Buy to Let Property Tax 2026/27

Tax on Rental Profits

Rental profits from buy-to-let property are taxed as savings and investment income at your marginal income tax rate. For the 2026/27 tax year, the rates are 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers. Your taxable rental profit is calculated as: total rents received minus allowable expenses (repairs, insurance, letting agent fees, ground rent, service charges, utility bills, and professional fees). The Section 24 restriction means mortgage interest is not deducted from rental income — instead, you receive a 20% tax credit on your interest costs. This restriction disproportionately affects higher-rate and additional-rate taxpayers, who previously benefited from deducting interest at their marginal rate. The net effect is that buy-to-let is now often less tax-efficient than other investments such as stocks and shares ISAs or pension contributions. Many landlords have seen their effective tax rate on rental income rise significantly. For example, a higher-rate taxpayer with £20,000 of rental profit and £10,000 of mortgage interest would previously have paid tax on £10,000 (£2,000 tax at 20% or £4,000 tax at 40%). Under the new rules, they pay tax on the full £20,000 (£8,000 at 40%), less a 20% tax credit of £2,000 (20% of £10,000), giving a final tax bill of £6,000 — a £4,000 increase.

Mortgage Interest Restriction (Section 24)

The Section 24 rules restrict the tax relief available on finance costs for residential property businesses. Finance costs include mortgage interest, interest on loans to buy or improve property, arrangement fees, and early repayment charges. Under Section 24, finance costs are not deductible from rental income. Instead, landlords receive a basic-rate tax reduction of 20% of their finance costs, deducted from their income tax liability. The restriction applies to all residential landlords, whether they own one property or dozens. It does not apply to furnished holiday lettings, commercial property, or property held through a company (companies can still deduct interest as a trading expense). The restriction is phased in gradually: for the current 2026/27 tax year, 100% of finance costs are restricted to the 20% basic-rate reduction. Any unused finance costs (where the 20% tax reduction exceeds the landlord's tax liability) can be carried forward to future tax years. If you have a rental loss because your finance costs exceed your rental income, you can carry forward the excess finance costs to claim in future years. The Section 24 restriction has prompted many higher-rate taxpayers to consider incorporating their property portfolio into a limited company, where mortgage interest remains fully deductible.

SDLT on Buy-to-Let Purchases

When you buy a buy-to-let property, you pay the standard SDLT rates plus an additional 5% surcharge (as of 2026/27, increased from 3% in 2016). This means the effective SDLT rates for buy-to-let purchases are: 5% on the first £250,000, 10% on the portion from £250,001 to £925,000, 15% from £925,001 to £1.5 million, and 17% above £1.5 million. The 5% surcharge applies if you already own one or more residential properties and are purchasing an additional property worth £40,000 or more. If you are replacing your main residence (selling your old home and buying a new one), the surcharge does not apply. However, if you buy a new main residence before selling your old one, you must pay the surcharge and can claim a refund when you sell the old property within 36 months. The SDLT surcharge significantly increases the upfront cost of buying a buy-to-let property. For example, a buy-to-let property purchased for £250,000 would attract SDLT of £12,500 (5% × £250,000), compared to £nil for a main residence purchase at that price. This additional cost must be factored into your investment return calculations and may affect the viability of lower-value buy-to-let investments.

Capital Gains on Sale

When you sell a buy-to-let property, you are liable to Capital Gains Tax on any increase in value. The CGT rates for residential property are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers (for the 2026/27 tax year). The annual exempt amount is £3,000, meaning the first £3,000 of gains across all assets in the tax year are tax-free. You must report the disposal to HMRC within 60 days of completion using the online PPD (Property Disposal) return and pay the estimated CGT within the same 60-day window. The gain is calculated as: sale proceeds minus purchase price minus allowable costs (SDLT at purchase, legal fees at purchase and sale, estate agent fees at sale, and capital improvements). You cannot deduct general repairs and maintenance from the gain — those are revenue expenses deductible against rental income. Indexation allowance was withdrawn from January 2018 for individuals, so only actual costs are deductible. If you have owned the property for many years, the gain can be substantial. For example, a buy-to-let bought for £150,000 in 2010 and sold for £300,000 in 2026, with £10,000 of buying and selling costs, gives a gain of £140,000. After the £3,000 exempt amount, a higher-rate taxpayer pays 24% × £137,000 = £32,880 in CGT. The 60-day reporting requirement is strict — missing the deadline incurs penalties even if the tax is eventually paid.

Wear and Tear and Replacement Relief

The old wear and tear allowance (10% of gross rent for furnished properties) was abolished in April 2016 and replaced with the replacement of domestic items relief. Under this relief, you can claim the cost of replacing furnishings, appliances, and kitchenware in your buy-to-let property, but not the initial cost of buying these items for a new let. The relief covers replacements of: beds, sofas, and other furniture; fridges, washing machines, and other white goods; carpets and floor coverings; curtains and blinds; crockery, cutlery, and kitchen equipment; televisions and other electronic equipment. If you sell the replaced item, you must deduct the sale proceeds from the replacement cost. If the replacement is an upgrade (e.g., replacing a basic fridge with an American-style fridge-freezer), you can only claim the cost of a like-for-like replacement — the additional cost of the upgrade is not deductible. The relief applies only to the cost of the replacement item itself, not to installation or delivery costs (these are separately deductible as repairs). The replacement of domestic items relief is claimed as an allowable expense on your SA105 property pages. It is important to keep receipts for replaced items and records showing that the item was genuinely replaced, not a new addition.

Incorporation: Should You Set Up a Company?

Many buy-to-let landlords have considered incorporating their property portfolio into a limited company to avoid the Section 24 mortgage interest restriction and to pay corporation tax (currently 19–25%) instead of income tax. A company can deduct mortgage interest as a trading expense, pay corporation tax on profits, and distribute retained profits as dividends to shareholders. However, incorporation has significant costs and disadvantages: SDLT may be payable on the transfer of existing properties into the company (though incorporation relief may be available); Capital Gains Tax may be triggered on the transfer (though incorporation relief can defer this); annual accounting and filing costs for the company; dividend tax for shareholders extracting profits; potential loss of the annual CGT exempt amount (companies pay corporation tax on gains); and increased complexity in selling properties (selling shares vs selling property). Incorporation is generally more attractive for higher-rate taxpayers with significant mortgage interest costs and a growing portfolio. For basic-rate taxpayers with low or no mortgage debt, remaining as an individual landlord is usually simpler and more tax-efficient. Professional tax advice is essential before incorporating, as the decision depends on your specific circumstances, property values, mortgage debt levels, and long-term plans.

FAQs

Can I still claim mortgage interest as an expense?

No. Mortgage interest is no longer deductible from rental income for individual landlords. Instead, you receive a 20% tax credit on your interest costs. Companies can still deduct interest as a trading expense.

What is the SDLT surcharge for buy-to-let in 2026/27?

An additional 5% surcharge applies to purchases of additional residential properties, including buy-to-let investments. This is on top of the standard SDLT rates.

Do I need to report the sale of a buy-to-let property within 60 days?

Yes. The disposal of any UK residential property that is not your main home must be reported to HMRC within 60 days of completion, and any CGT due must be paid within the same timeframe.

Is buy-to-let still tax-efficient in 2026/27?

For higher-rate taxpayers with significant mortgage debt, buy-to-let is less tax-efficient than it was before 2016. Incorporation may be beneficial for larger portfolios, while lower-rate taxpayers with low mortgage debt can still achieve reasonable returns.