While our Stamp Duty Timeline covers the tax paid at the point of purchase, this page covers the ongoing tax landlords pay on rental profit and capital gains, a genuinely separate story that has arguably done more to change landlord behaviour over the past decade than any transaction tax change. This is a permanent, regularly updated reference to Section 24's mortgage interest restriction, capital gains tax reform for residential property, and the digital reporting overhaul now underway.
Figures below reference HMRC's Property Income Manual, the Finance (No. 2) Act 2015, and published analysis of the Autumn Budget 2025, current to mid-2026. This is general information, not tax advice; always confirm your specific position with a qualified accountant.
- 2015: Section 24 is announced
- 2017–2020: the phased withdrawal of mortgage interest relief
- A worked example: before and after Section 24
- The incorporation boom Section 24 triggered
- Capital gains tax reform since 2020
- 2027: a dedicated, higher rate of tax on rental income
- Making Tax Digital: the reporting overhaul
- Furnished holiday lets and other exceptions
- ATED and Council Tax on empty or second homes
- Frequently asked questions
1. 2015: Section 24 is announced
In his July 2015 Budget, then-Chancellor George Osborne announced a measure to restrict tax relief on finance costs, principally mortgage interest, for individual landlords of residential property. Enacted as Section 24 of the Finance (No. 2) Act 2015, the stated aim was to level the playing field between buy-to-let investors, who could deduct mortgage interest before calculating taxable rental profit, and ordinary first-time buyers, who could not deduct mortgage interest on their own home purchase. Before this reform, a landlord's taxable rental profit was calculated in the same way as any other business: rental income minus allowable expenses, including mortgage interest, in full.
2. 2017–2020: the phased withdrawal of mortgage interest relief
Rather than taking effect immediately, Section 24 was phased in gradually over four tax years, restricting the proportion of finance costs that could be deducted as a business expense on a sliding scale, while introducing a basic-rate tax credit to replace the lost deduction.
| Tax year | Finance costs deductible as an expense | Finance costs eligible for 20% tax credit only |
|---|---|---|
| 2016/17 (pre-reform) | 100% | 0% |
| 2017/18 | 75% | 25% |
| 2018/19 | 50% | 50% |
| 2019/20 | 25% | 75% |
| 2020/21 onward | 0% | 100% |
From the 2020/21 tax year onward, individual landlords can no longer deduct any mortgage interest or other finance costs (including mortgage arrangement fees and overdraft interest on the property business) when calculating taxable rental profit. Instead, all such finance costs are used to calculate a tax credit at the basic rate of 20%, applied against the landlord's overall income tax liability, rather than reducing the taxable profit itself.
3. A worked example: before and after Section 24
The practical effect of this change is best understood through a direct comparison, using a higher-rate taxpayer landlord receiving £20,000 in annual rental income with £12,000 in annual mortgage interest and no other costs.
Because Section 24 adds the full rental income, rather than the net profit, to a landlord's total income for tax band purposes, it can push a landlord's measured income across thresholds they wouldn't otherwise cross, even though their actual cash profit hasn't changed. This can reduce or eliminate eligibility for the personal savings allowance, Child Benefit (via the High Income Child Benefit Charge), and the tapering of the pension annual allowance, effects that operate independently of, and in addition to, the direct increase in the tax bill itself. A landlord assessing the real impact of Section 24 needs to look at these secondary effects, not just the headline income tax calculation.
4. The incorporation boom Section 24 triggered
Section 24 applies specifically to individual landlords, including those in partnerships; it does not apply to landlords who hold their properties through a limited company, which continue to deduct mortgage interest in full as a normal business expense and instead pay corporation tax on net profit. This single structural exception has driven one of the most significant behavioural shifts in the buy-to-let market since Section 24's announcement.
According to analysis from estate agency Hamptons, the number of companies established specifically to hold buy-to-let property increased by over 300% between the start of 2016 and the end of 2024, reaching more than 400,000 by early 2025, up from around 200,000 as recently as mid-2020. By some estimates, around three-quarters of new rental property purchases in England and Wales are now made through a limited company structure rather than in an individual's own name, a dramatic shift from the pre-2015 market.
Transferring an existing property portfolio into a limited company structure is treated by HMRC as a sale at market value, which can crystallise capital gains tax on any unrealised gain, and triggers Stamp Duty Land Tax (including the additional dwellings surcharge) payable by the company on the transfer. Incorporation Relief may reduce or defer some of this cost, but only where the underlying property activity can be shown to constitute a genuine trade rather than passive investment, a test that typically requires a substantial portfolio (commonly cited as six or more properties) and clear evidence of active, extensive management (often referenced as around 20 hours per week), rather than simply owning and letting a small number of properties. For a single property or a small portfolio, the transfer costs frequently outweigh the ongoing tax benefit, making incorporation a decision that needs individual modelling rather than a default assumption.
5. Capital gains tax reform since 2020
Alongside the income tax changes above, capital gains tax on residential property that isn't a main home has been tightened significantly since 2020. Lettings Relief, which had previously allowed a landlord who once lived in a property before letting it out to shelter up to £40,000 of gain from CGT, was drastically restricted from April 2020 to require the owner to have been in shared occupancy with the tenant at the time, a condition that excludes the overwhelming majority of landlords who let out a former home after moving out entirely. The final-period exemption under Private Residence Relief, which allows a former main home to remain exempt from CGT for a period after the owner moves out, was also reduced from 18 months to 9 months over the same reform.
Separately, the reporting and payment deadline for CGT on UK residential property sales was overhauled: since April 2020, UK residents must report the gain and pay any CGT due within a set short window of completion (extended from an initial 30 days to 60 days from October 2021), rather than simply reporting it through the following January's Self Assessment return as previously allowed. This has meaningfully accelerated the cash cost of a property sale for many landlords, since the tax is now due within weeks rather than being deferred for up to nearly two years under the old system.
The annual CGT exempt allowance, the amount of gain that can be realised entirely tax-free each year, has also been cut substantially in recent years, falling from £12,300 to £6,000 and then to £3,000 across successive tax years, meaning a much smaller share of any given gain now falls outside the tax net entirely compared with a few years ago.
Worked example: capital gains tax before and after the reforms
Consider a landlord selling a buy-to-let property, once their main home for two years before being let out for a further eight years, realising a total gain of £150,000 over the ten years of ownership.
The combined effect of a shorter exempt period, the loss of Lettings Relief, and a far smaller annual allowance means a materially larger portion of the same £150,000 gain is now taxable, and the resulting bill is due within weeks rather than up to two years later. This combination of a larger taxable gain and a dramatically accelerated payment timeline is one of the least-discussed but most financially significant changes to affect landlords selling property over the past five years.
6. 2027: a dedicated, higher rate of tax on rental income
The Autumn Budget 2025 announced a further significant change: from 6 April 2027, rental income will be taxed at rates 2 percentage points higher than the equivalent rates on other income, across every band. Basic-rate landlords will pay 22% instead of 20% on rental profit, higher-rate landlords 42% instead of 40%, and additional-rate landlords 47% instead of 45%. The Section 24 tax credit rate is set to rise in line with the new basic rate, to 22%, but this adjustment is modest relative to the overall increase in the effective tax rate on rental profit.
Once in force, this reform means rental profit will no longer simply be added to other income and taxed at the same marginal rate; it will carry its own, higher dedicated rate at every band. Landlords modelling future returns should build this into multi-year projections from 2027 onward rather than assuming rental income will continue to be taxed identically to salary or other income.
7. Making Tax Digital: the reporting overhaul
Making Tax Digital for Income Tax is being rolled out to landlords in stages based on gross qualifying income, replacing the traditional annual Self Assessment return with quarterly digital summaries of income and expenses submitted through MTD-compatible software.
| Mandatory from | Applies to landlords with gross income above |
|---|---|
| 6 April 2026 | £50,000 (based on 2024/25 income) |
| 6 April 2027 | £30,000 (based on 2025/26 income) |
| 6 April 2028 | £20,000 (based on 2026/27 income) |
Under MTD, Section 24 finance costs and other allowable expenses need to be tracked accurately in compatible software throughout the year, rather than reconstructed retrospectively at year-end as many landlords have historically done under Self Assessment. This is a genuine administrative shift, not just a change in tax rates, and landlords approaching the relevant income threshold should begin adapting their record-keeping process well ahead of their specific mandatory start date rather than waiting until the deadline arrives.
8. Furnished holiday lets and other exceptions
Furnished holiday lets (FHLs), a distinct category of short-term let meeting specific occupancy and availability rules, were exempt from Section 24 and retained full mortgage interest deductibility, along with other tax advantages including access to certain capital allowances, right up until the FHL regime itself was abolished from April 2025. From the 2025/26 tax year, former FHL properties have been brought within the same Section 24 rules as standard residential lets, removing what had been one of the last remaining routes for an individually-owned rental property to retain full interest deductibility outside of a company structure.
Commercial property lettings remain outside Section 24's scope entirely, since the restriction applies specifically to residential dwellings. This distinction has added a further consideration for some landlords assessing mixed-use or commercial diversification as part of a broader tax strategy, alongside the incorporation route discussed above.
9. ATED and Council Tax on empty or second homes
Two further, more targeted property taxes are worth understanding alongside the main income and gains tax picture. The Annual Tax on Enveloped Dwellings (ATED) applies to residential properties valued above £500,000 held within a corporate "envelope" (typically a company structure), an annual charge specifically designed to discourage holding high-value residential property inside a company purely to avoid personal taxes, with the charge increasing in bands as the property's value rises. Reliefs are available where the company genuinely lets the property commercially on an arm's-length basis, which covers most standard corporate buy-to-let structures, but the annual return must still be filed even where a full relief applies, and failure to do so carries its own penalties.
Separately, many local councils in England now apply a Council Tax premium on long-term empty homes and second homes, with some councils charging up to 100% extra (effectively doubling the standard Council Tax bill) on properties empty for two years or more, and a growing number of councils introducing a second homes premium specifically aimed at properties that aren't anyone's main residence. These premiums are set locally rather than nationally, so the exact rate and qualifying criteria vary by council, and should be checked directly for any specific property rather than assumed from national headlines about the policy generally.
10. Frequently asked questions
Can landlords still deduct mortgage interest from rental income?
Individual landlords cannot deduct mortgage interest as an expense from 2020/21 onward; instead, they receive a tax credit worth 20% of their finance costs, applied against their overall tax bill. Landlords who hold property through a limited company can still deduct mortgage interest in full as a normal business expense.
Is incorporating my rental portfolio automatically worth it because of Section 24?
Not automatically. Transferring properties into a company triggers Stamp Duty Land Tax and can crystallise capital gains tax on the transfer, and Incorporation Relief generally requires a substantial, actively-managed portfolio to qualify. For a single property or small portfolio, the upfront transfer costs often exceed the ongoing tax benefit; professional advice tailored to your specific circumstances is essential before deciding.
How has capital gains tax on rental property changed since 2020?
Lettings Relief was drastically restricted from April 2020 to require shared occupancy with the tenant, effectively excluding most landlords. The reporting and payment window for CGT on residential property sales was shortened to within 60 days of completion, and the annual tax-free CGT allowance has fallen substantially, from £12,300 to £3,000, over successive tax years.
When does Making Tax Digital become mandatory for landlords?
MTD for Income Tax becomes mandatory from 6 April 2026 for landlords with gross qualifying income above £50,000 (based on 2024/25 figures), extending to those above £30,000 from April 2027 and above £20,000 from April 2028.
What is the Annual Tax on Enveloped Dwellings (ATED)?
ATED is an annual charge on residential properties valued above £500,000 held within a company structure, intended to discourage using a corporate envelope purely to avoid personal taxes. Relief is available where the property is genuinely let commercially on an arm's-length basis, but an annual return must still be filed even where full relief applies.
Do all councils charge extra Council Tax on empty or second homes?
Many, but not all, English councils apply an empty homes or second homes Council Tax premium, with some charging up to 100% extra. These premiums are set locally, so the exact rate and qualifying criteria vary by council and should be checked directly for a specific property.
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