Landlord Tax Guide: Rental Income, Expenses & Capital Gains

How rental income is taxed

If you let property as an individual, your rental profit — rents received less allowable expenses — is taxed as income through self assessment, on top of your salary or business profits. All your UK lets are pooled as a single property business, so a loss on one property offsets profit on another.

You normally need to file a return once rental income is more than a small annual amount, even if the properties make little or no profit. Many accidental landlords — people letting a former home — only discover this when HMRC writes to them, by which point penalties may already be running. Coming forward first is always cheaper.

Mortgage interest and the Section 24 rules

Since the Section 24 changes were fully phased in, individual landlords can no longer deduct mortgage interest and other finance costs from rental income. Instead, you receive a tax credit worth 20% of those finance costs — basic-rate relief only.

For basic-rate taxpayers the outcome is often similar to the old rules. For higher-rate taxpayers it is a genuine cost increase — and because rental income is now taxed on the pre-interest figure, the rules can push landlords into a higher band even when their cash profit is modest. This is a key reason some landlords with larger portfolios consider holding property through a limited company, where interest remains deductible — though incorporation has significant costs and downsides of its own and needs proper advice.

Allowable expenses: repairs versus improvements

Day-to-day running costs of the letting are deductible from rental income.

• Letting agent fees and management charges
• Repairs and maintenance — fixing, redecorating and replacing like for like
• Landlord insurance, gas safety checks, EPCs and other compliance costs
• Ground rent, service charges and council tax or utilities you pay between tenancies
• Accountancy fees for the rental business and replacement of domestic items in furnished lets

The critical distinction is repairs versus improvements. Repairing a broken boiler or replacing rotten windows like for like is deductible against rental income now. Improving the property — an extension, a loft conversion, upgrading beyond the original standard — is capital expenditure: no relief against rent, but it is added to your base cost and reduces the capital gain when you eventually sell. Keep invoices that make clear which side of the line each job falls on.

Selling up: capital gains tax and the 60-day rule

When you sell a rental property, capital gains tax applies to the gain after deducting purchase and sale costs, improvement expenditure and the annual CGT exemption of £3,000. Residential gains are taxed at the higher CGT rates that apply to property.

The deadline catches people out: a UK residential property sale with tax due must be reported to HMRC and the CGT paid within 60 days of completion — not in your next tax return. Missing the window brings automatic penalties and interest, so the calculation needs to be prepared before you complete, not after.

Making Tax Digital is coming for landlords

From April 2026, landlords with combined gross rental and self-employment income over £50,000 must keep digital records and send HMRC quarterly updates under Making Tax Digital for Income Tax, with a £30,000 threshold following from April 2027. Note that the test is gross rents, not profit — a landlord with a handful of properties can be in scope while making little actual profit.

Bayar Hughes & Co has looked after landlords across south-east London since 1991. From our New Eltham office in SE9 we handle rental accounts, self assessment, 60-day CGT returns and MTD setup — and we will tell you honestly whether a company structure makes sense for your portfolio. Call +44 7441 347796 for a landlord tax review.