Owning rental property used to feel fairly simple at tax time. You added up the rent, took off the mortgage interest and a few costs and paid tax on what was left. That world is gone. Over the last few years the rules have been rewritten in ways that quietly eat into landlord profit, and a lot of people only notice when the tax bill lands and it is bigger than they expected.
The frustrating part is that much of the extra tax landlords pay is avoidable. Not through anything clever or risky, but through ordinary planning that gets missed when property is treated as a side income you only think about once a year. This piece walks through where the money usually leaks, and where a good accountant earns their fee several times over.
Why a landlord’s tax bill grew even when the rent did not
The single biggest change was the restriction on mortgage interest relief, often called Section 24. It used to be that you deducted finance costs from your rental income before working out the tax. Now you cannot. Instead you get a basic-rate tax credit worth 20% of those finance costs.
For a basic-rate taxpayer the difference is small. For anyone paying higher-rate tax it can be brutal, because the full rental income now counts towards your total, and that can push you into the 40% band even though your actual cash profit has not moved.
Here is a quick example. Say you receive £20,000 in rent and pay £10,000 in mortgage interest. Under the old rules you were taxed on £10,000. Now you are taxed on the full £20,000, then handed a £2,000 credit (20% of the interest) at the end. If you are a higher-rate taxpayer, you have just gone from a manageable bill to one that can wipe out most of your margin. This single rule is why some landlords who feel like they are doing fine on paper end up with almost nothing after tax.
Claim every expense you are entitled to, and nothing you are not
Most landlords know they can deduct costs. Where they lose money is in the detail, either by missing legitimate claims or by claiming something that gets disallowed in an enquiry.
Costs you can usually deduct against rental income include:
- Letting agent and property management fees
- Landlord insurance and the cost of safety certificates
- Ground rent and service charges on leasehold flats
- Accountancy fees for preparing your property accounts
- Repairs and ongoing maintenance, such as fixing a boiler or repainting
- The 20% finance cost credit on mortgage interest and certain loan fees
- Replacing furnishings and appliances under replacement of domestic items relief
That last one trips people up. You can claim the cost of replacing a worn-out sofa, fridge or carpet, but only a like-for-like replacement. If you swap a basic cooker for a top-of-the-range one, only the equivalent basic cost counts.
The bigger trap is the line between a repair and an improvement. Repairs are deductible now. Improvements are capital, which means you cannot claim them against rental income at all, though they may reduce your Capital Gains Tax when you sell. Mending a section of fence is a repair. Knocking through to add a bedroom is an improvement. Get this wrong and you either overpay year after year, or you claim something that comes back to bite you later.
The ownership question that quietly decides your tax rate
How you hold a property affects almost everything that follows, and it is worth getting right before you buy rather than after.
Personal name or limited company
Since Section 24 landed, holding property through a limited company has become more popular. A company is not affected by the interest restriction in the same way, so it can deduct mortgage interest in full, and company profits are taxed at corporation tax rates rather than your personal rate. For a higher-rate taxpayer building a portfolio, that can be a real saving.
It is not a free win, though. Moving an existing property into a company counts as a sale, which can trigger Capital Gains Tax and a Stamp Duty charge, including the extra rate on additional property. Mortgages for limited companies often carry higher rates. And taking the money back out as dividends gets taxed again. Whether incorporation helps depends on your income, how long you plan to hold, and whether you are reinvesting profits or living off them. This is exactly the kind of decision worth modelling properly before committing.
Splitting income with a spouse
If you own property jointly with a husband, wife or civil partner, the income is split 50/50 by default for tax. But if one of you pays tax at a lower rate, you can often elect to split the income to match your actual ownership shares using a Form 17 election, backed by a declaration of trust. Done correctly, this can move income from the 40% band into the 20% band within the same household. It only works if the paperwork is right, which is where people come unstuck doing it themselves.
What happens to your tax when you sell
Selling a rental property brings Capital Gains Tax into play, and the rules here have tightened too. The tax-free allowance has fallen to £3,000 a year, so far less of your gain escapes tax than it once did. Residential property gains are taxed at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
There is also a deadline that catches people out. When you sell a UK residential property at a gain, you have to report it and pay the tax within 60 days of completion. Miss it and penalties start adding up. If you ever lived in the property yourself, you may qualify for some Private Residence Relief, which can reduce the gain. Planning the timing of a sale, and gathering your improvement costs and buying expenses in advance, can make a meaningful difference to the final bill.
Making Tax Digital is no longer a future problem
For years Making Tax Digital for landlords was something on the horizon. It has now started. From April 2026, landlords and sole traders with qualifying income above £50,000 have to keep digital records and send quarterly updates to HMRC, rather than filing once a year. Lower income thresholds are due to follow in the years after.
If your record keeping is a shoebox of receipts and a spreadsheet you update each January, that approach no longer works once you are in the system. The landlords who will find this painful are the ones who wait. The ones who get their bookkeeping onto compatible software early will barely notice the change. An accountant can set this up so the quarterly submissions happen quietly in the background instead of becoming four new deadlines to dread.
Where good accounting actually pays for itself
Filing a return is the visible part of the job, but it is rarely where the value sits. The savings come from the conversations before the year end, not the form filled in afterwards.
A few examples of what that looks like in practice. Timing a property sale to fall in a tax year when your other income is lower. Deciding whether a new purchase should sit in your name or a company before you exchange. Making sure a couple’s ownership split matches their tax positions. Bringing forward or holding back deductible work so it lands in the most useful year. None of these are loopholes. They are ordinary decisions that simply produce a smaller bill when someone is paying attention to them in advance.
There is a reason landlords who use a specialist accountant tend to feel calmer about tax. It is not that they found a trick. It is that nothing surprises them in January.
Conclusion
Property is still a sound long-term investment, but it is no longer a passive one when it comes to tax. The relief restrictions, the lower Capital Gains allowance, the 60-day reporting window and the move to digital reporting have all shifted the burden onto landlords to be organised and deliberate. The cost of drifting is real, and it usually shows up as tax you did not need to pay.
The good news is that the landlords who plan ahead, keep clean records and get advice before making big decisions are in a strong position. As thresholds for digital reporting keep dropping over the next couple of years, that gap between the organised and the disorganised will only widen. Getting the structure and the systems right now is the cheapest it will ever be.
If you would like that handled properly, the team at Interface Accountants works with landlords day in, day out and can review where your portfolio sits today:
Frequently asked questions
Can I still deduct my buy-to-let mortgage interest?
Not as a straight expense. You now receive a tax credit worth 20% of your finance costs instead. Higher-rate taxpayers feel this most, because the full rental income is taxed before the credit is applied.
Is it worth putting my rental property into a limited company?
Sometimes, especially if you pay higher-rate tax and plan to reinvest profits. But moving an existing property in can trigger Capital Gains Tax and Stamp Duty, and company mortgages cost more. It is a calculation worth running before you decide, not a default answer.
When do I have to pay Capital Gains Tax after selling a rental?
You must report the sale and pay the tax within 60 days of completion for UK residential property. The annual tax-free allowance is now £3,000, with gains taxed at 18% or 24% depending on your income.
What is Making Tax Digital and does it affect me?
It is HMRC’s move to digital, quarterly reporting. From April 2026 it applies to landlords with qualifying income over £50,000, with lower thresholds following. If it applies to you, you need digital records and compatible software rather than one annual return.
What expenses do landlords most often forget to claim?
Accountancy fees, safety certificates, service charges and ground rent on leasehold flats, and like-for-like replacement of furnishings. Many also confuse repairs with improvements and end up either overpaying or claiming the wrong thing.