UK Property Tax Guide (Buy-to-Let, Second Home, 2026/27)

Rental Income Tax

Rental profit — rental income minus allowable expenses — is taxed at your marginal Income Tax rate (20%, 40%, or 45%). Allowable expenses include letting agent fees, ground rent, service charges, buildings and contents insurance, council tax (if you pay it), utilities (if included in rent), repairs and maintenance (but not improvements), legal fees for new tenancies, and accounting fees. Mortgage interest is no longer a deductible expense — instead, you receive a basic rate tax credit of 20% of the interest.

If your rental income is under £1,000 per year, you can use the property allowance — your rental income is tax-free. Above £1,000, you must report the income and either deduct actual allowable expenses or use the £1,000 allowance (whichever gives the better result). You cannot use the allowance if you claim expenses or use the rent-a-room scheme. Losses from property can be carried forward to offset future rental profits, but losses cannot be offset against your employment income.

Section 24 Mortgage Interest Restriction

Since April 2020, mortgage interest relief for residential landlords has been restricted to a basic rate tax credit (20% of the interest). This means higher-rate (40%) and additional-rate (45%) landlords cannot deduct interest from their rental income before calculating tax — instead, they get a 20% credit, which is often much less than the 40% or 45% relief they would have received under the old system.

Example: rental profit £20,000, mortgage interest £10,000. Under the old system: profits reduced to £10,000, higher-rate tax £4,000. Under Section 24: tax on £20,000 at 40% = £8,000, minus 20% credit on £10,000 interest = £2,000, net tax = £6,000. The landlord pays £2,000 more tax. This has made buy-to-let less profitable for higher-rate taxpayers. Many have incorporated into limited companies (where interest remains fully deductible) or shifted to repaying mortgages rather than interest-only.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) rates for residential property in 2026/27: 0% up to £250,000; 5% on £250,001 to £925,000; 10% on £925,001 to £1.5 million; 12% above £1.5 million. For additional properties (buy-to-let, second homes), an extra 3% surcharge applies on each band. First-time buyers get relief: 0% up to £425,000 (on properties up to £625,000), then 5% on the portion from £425,001 to £625,000.

Non-UK residents pay an additional 2% surcharge on top of any other SDLT due. Companies buying residential property over £500,000 pay 15% SDLT unless they are property traders or developers. The higher rates for corporate and non-resident buyers reflect government policy to reduce foreign and corporate ownership of UK residential property. SDLT must be paid within 14 days of completion (30 days for transactions before March 2025).

Capital Gains Tax on Property

When you sell a second home or buy-to-let property, Capital Gains Tax applies at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers (2026/27 rates). The annual exempt amount is £3,000. You must report and pay CGT on property within 60 days of completion using the "UK Property Account" on the HMRC website. The gain is calculated as sale proceeds minus purchase price minus allowable costs (legal fees, stamp duty, estate agent fees, improvement costs).

Principal Private Residence (PPR) relief means your main home is exempt from CGT. If you have lived in a property at some point but later rented it out, you get PPR relief for the period you lived there plus the final 9 months of ownership (the "final period exemption"). Lettings relief can reduce CGT further if the property was your main home at some point — up to £40,000 per owner. If you have lived in the property throughout, there is no CGT to pay at all.

Allowable vs Capital Expenses

The distinction between repairs (deductible) and improvements (capital, not deductible) is critical. Repairs restore the property to its original condition — fixing a leaking roof, replacing a broken window, repainting. Improvements enhance the property beyond its original state — adding an extension, installing a new kitchen where none existed, fitting central heating for the first time. Improvements are added to the cost base for CGT purposes and are deducted when you sell.

The "replacement of domestic items relief" allows you to deduct the cost of replacing furniture, white goods, and furnishings in a furnished rental property. You cannot deduct the initial cost of furnishing a property (that is a capital expense), but when you replace an old sofa with a similar new one, the cost is deductible. If you replace a single bed with a double, HMRC may argue it is an improvement — keep similar quality and specification to be safe.

Leasehold vs Freehold and Tax Implications

The tenure of your property — leasehold or freehold — has significant tax and practical implications. Freehold means you own the property and the land it stands on outright. Leasehold means you own the property for a fixed term (typically 99-999 years for flats, sometimes houses) and pay ground rent and service charges to the freeholder. For leasehold properties, the "lease premium" (the cost of acquiring the lease) is not deductible for Income Tax purposes — it is capital. However, if you are a tenant and pay the freeholder's costs, you may be able to deduct service charges and ground rent as allowable expenses against rental income.

For CGT purposes, the length of the lease affects the cost base — leases with fewer than 50 years remaining are treated as "wasting assets," meaning the cost base depreciates on a straight-line basis over the remaining term. This can significantly reduce the CGT charge when you sell a short-lease property. For lease extensions or enfranchisement (buying the freehold), the costs are treated as capital expenditure added to the cost base for CGT — not deductible against income. The tax treatment of leasehold property is complex, especially for investors with portfolios of leasehold flats. Understanding your lease terms and the potential tax implications of lease expiry, extension, or enfranchisement is essential before buying a leasehold investment property.

Furnished Holiday Lettings

Furnished Holiday Lettings (FHL) are treated as a business for tax purposes, giving significant advantages over standard residential letting. To qualify, the property must be in the UK or EEA, furnished, available for letting for at least 210 days per year, actually let for at least 105 days, and not let for long-term occupation (more than 31 continuous days to the same person) for more than 155 days. FHL status gives: mortgage interest deductible in full (no Section 24 restriction), capital allowances on furniture and equipment (rather than the replacement of domestic items relief), CGT rollover relief and Business Asset Disposal Relief on sale, and the ability to make pension contributions based on FHL income.

The government has announced plans to abolish the FHL tax regime from April 2025 (though this has been delayed — check current status for 2026/27). If you operate an FHL, monitor the legislation closely — the special tax treatment may be withdrawn, which would make FHL properties less attractive compared to standard buy-to-let. Professional advice is essential if you are considering entering the FHL market.

Corporate Structure for Buy-to-Let

Many higher-rate taxpayers have incorporated their buy-to-let portfolios into limited companies to avoid the Section 24 mortgage interest restriction. In a company structure, mortgage interest is fully deductible as a trading expense, saving 40-45% tax compared to the 20% basic rate credit available to individual landlords. However, there are downsides: incorporating a portfolio may trigger Stamp Duty Land Tax on the transfer (though relief may be available), CGT on the deemed disposal, and ongoing administrative costs for the company (annual accounts, Corporation Tax returns, HMRC filings).

Once the property is in a company, extracting profits comes with its own tax cost. You can take a salary (deductible for Corporation Tax but subject to Income Tax and NI) or dividends (not deductible for Corporation Tax but lower personal tax rates). The combined Corporation Tax (25% on profits over £250,000) plus dividend tax (8.75%/33.75%/39.35%) means the total tax take can be higher than individual ownership unless you retain profits within the company (paying only Corporation Tax). For most individual landlords with 1-3 properties, incorporating is unlikely to be worthwhile after accounting for costs and complexity. For larger portfolios (5+ properties or when you want to retain and reinvest profits), a company structure is more attractive. Professional tax advice is essential before incorporating property into a company — the process is complex and irreversible in most practical respects.

Property Reporting and Compliance

Landlords must report rental income and expenses annually through Self-Assessment. You can deduct allowable expenses (letting agent fees, repairs, insurance, ground rent, service charges, council tax, utilities) and the replacement of domestic items relief (for furniture, white goods, and furnishings). Keep detailed records of all income and expenditure — HMRC can request to see them for up to 6 years after the tax year. If you are registered for Making Tax Digital (property income over £50,000 from 2026), you must use MTD-compatible software and submit quarterly updates to HMRC.

For Capital Gains Tax on property disposals, the reporting deadline is 60 days from completion, using the UK Property Account on the HMRC website. You must report the gain even if you have not yet paid the tax — you can arrange to pay later in instalments in some cases. The 60-day rule applies to residential property only; commercial property disposals are reported through the annual Self-Assessment return with the usual 31 January deadline. Failure to report a property disposal on time results in penalties and interest charges. If you have made losses on other assets in the same tax year, you can offset them against the property gain to reduce the CGT bill — but you must report the losses to HMRC. Professional conveyancing solicitors often handle the SDLT filing, but the CGT reporting is your responsibility as the seller.

FAQs

Can I deduct mortgage interest from rental income?

Not directly for residential property. Since Section 24, you receive a basic rate (20%) tax credit on mortgage interest instead. Higher-rate taxpayers pay significantly more tax than before.

What is the SDLT surcharge for second homes?

An additional 3% on each SDLT band applies to buy-to-let properties and second homes. First-time buyers are exempt from the surcharge.

How long do I have to report CGT on property?

You must report and pay CGT within 60 days of completing the sale of a residential property. Use the UK Property Account on the HMRC website.

What is the CGT rate on property in 2026/27?

18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers. The annual exempt amount is £3,000.

Are improvements tax deductible?

No — improvements are capital expenses and are not deductible against rental income. They are added to the cost base and deducted when you sell the property.