costs (deductible against rental income now) and capital costs (added to the property's cost base and only relevant for CGT on sale).
| Revenue (deduct now) | Capital (relevant at sale) |
|---|---|
| Repairs & maintenance (like-for-like) | Improvements / extensions |
| Insurance, management fees | New additions that didn't exist before |
| Safety & compliance costs | Renovation beyond original condition |
| Letting agent & professional fees | Initial purchase & acquisition costs |
Replacing worn furnishings or appliances in a furnished let can qualify for Replacement of Domestic Items Relief — but only replacements, not the initial furnishing. Getting the revenue/capital split right is essential for accurate modelling.
Note: the Furnished Holiday Lettings regime was abolished on 6 April 2025, so holiday lets are now taxed like standard residential lettings — Section 24 applies and the old capital allowances and CGT reliefs no longer do.
6.7 Why tax planning matters early
Tax structure is path-dependent: early choices shape later flexibility, and changing structure later can trigger SDLT and CGT. With income-tax thresholds frozen to 2031, the 2027 rate rise scheduled, and MTD for Income Tax phasing in (quarterly digital reporting for landlords over £50k gross from April 2026, £30k from April 2027), the direction of travel is clearly toward more tax and more admin for personally held property. Early awareness supports realistic projections and better stress-testing — the goal is clarity and resilience, not minimisation at all costs.
Module summary: Section 24 taxes personal landlords on a profit figure that ignores mortgage interest, giving only a 20% credit — brutal for higher-rate taxpayers. From April 2027 property income is taxed 2% higher (22/42/47%) with the credit rising to 22%. Companies escape Section 24 but tax profit again on extraction. CGT on residential property is 18/24% with a £3,000 allowance and a 60-day reporting deadline. Strong strategies focus on after-tax resilience, not headline returns.
Educational information only. This does not constitute tax, financial or legal advice. Figures are for 2025/26 (England/Wales/NI) and correct as of July 2026; announced changes are dated. Scotland sets some of its own rates. Tax rules change frequently — always verify against current HMRC guidance or with a qualified accountant before acting.