UK rental income tax is charged on profits from letting UK land or buildings, which HMRC treats as a UK property business. In practice, that means you are taxed on rent and related payments for using property you hold to let, not to sell. From 6 April 2024, unincorporated landlords use the cash basis by default, so you tax receipts when you receive them and costs when you pay them, unless you elect to use the accruals basis.
This guide explains who pays and when, how to compute profits, the big differences between residential and commercial, and where landlords most often overpay or underpay. Use it to avoid common pitfalls and to make faster structure decisions with simple, worked rules of thumb.
What counts as a UK property business?
The UK property business covers most letting situations: standard residential tenancies, HMOs, ground rents, short lease premiums, and service charges that are tied to tenancies. If you take a lodger in your home, you may elect into Rent-a-Room. Property development or trading in land sits outside this regime and is taxed as a trade, not as property income. Residential rent is exempt from VAT. Commercial rent is also exempt by default, but you can opt to charge VAT on a property-by-property basis.
Ownership mechanics can affect tax, management, and exit. Before you let a flat or house, understand freehold vs leasehold consequences for service charges, ground rent, and repair obligations, since those costs feed directly into your deductible expenses.
Who pays, where, and when?
UK residents are taxed on UK property profits each tax year. Non-residents are taxed on UK property income whether or not they bring the money into the UK. Individuals pay income tax under ITTOIA. UK and non-resident companies are charged corporation tax on UK property income, with non-resident companies moving into corporation tax from 6 April 2020.
Working out profits as an individual
From 2024-25, the cash basis applies by default to unincorporated property businesses. Under the cash basis, you recognize rent when received and expenses when paid, with limited adjustments. From 6 April 2024, HMRC removed both the old turnover threshold and the 500 pounds cap on interest within the cash basis. You can elect annually into the accruals basis if it gives a better timing result.
What expenses you can claim
Allowable revenue costs include repairs, insurance, letting agent fees, accountancy fees, landlord-borne utilities and council tax, ground rent, service charges, statutory safety checks, and the replacement of domestic items in furnished lettings. Improvements are capital and not deductible from income. Replacement of domestic items relief covers replacing furniture, appliances, and kitchenware, net of any sale proceeds for the old item. Initial furnishing does not qualify.
Interest and the 20 percent reducer
For individuals, finance costs on residential property no longer reduce rental profit. Instead, you receive a basic-rate tax reduction equal to 20 percent of eligible finance costs, capped by your property income tax liability. This rule does not apply to commercial property or to companies, where interest remains deductible in the normal way.
Here is a practical rule of thumb. If you are a higher-rate taxpayer and annual interest exceeds roughly a quarter of gross rent, the effective tax rate on your economic profit can escalate fast. Model the numbers before the next refinancing or consider an UK buy-to-let SPV to keep interest deductible, then weigh company running costs and extraction taxes.
Loss relief and pre-letting costs
Losses in your UK property business carry forward against future profits from the same UK property business. They do not offset other income, except under limited furnished holiday lettings rules until any changes take effect. Pre-letting revenue expenses within seven years before first letting are allowable if they would have been deductible once the property business started.
Small allowances that simplify filings
- Property allowance: Each tax year, you can either treat the first 1,000 pounds of gross property income as covered with no expense deductions, or deduct a flat 1,000 pounds from gross receipts. You cannot use the allowance for receipts from a closely connected company or partnership.
- Rent-a-Room: If you let furnished accommodation in your only or main home, gross receipts up to 7,500 pounds per year can be tax-free by election. If you exceed the threshold, either pay tax on the excess with no expense deduction or disapply the scheme and compute profits normally.
- Domestic items relief: Claim only on replacements, not initial purchases, and keep invoices and disposal records.
Residential vs commercial: tax and VAT differences
Residential letting triggers the individual finance cost restriction and is exempt from VAT, which blocks VAT recovery on related costs. Commercial letting allows full deduction of finance costs for individuals. VAT is exempt by default, but you can opt to tax a building so you charge VAT on rent and recover VAT on related costs. The option to tax brings cash benefits but can create tenant friction if the tenant cannot recover VAT. Plant and machinery allowances are generally available on commercial fittings and integral features. Dwellings do not typically qualify for plant and machinery allowances inside the unit, though communal areas in multi-occupancy buildings may. The Structures and Buildings Allowance at 3 percent a year can apply to eligible non-residential construction and certain communal parts.
If you hold retail or office assets, check whether your tenant will recover VAT before you opt. If they cannot, the rent gross-up may offset any input VAT recovery. For further commercial context, see this overview on investing in commercial real estate.
Furnished holiday lettings: changes from 2025
Furnished holiday lettings historically benefited from full interest deductibility, capital allowances on furniture and fixtures, and access to certain trading reliefs. The government announced its intention to abolish the FHL regime from April 2025, aligning tax with standard property businesses. Track the enactment and transitional rules before relying on legacy FHL advantages.
Co-ownership and family structures: getting splits right
Spouses and civil partners who live together are taxed 50:50 on income from jointly held assets unless you file Form 17 and can evidence actual beneficial shares. Transfers between spouses are no-gain no-loss for capital gains tax. Assigning income without transferring genuine ownership risks recharacterization under the settlements rules. Bare trusts and declarations of trust can align legal and beneficial ownership where appropriate, and detailed declarations of trust help evidence the split. If co-owners run a partnership with a view to profit, the partnership computes profits and allocates them by the profit-sharing ratio; otherwise, each person reports their share.
Non-resident landlords: withholding and gross status
Letting agents must withhold basic-rate tax from rents for non-resident landlords unless HMRC authorizes gross payment. Tenants must withhold if they pay over 100 pounds a week and there is no agent. Apply for gross status on NRL1 for individuals, NRL2 for companies, or NRL3 for trustees. Gross status stops withholding but does not remove your filing and payment obligations. Non-resident companies pay corporation tax on UK property income and claim deductions under corporation tax rules. Double tax relief may apply in your residence country under a treaty.
Companies and SPVs: when the math may work
Companies compute property business profits under corporation tax. The main rate is 25 percent for profits over 250,000 pounds and the small profits rate is 19 percent up to 50,000 pounds, with marginal relief in between. Finance costs are generally deductible, subject to transfer pricing, the Corporate Interest Restriction, and hybrids rules. The Corporate Interest Restriction can limit deductions if the group’s UK net interest exceeds 2 million pounds per year.
Companies can use group relief and carried-forward loss rules. They prepare accounts under UK GAAP or IFRS on an accrual basis. Close companies transacting with participators should check transfer pricing and benefits-in-kind where shareholders use property. For residential property over 500,000 pounds held in a company, ATED can apply, though lettings to third parties on a commercial basis can qualify for relief if you claim annually.
Structure choice is not just about tax. Lenders, conveyancers, and buyers expect coherent paperwork. Before you set up an SPV, review typical lender asks and filings in this guide to SPV vs personal name, then file accurately per this step-by-step for a property SPV at Companies House.
VAT on property income: opting to tax without surprises
Residential rents are VAT-exempt. Commercial rents are exempt unless you opt to tax, which you notify to HMRC. An option is property-specific and subject to anti-avoidance rules around connected or partially exempt tenants. Once opted, VAT applies to rent and most amounts that are consideration for the supply. The Capital Goods Scheme adjusts input recovery over time for high-value spends, which affects cash flow planning.
Lease premiums and other receipts: what is taxable?
Premiums for the grant of a short lease of 50 years or less are partly income, and HMRC provides a formula for calculating the income element by lease term. Service charges collected purely as agent for tenants are not income for tax. Forfeited deposits become income when retained. Insurance recharges and dilapidations can be taxable if they form part of the consideration. Check the VAT character of each item carefully.
Rates and a worked example: 2024-25 snapshot
For 2024-25, the Personal Allowance is 12,570 pounds. The higher rate is 40 percent and the additional rate is 45 percent in England and Northern Ireland. Corporation tax from 1 April 2023 is at a 25 percent main rate, 19 percent small profits rate, and marginal relief up to 250,000 pounds.
Example: A higher-rate individual landlord receives 18,000 pounds rent in 2024-25, pays 3,000 pounds allowable expenses, and 7,000 pounds mortgage interest. Taxable rental profit is 15,000 pounds. Income tax at 40 percent is 6,000 pounds. The finance cost reducer is 20 percent of 7,000 pounds, or 1,400 pounds. Net tax is 4,600 pounds. On an 8,000 pounds economic profit, the cash tax take is 57.5 percent. A company with the same numbers deducts the 7,000 pounds of interest. At 25 percent corporation tax, tax is 2,250 pounds on 9,000 pounds profit. Dividends then face shareholder-level tax, so extraction planning determines the end result.
Compliance timelines you cannot miss
Individuals with untaxed property income over 1,000 pounds must register for Self Assessment. File online by 31 January after the tax year. Pay the balancing payment and the first payment on account by 31 January, and the second payment on account by 31 July. Making Tax Digital for Income Tax starts from April 2026 for those with total qualifying income over 50,000 pounds, and from April 2027 for 30,000 to 50,000 pounds. You will send quarterly updates and an End of Period Statement using compatible software.
Companies must register for corporation tax within three months of starting to let. File the CT600 within 12 months of the period end. Pay corporation tax nine months and one day after the period end, or by quarterly instalments for large companies. File statutory accounts with Companies House. ATED returns and relief claims are annual. For context on sale-lease alternatives that can influence tax timing and cash flow, see this primer on sale-leaseback transactions.
Data visibility: HMRC third party data
From 1 January 2024, platform operators report seller income under the OECD Model Rules known as DAC7. Short-stay platforms will report receipts, fees, and seller details. Letting agents already issue annual statements. Lenders report mortgage interest. HMRC cross-checks these streams, so assume your numbers are visible and reconcile to third party data.
Records to keep: audit-proof your file
- Tenancy paperwork: Agreements and renewals to evidence entitlement and VAT character.
- Agent and rent records: Statements and invoices to support gross-to-net reconciliations and any NRL withholding.
- Finance documents: Mortgage statements and interest certificates to evidence amounts and dates paid.
- Repair vs improvement: Invoices for repairs and replacements to separate capital from revenue and to track domestic item replacements.
- Service charge schedules: Budgets and accounts to isolate pass-through items.
- Ownership evidence: Title documents, declarations of trust, and any Form 17 to support income allocations. If you are new to reading titles, use this guide on HM Land Registry title and plan.
- VAT and ATED: Option-to-tax notifications, VAT returns, and ATED returns where relevant.
Accounting notes: cash vs accruals in practice
Individuals may use the cash basis for tax, but lenders and investors often expect accrual-based internal reports. Track timing differences if you plan to incorporate. Companies using UK GAAP or IFRS recognize rental income on an accrual basis. Disclose related party use and consider impairment or onerous lease issues where you headlease and sublet.
Structure choices: quick pros and cons
- Personal ownership: Simple and cheap, but the finance cost restriction can bite for leveraged higher-rate taxpayers.
- SPV company: Deductible interest, group relief options, and tax deferral on retained profits. Adds running costs, filings, and possible ATED exposure for residential assets without relief.
- Partnership or LLP: Flow-through taxation and flexible profit shares, with more admin complexity as partners change.
- Pension wrapper: SIPPs and SSASs can hold commercial property, with income and gains tax-exempt. Borrowing is limited and residential is generally off-limits due to tax charges.
- REIT structure: Efficient for scale with company-level exemption on qualifying rental profits and gains if you meet distribution and other rules.
Mixed portfolios and partial exemption: practical tips
If you hold both residential and commercial assets and opt to tax some assets, manage partial exemption to protect input recovery. Consider a special method if standard methods misallocate. Monitor the Capital Goods Scheme for large refurbishments. Avoid opting on a building where tenants cannot recover VAT unless input recovery clearly outweighs rent gross-up friction. Where leaseholders want to control costs, explore a Right to Manage company, since better control of service charges and dilapidations can reduce disputes and protect allowable deductions.
Risk hotspots HMRC checks often
- Capital vs revenue: Betterment is capital; repairs restore original condition. Misclassifying upgrades is a common adjustment.
- Finance cost restriction: Interest paid to connected parties still falls under the 20 percent reducer for individuals on residential property.
- Settlements risk: Assigning rent to a spouse without transferring beneficial ownership is likely taxed back on the transferor.
- Mixed-use apportionments: Split expenses and interest between residential and commercial elements on a defensible basis.
- Short lease premiums: Part of a premium for a lease of 50 years or less is income; omitting it understates taxable income.
- FHL transition: Confirm enacted rules for 2025-26 onward before claiming legacy reliefs.
- NRL withholding: If there is no agent and rent exceeds 100 pounds a week, tenants must withhold unless you have gross status.
- CIR and hybrids: Groups near the 2 million pounds de minimis can trip limits after refinancing.
- Title problems: Unfixed title defects can impact letting permissions and insurance, which in turn affects deductibility and VAT.
Quick screens: 30 second triage
- High-rate and leveraged: If your effective tax rate on economic profit exceeds 50 percent, model an SPV or deleveraging.
- Opt to tax decision: If you want input recovery on a refurb, verify tenant VAT recovery first.
- Small receipts: If rents are below 1,000 pounds or you have a lodger, property allowance or Rent-a-Room may fully shelter income.
- Non-resident: If you have an agent, secure NRL gross approval before first rent receipt to avoid cash drag from withholding.
Cash management and controls: stay liquid
Open a dedicated bank account for your property business. For cash-basis individuals, it simplifies timing and evidence. Set aside tax monthly and model payments on account to avoid January shocks. In companies, minute board approvals for related party transactions, document shareholder loans, and maintain a fixed asset register plus a schedule for domestic item replacements.
Conclusion
Successful landlord tax is mostly process. Choose the right basis each year, separate residential from commercial rules, document ownership and VAT positions, and model finance costs before you refinance or incorporate. With clean records and a simple structure decision framework, you minimize friction and keep more of the rent you work to earn.