Buy-to-Let Tax Guide 2026: Income Tax, CGT, and Allowable Expenses

HMRC data shows that UK landlords collectively declared over £48 billion in rental income in the 2024-25 tax year, paying an estimated £16 billion in income tax alone. At HouseCheckup, we help investors make informed property decisions with comprehensive reports for just £24.99, and understanding the tax landscape is a fundamental part of any buy-to-let investment strategy. This guide covers everything you need to know about buy-to-let taxation in 2026.

Income Tax on Rental Income

Rental income from buy-to-let properties is added to your other income and taxed at your marginal rate. For the 2026-27 tax year, the rates are:

Key point: Your rental income sits on top of your employment income. If you earn £45,000 from your job and £10,000 net rental profit, you'll pay 20% on the first £5,270 of rental profit and 40% on the remaining £4,730.

What Counts as Rental Income

HMRC considers the following as taxable rental income:

• Monthly rent payments — The core rental income
• Service charges you pass on — If tenants pay you for services (cleaning, utilities), this counts as income
• Non-refundable deposits — If you keep any part of a deposit for damage, it's income
• Insurance payouts for lost rent — Rent guarantee insurance payouts are taxable
• Premiums for granting a lease — Partial tax charge applies for lease premiums

Allowable Expenses: What You Can Deduct

You can deduct legitimate expenses incurred wholly and exclusively for the rental business. These reduce your taxable profit and therefore your tax bill.

Fully Deductible Revenue Expenses

• Letting agent fees — Typically 8-15% of rental income, fully deductible
• Maintenance and repairs — Like-for-like repairs (not improvements) are fully deductible
• Insurance premiums — Landlord insurance, buildings insurance, rent guarantee insurance
• Ground rent and service charges — For leasehold properties
• Council tax — Only during void periods when you're paying it
• Utility bills — Only if included in the rent or during void periods
• Accountancy fees — For preparing your tax return
• Legal fees — For renewing tenancies, eviction costs (not purchase-related)
• Advertising costs — For finding tenants
• Travel costs — For visiting the property for management purposes
• Stationery, phone calls, and postage — Related to managing the let

Replacement of Domestic Items Relief

Since April 2016, the old 10% wear-and-tear allowance was replaced with the Replacement of Domestic Items Relief. You can now deduct the cost of replacing:

• Furniture (sofas, beds, wardrobes)
• Furnishings (curtains, carpets, linen)
• Appliances (washing machines, fridges, ovens)
• Kitchenware and crockery

Important: You can only claim for replacements, not initial furnishing of the property. And you can only claim the cost of a like-for-like replacement — if you upgrade, only the equivalent replacement cost is deductible.

Repairs vs Improvements: The Critical Distinction

This is where many landlords get caught out. HMRC draws a clear line:

• Repair (deductible): Replacing a broken boiler with a modern equivalent, repainting walls, fixing a leaking roof with the same materials
• Improvement (not deductible): Adding an extension, converting a loft, installing central heating for the first time, replacing a single-glazed window with double glazing (the improvement element is not deductible)

Improvements are capital expenditure and can only be set against Capital Gains Tax when you sell the property.

Mortgage Interest Relief: The Section 24 Rules

This is the single biggest tax change to hit landlords in recent years. Since April 2020, individual landlords can no longer deduct mortgage interest as an expense. Instead, you receive a basic-rate (20%) tax credit on your mortgage interest payments.

How it works in practice:

1. Calculate your rental profit without deducting mortgage interest
2. Pay income tax on this higher profit figure
3. Receive a 20% tax credit based on the lower of: your mortgage interest, your rental profits, or your total income

Example: You earn £15,000 rent and have £8,000 mortgage interest and £3,000 other expenses. Your taxable profit is £12,000 (£15,000 minus £3,000 — you cannot deduct the £8,000 mortgage interest). If you're a 40% taxpayer, you pay £4,800 tax. You then receive a 20% credit on the £8,000 = £1,600. Your net tax bill is £3,200. Under the old rules, your taxable profit would have been £4,000 and your tax bill £1,600.

Impact on Higher-Rate Taxpayers

Section 24 disproportionately affects higher-rate taxpayers. Some landlords with highly leveraged properties find themselves paying tax even when they're making a cash-flow loss. This has prompted many to consider incorporating.

Capital Gains Tax on Sale

When you sell a buy-to-let property, you pay Capital Gains Tax (CGT) on the profit. The current rates for residential property are:

• Basic-rate taxpayers: 18% on gains within the basic-rate band
• Higher/additional-rate taxpayers: 24% on gains above the basic-rate band

The annual CGT exemption for 2026-27 is £3,000 per person. This means the first £3,000 of your total capital gains in a tax year is tax-free.

Calculating Your Capital Gain

Your gain is calculated as:

1. Sale price minus purchase price
2. Minus allowable purchase costs (stamp duty, solicitor fees, survey costs)
3. Minus allowable selling costs (estate agent fees, solicitor fees)
4. Minus capital improvement costs (extensions, loft conversions — the costs you couldn't deduct from income tax)
5. Minus the annual exemption (£3,000)

CGT Reporting and Payment

You must report and pay CGT on UK residential property within 60 days of completion. This is done through the HMRC CGT on UK property service. Late reporting attracts penalties starting at £100.

Stamp Duty Land Tax (SDLT)

Buy-to-let purchases attract the standard SDLT rates plus a 5% surcharge on each band (increased from 3% in October 2024). This significantly increases the upfront cost:

Example: A £250,000 buy-to-let purchase incurs SDLT of approximately £10,000 with the surcharge, compared to £2,500 for a standard purchase.

Should You Use a Limited Company?

Since Section 24 removed mortgage interest deductibility for individuals, many landlords have considered buying through a limited company. The advantages include:

• Full mortgage interest deduction — Companies can still deduct mortgage interest as an expense
• Lower corporation tax rate — 25% (or 19% for small profits under £50,000) vs up to 45% income tax
• Retained profits taxed at company rate — Useful if reinvesting profits into more properties

However, there are disadvantages:

• Higher mortgage rates — Limited company mortgages typically cost 0.5-1.5% more
• Double taxation risk — Extracting profits via salary or dividends incurs additional tax
• Higher compliance costs — Annual accounts, confirmation statements, and company tax returns
• Transfer costs — Moving existing properties into a company triggers CGT and SDLT at market value

Generally, incorporating makes more financial sense for higher-rate taxpayers buying new properties with significant leverage. For existing portfolios, the transfer costs often outweigh the benefits.

Record Keeping Requirements

HMRC requires you to keep records for at least 5 years after the 31 January submission deadline of the relevant tax year. Keep:

• Rental income records (tenancy agreements, bank statements)
• Expense receipts and invoices
• Mortgage statements showing interest paid
• Purchase and sale documents (for CGT calculations)
• Improvement invoices (to offset against CGT later)

Making Tax Digital for Landlords

From April 2026, landlords with rental income over £50,000 must comply with Making Tax Digital (MTD) for Income Tax. This means using compatible software to keep digital records and submitting quarterly updates to HMRC. Landlords earning over £30,000 will join from April 2027.

Get the Full Picture Before Investing

A HouseCheckup report for £24.99 (Complete tier) gives you comprehensive property data including EPC ratings, flood risk, subsidence risk, planning history, and local market comparables — all essential information when evaluating a buy-to-let investment. Understanding your likely rental yield, potential capital growth, and the property's risk profile helps you make tax-efficient investment decisions from the start. Get the data you need before committing to a purchase.