UK Tax on Rental Income for Residents

UK residents with rental income are taxed on the profit of a property business under sections 264 to 360 of ITTOIA 2005. The structure has shifted materially over the last decade: mortgage interest relief was withdrawn in stages between 2017 and 2020 and replaced by a 20% basic-rate tax credit, the Wear and Tear allowance was abolished, the Furnished Holiday Lets regime was abolished from 6 April 2025, and Making Tax Digital for Income Tax Self-Assessment begins for landlords from 6 April 2026 (GBP 50,000 income threshold) and 6 April 2027 (GBP 30,000).

This guide covers the calculation, the main allowable expenses, the finance cost restriction, the property allowance, and the reporting routes for UK-resident landlords with UK property.

What counts as a property business

Letting one or more properties for income is a property business under section 264 ITTOIA 2005, regardless of scale. A single buy-to-let, a single room rented under the Rent a Room scheme, and a portfolio of 10 properties are all property businesses subject to the same basic structure of profit calculation.

The Rent a Room scheme allows a resident landlord renting a furnished room in their main home to receive up to GBP 7,500 a year tax-free (or GBP 3,750 each where the income is shared between two people). Income above the threshold is either taxed on the actual profit (rent less allowable expenses) or at the gross income less GBP 7,500, whichever produces the lower tax bill.

The property allowance gives GBP 1,000 of tax-free property income to any individual. Where rental receipts are GBP 1,000 or less, no reporting is required. Between GBP 1,000 and the expense level, the landlord can choose to deduct GBP 1,000 from gross rent instead of actual expenses. Above the allowance the choice is between actual expenses or the GBP 1,000 allowance, whichever is more beneficial.

Edge case: the property allowance and the Rent a Room scheme cannot both apply to the same income source. A landlord with multiple letting sources can use the property allowance on one and a different basis on another, as long as the same stream is not double-counted.

Allowable expenses and the wholly-and-exclusively rule

Allowable expenses follow the section 34 ITTOIA 2005 wholly and exclusively rule: an expense is deductible only if incurred wholly and exclusively for the purposes of the property business. Common allowables include letting agent fees, accountancy fees for the property element, repairs and maintenance (not improvements), insurance, ground rent, service charges, council tax where paid by the landlord, utilities where included in the rent, and the day-to-day management costs.

Repairs versus improvements is the most common point of dispute. Replacing a like-for-like worn carpet with a similar carpet is a deductible repair. Installing new fitted wardrobes where there were none before is a capital improvement, not deductible against rental income but added to the base cost for CGT on eventual disposal. The HMRC Property Income Manual PIM2025 onwards gives detailed examples.

Replacement of Domestic Items relief replaced the old Wear and Tear allowance from April 2016. It allows the cost of replacing furniture, white goods, kitchenware, and similar items provided to tenants as deductible expense. The first provision is not deductible (it is treated as part of setting up the rental); only the replacement is. The relief is in section 311A ITTOIA 2005.

Worked example: a landlord receives GBP 14,400 rent in the year, pays a 10% letting fee (GBP 1,440), spends GBP 800 on boiler servicing and minor repairs, GBP 250 on landlord insurance, GBP 300 on a replacement fridge (the original fridge having broken down), and GBP 400 on a new fitted wardrobe replacing a damaged built-in (deductible as repair of an existing fixture). Allowable expenses total GBP 3,190, rental profit GBP 11,210.

The mortgage interest restriction

Finance costs on residential let property are no longer a deductible expense from rental income for individual landlords. The restriction phased in from 2017/18 and completed in 2020/21. Instead, the landlord receives a 20% basic-rate tax reducer under section 274A ITTOIA 2005, calculated on the lower of finance costs, property profits, or total adjusted income above the Personal Allowance.

The change reduces the post-tax yield for higher and additional-rate landlords. A higher-rate taxpayer with mortgage interest costs that would previously have been deducted at 40% now only receives 20% relief, effectively doubling the tax cost of the interest portion of the mortgage.

Worked example: a higher-rate landlord receives GBP 18,000 rent, pays GBP 9,000 of mortgage interest, GBP 2,000 of other allowable expenses, and GBP 1,000 of agent fees. Taxable profit ignoring interest is GBP 15,000 (GBP 18,000 less GBP 3,000). Tax at 40% is GBP 6,000. The 20% finance cost reducer is GBP 1,800 (20% of GBP 9,000), leaving net tax of GBP 4,200. Under the old fully-deductible regime tax would have been 40% of GBP 6,000 (GBP 15,000 less GBP 9,000 interest) = GBP 2,400, so the post-2020 net position is GBP 1,800 worse.

Edge case: the restriction does not apply to companies holding rental property. Many higher-rate landlords have transferred portfolios into limited companies post-2017 to preserve full interest deductibility against corporation tax. Each transfer is a CGT and SDLT event with its own costs, so the structuring decision requires careful modelling.

Cash basis, reporting and MTD ITSA

The cash basis is the default for individual landlords with rental receipts up to GBP 150,000 since April 2017, expanded from earlier thresholds. Under cash basis, rent is taxed when received and expenses are deducted when paid, removing the need to apply accruals adjustments for prepaid rent or accrued expenses at year-end.

Self-Assessment reporting is on the UK Property pages (SA105) for UK property and the Foreign pages (SA106) for overseas property. The deadlines mirror the main Self-Assessment cycle: online 31 January following the tax year end, paper 31 October.

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) begins for sole traders and landlords with combined self-employment and property income above GBP 50,000 from 6 April 2026, and above GBP 30,000 from 6 April 2027. MTD requires quarterly digital updates to HMRC through compatible software, plus a final year-end declaration. The threshold is the gross rental and self-employment income figure, not the profit.

Practical action: a landlord above GBP 50,000 of combined income with self-employment will need MTD-compatible software in place by April 2026. Below GBP 30,000 the existing annual SA filing continues unchanged. Between GBP 30,000 and GBP 50,000 there is a year of breathing space before April 2027 to choose and implement compatible software.

Capital gains and disposal of rental property

Disposal of a residential let property by a UK resident triggers capital gains tax. After the GBP 3,000 AEA, gain is taxed at 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers (rates aligned from 30 October 2024). The 60-day CGT on UK property return must be filed within 60 days of completion under Schedule 2 Finance Act 2019, with the estimated tax paid by the same deadline.

Where the property was at any point the landlord's main home, Private Residence Relief applies to the period of occupation plus the final nine months. Letting Relief is now restricted to periods of shared occupation with a tenant under section 223B TCGA 1992. Landlords whose buy-to-let was previously a home are typically owed substantial PPR relief, calculated proportionately by months of occupation.

Worked example: a flat owned for 12 years was lived in for 4 years and let for 8 years. On a gain of GBP 80,000, PPR covers 4/12 + 9/12 of a month = 4.75/12 = 39.6% of the gain (GBP 31,667). Chargeable gain is GBP 48,333. After the AEA of GBP 3,000 the taxable gain is GBP 45,333. At 24% (a higher-rate disposer) the CGT bill is GBP 10,880, payable via the 60-day return.

Edge case: the Furnished Holiday Lets regime was abolished from 6 April 2025. FHL landlords lost the access to Business Asset Disposal Relief on sale, capital allowances on furnishings, and the higher pension contribution scope from FHL profits. Existing FHL landlords now operate under the standard property business rules with the consequent tax impact.

Frequently asked questions

How is rental income taxed?

As a UK property business under section 264 ITTOIA 2005. Profit is calculated as gross rents less allowable expenses, taxed at the landlord's marginal income tax rate. Mortgage interest on residential let property is no longer fully deductible; it receives a 20% basic-rate tax reducer under section 274A. The property allowance gives GBP 1,000 of tax-free property income, with the choice between actual expenses or the allowance where income is between GBP 1,000 and the expense level.

What expenses can a landlord deduct?

Anything wholly and exclusively for the property business: letting agent fees, accountancy fees, repairs (like-for-like, not improvements), insurance, ground rent, service charges, utilities included in rent, professional fees on letting, advertising for tenants. Replacement of Domestic Items relief covers furniture and white goods replacement (not the initial provision). Capital improvements are not income-deductible but add to base cost for CGT on disposal.

Do I have to report rental income under GBP 1,000?

No. The property allowance gives GBP 1,000 of tax-free property income; rental receipts at or below that level do not need to be reported. Above GBP 1,000, reporting is required, with the choice between actual expenses or the GBP 1,000 allowance deduction. The Rent a Room scheme separately allows up to GBP 7,500 tax-free for a furnished room in a main home, but cannot be combined with the property allowance for the same income source.

How does the mortgage interest restriction work?

Finance costs on residential let property are no longer deductible from rental profit since April 2020. Instead the landlord receives a 20% basic-rate tax reducer under section 274A ITTOIA 2005, calculated on the lower of finance costs, property profits, or total adjusted income above the Personal Allowance. The effect for higher and additional-rate landlords is to halve or more than halve the effective relief on interest, compared with the pre-2017 full-deduction regime.

When does Making Tax Digital apply to landlords?

From 6 April 2026 for sole traders and landlords with combined self-employment and gross property income above GBP 50,000. From 6 April 2027 for those above GBP 30,000. Below GBP 30,000 the existing annual Self-Assessment continues. MTD requires quarterly digital updates through compatible software plus a final year-end declaration. The threshold uses gross income, not profit. Affected landlords should select software well before the April start date to allow setup and testing.