01

How rental income is taxed — the basic framework

Rental income from UK residential property is taxed as property income under Part 3 of ITTOIA 2005. All UK residential properties owned by the same individual are pooled into a single property business — profits and losses are calculated across the entire portfolio, not property by property. The net profit is added to other income and taxed at the individual's marginal income tax rate: 20% basic rate, 40% higher rate, 45% additional rate.

The taxable profit is gross rent received minus allowable revenue expenditure. Revenue expenditure (day-to-day running costs) is deductible in full. Capital expenditure (improvements, additions to the property) is not deductible as revenue expenditure — it is added to the cost base of the property for CGT purposes on eventual disposal.

Allowable revenue expenses include: letting agent fees and management charges; accountancy fees for preparing rental accounts; buildings and contents insurance premiums; repairs and maintenance that restore the property to its previous condition (not improvements); ground rent and service charges for leasehold properties; council tax and utility bills paid by the landlord; and legal fees for tenancy agreements of one year or less. Mortgage interest is specifically not allowable as a deduction — it receives only the 20% credit under Section 24.

02

Section 24 — the full financial impact by income level

Section 24 affects landlords differently depending on their income tax position. The following analysis sets out the precise impact across three landlord profiles — all with the same property generating £18,000 rent and £8,000 mortgage interest, with £2,000 of other allowable expenses.

Basic rate landlord (total income including rental profit below £50,270): taxable rental profit = £16,000. Tax at 20% = £3,200. Less 20% credit on £8,000 = £1,600. Net tax on rental income = £1,600. Under old rules: taxable profit £8,000, tax at 20% = £1,600. No change — basic rate landlords are unaffected by Section 24 because the 20% credit exactly equals the 20% they would have paid on the deducted interest.

Higher rate landlord (income in the 40% band): taxable rental profit = £16,000. Tax at 40% = £6,400. Less 20% credit on £8,000 = £1,600. Net tax = £4,800. Under old rules: taxable profit £8,000, tax at 40% = £3,200. Additional annual cost of Section 24: £1,600 per property per year at these figures.

Additional rate landlord (income above £125,140) with the same property: taxable profit £16,000. Tax at 45% = £7,200. Less 20% credit £1,600. Net tax = £5,600. Under old rules: £8,000 × 45% = £3,600. Additional annual cost: £2,000 per property.

For highly leveraged portfolios with multiple properties, the cumulative Section 24 impact can eliminate all economic profit — creating a situation where the landlord pays tax on income they have not actually received in cash after mortgage payments.

03

Allowable deductions — the complete list and the common errors

Maximising allowable deductions is the primary legal method of reducing rental income tax within the individual landlord framework. The following categories are confirmed as allowable by HMRC and the relevant case law.

Letting agent fees: fully allowable, including tenant-find fees, renewal fees and management charges. Keep all invoices — HMRC requests these in compliance checks. Accountancy and tax return fees: fully allowable for the proportion relating to the rental business. If the same accountant prepares a mixed return covering rental income, employment income and investments, the apportioned rental fee is allowable. Buildings and contents insurance: fully allowable — keep policy documents and payment receipts. Maintenance and repairs: materials and labour costs for genuine repairs (replacing like-for-like) are fully allowable. Keep contractor invoices that specifically describe the work as repair and the nature of the defect repaired. Ground rent and service charges: fully allowable for leasehold properties. Council tax and utilities: allowable where paid by the landlord during void periods or under the tenancy agreement. Advertising costs: fully allowable — including website listings, photography costs and estate agent advertising fees. Legal fees for short tenancy agreements: allowable for new tenancy agreements of less than one year and for the renewal of existing tenancies.

04

Limited company ownership — when the numbers work

The limited company (Ltd) is the most commonly discussed alternative to individual landlord ownership in the post-Section 24 environment. The key advantage: a company pays corporation tax (25% on profits above £50,000, 19% on the first £50,000) on rental income and can deduct mortgage interest in full — Section 24 applies only to individual landlords, not companies.

For a company with £18,000 rent, £8,000 mortgage interest and £2,000 other expenses: taxable profit = £18,000 - £8,000 - £2,000 = £8,000. Corporation tax at 25% = £2,000. For an individual higher rate landlord: net tax = £4,800 (as calculated above). The company saves £2,800 per year on this single property — but only if the profit is retained in the company. When profit is extracted as dividends the additional dividend tax reduces or eliminates the annual saving.

The transfer of existing personally held properties into a company is a taxable disposal — triggering CGT on any accrued gain plus SDLT at the full rate including the 3% surcharge on the acquisition by the company. For a property bought for £150,000 and now worth £280,000: CGT on £130,000 gain at 24% = £31,200. SDLT on the £280,000 purchase by the company at approximately 4.5% average rate = £12,600. Total transfer cost: approximately £43,800. Break-even at £2,800 per year saving: approximately 15 years.

The company structure makes most financial sense for new purchases — where no transfer cost is incurred — and where profit will be retained and reinvested within the company rather than extracted annually. For landlords near retirement who need rental income to fund living costs, the company offers limited benefit as the profit must eventually be extracted and taxed.

05

Furnished holiday lettings — the end of the preferential regime

The furnished holiday lettings (FHL) regime was abolished from 6 April 2025 by the Finance Act 2024. Properties that previously qualified as FHLs are now treated as standard residential rental properties for all tax purposes. The abolition affects thousands of UK holiday let owners who relied on FHL tax advantages.

The preferential FHL tax treatment that has been lost from April 2025 includes: the ability to deduct mortgage interest in full (now subject to Section 24 like all residential lettings); eligibility for business asset disposal relief on disposal (now taxed at standard CGT rates unless BADR conditions met through employment/partnership); the ability to claim capital allowances on furniture and fixtures (now replaced by the standard replacement of domestic items relief); and the treatment of FHL income as earned income for pension contribution purposes.

For former FHL landlords, the April 2025 change requires a full reassessment of the economics of holiday letting. The combination of Section 24 mortgage interest restriction, loss of CGT reliefs and loss of capital allowances materially increases the effective tax rate on holiday let income. Landlords who planned to sell their holiday let and claim BADR on the gain must now reconsider — the BADR qualifying conditions for a standard rental property are far more restrictive than for an FHL.

Transitional provisions: losses incurred under the FHL regime before April 2025 that were carried forward cannot be offset against general property income from April 2025 — they can only be offset against future FHL income from the same property if any FHL activity continues. In practice, most former FHL properties will have stranded pre-April 2025 FHL losses.