What Tax Do You Pay When Letting a Property?
Letting out a property can provide a useful source of income, whether as a long-term investment or alongside other earnings. However, it also brings several tax responsibilities that need to be understood and managed correctly.
The way property income is taxed in the UK depends on your individual circumstances, but there are some common rules that apply to most landlords.
In this article, we explain the main taxes involved and what they mean in practice. Keep reading to understand how these rules may apply to you.
Income Tax on Rental Income
In most cases, rental income is subject to Income Tax. This is based on the profit you make, rather than the total rent received. To calculate your taxable profit, you take your rental income and deduct allowable expenses.
These may include:
- Letting agent fees
- Repairs and maintenance (but not improvements)
- Insurance policies relating to the property
- Utility bills or Council Tax paid by the landlord
- Certain professional fees
The remaining profit is added to your other income and taxed at your usual Income Tax rate.
Finance Costs and Mortgage Interest
Mortgage interest has changed in recent years. Landlords can no longer deduct finance costs when calculating rental profit. Instead, tax relief is given as a basic rate tax credit at 20%.
This means that the way your taxable profit is calculated may be different from your actual cash position, and higher-rate taxpayers may see a higher tax liability than under previous rules
This is an area where it is often worth reviewing your figures carefully, particularly if you have significant borrowing.
Capital Gains Tax on Sale
If you sell a rental property, you may need to pay Capital Gains Tax (CGT) on any increase in value.
The gain is calculated by comparing the sale proceeds with the original purchase cost, taking into account certain allowable costs such as:
- Stamp Duty Land Tax on purchase
- Legal and estate agent fees
- Capital improvements to the property
Each individual has an annual CGT allowance of £3,000. Gains above this level are taxed at 18% or 24%, depending on your Income Tax band and the level of your total taxable income.
For example, if your total taxable income falls within the basic rate band, which currently applies to income up to £50,270, any remaining basic rate band can be used to tax part of your capital gain at 18%. Any portion of the gain above this threshold would be taxed at 24%.
This means that if your income is already within the higher rate band, your capital gains on residential property are likely to be taxed at 24%, as your basic rate band will already be used. For UK residential property, any CGT due is usually reported and paid within 60 days of completion.
Stamp Duty Land Tax
If you purchase a property that is not your main residence, higher rates of Stamp Duty Land Tax will generally apply.
This typically includes a 5% surcharge on top of the standard rates. The exact amount payable will depend on the value of the property and your wider circumstances, including how many properties you already own.
National Insurance
Rental income is generally treated as investment income rather than trading income. As a result, most landlords do not pay National Insurance Contributions on their rental profits.
In limited circumstances, where a landlord’s activities are more substantial and involve providing additional services, HMRC may consider the income to be trading in nature. This is uncommon and will depend on the specific facts of the situation.
Allowable Expenses and Improvements
A key area of property taxation is the distinction between repairs and improvements.
- Repairs and maintenance are generally allowable as expenses
- Improvements are treated as capital expenditure and are not deducted from rental income
Instead, capital expenditure may be taken into account when calculating any gain on disposal. The distinction is not always straightforward and may require careful judgment.
The Property Allowance
If your rental income is relatively low, you may be able to use the £1,000 property allowance.
This allows you to receive up to £1,000 of property income without paying tax. If your income exceeds this amount, you can choose between using the allowance or claiming actual expenses.
Record Keeping and Reporting
Landlords are responsible for keeping accurate records and reporting their income to HMRC. This usually involves completing a Self Assessment tax return each year.
Making Tax Digital for Income Tax is due to be introduced from April 2026 for landlords with income over £50,000, with further expansion to those earning over £30,000 from April 2027. This will require digital record-keeping and more regular reporting.
Helping You Manage Your Property Tax
Although the rules for taxing rental income are relatively straightforward, applying them in practice can be more complex. The details will depend on your individual circumstances, including your level of income, how your property is financed, and your longer-term plans.
At Hartley Fowler, we support landlords and property owners in managing their tax affairs clearly and effectively. This includes:
- Preparing and submitting Self Assessment tax returns
- Calculating rental income and allowable expenses
- Ensuring your reporting meets HMRC requirements
- Advising on Capital Gains Tax when a property is sold
- Reviewing your wider tax position where appropriate
We can also assist with HMRC correspondence where required, helping ensure your affairs are dealt with efficiently and in line with current legislation.
Contact Our Team Today
Letting a property can be a practical way to generate income, but it is important to understand the associated tax obligations. We provide clear, practical advice to ensure you remain compliant and can plan with confidence.
If you are unsure how the rules apply to your situation or would like support managing your property income, contact our expert team today.