Property investment has never been a passive income exercise in the straightforward sense, but the tax obligations now attached to letting residential property in the UK make the business case more demanding to model correctly. Self-assessment alone no longer captures the full compliance picture. From April 2026, a significant proportion of landlords are operating under Making Tax Digital — a shift that changes not just when tax is filed but how financial records must be kept throughout the year.
April 2026: MTD now mandatory for qualifying landlordsThe combined effect of quarterly reporting, the Section 24 mortgage interest restriction, the 5% Stamp Duty surcharge on additional residential properties, and the confirmed property income rate rises from April 2027 means that landlords who have not reviewed their tax position recently may be operating on assumptions that no longer hold.
Checked against legislation.gov.uk and gov.uk at the review date. The £20,000 Making Tax Digital phase is confirmed for 6 April 2028 — this article previously described it as expected but unlegislated. The separate property income tax rates from April 2027 apply in England, Wales and Northern Ireland only.
What Has Making Tax Digital Changed for Landlords?
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) replaced the traditional annual self-assessment return for landlords whose combined property and self-employment gross income exceeded £50,000 in the 2024/25 tax year. From 6 April 2026, those landlords must use HMRC-compatible software to keep digital records and submit quarterly updates — four per year rather than one annual return. The Final Declaration, which reconciles the full tax position, is still due by 31 January, but the intervening quarters carry their own submission obligations and, from the second year, a points-based late penalty system.
The second phase, covering landlords with qualifying income between £30,000 and £50,000, follows in April 2027. The third phase is now confirmed rather than expected: from 6 April 2028, landlords with qualifying income over £20,000 in the 2026/27 tax year must also use MTD. HMRC estimates that phase alone brings in a further 970,000 sole traders and landlords.
Quarter 1 (6 Apr – 5 Jul): due 7 August 2026. Quarter 2 (6 Jul – 5 Oct): due 7 November 2026. Quarter 3 (6 Oct – 5 Jan): due 7 February 2027. Quarter 4 (6 Jan – 5 Apr): due 7 May 2027. Final Declaration: due 31 January 2028.
Spreadsheets remain permissible under MTD, but only where they are connected to HMRC via approved bridging software. Paper records and manual ledgers do not satisfy the digital record-keeping requirement.
What Can Landlords Actually Deduct?
The most consequential change to landlord taxation since 2020 is the Section 24 restriction — the phased removal of mortgage interest deductibility from rental income. Under the current regime, landlords cannot deduct mortgage interest payments from rental income when calculating their tax liability. Instead, they receive a 20% tax credit on the interest paid. For higher-rate taxpayers, this effectively means paying income tax on turnover rather than profit, which can push taxable income across marginal rate thresholds and create tax liabilities that appear disproportionate to actual profitability. Landlords significantly affected by Section 24 should review our guide on whether incorporating into a limited company makes financial sense for their situation.
Beyond financing costs, allowable deductions remain broad: letting agent fees, buildings and contents insurance, accountancy costs, ground rent, service charges, and repairs that restore rather than improve a property. The Replacement of Domestic Items Relief covers the like-for-like cost of replacing furniture and appliances but does not extend to the initial cost of furnishing a property. Landlords who let a furnished room within their own home may benefit from the Rent-a-Room scheme, which exempts up to £7,500 of gross income from income tax — halved to £3,750 where two people share the income from the same property.
The annual Property Allowance of £1,000 allows landlords with very small income to avoid a return altogether, but it cannot be claimed simultaneously with allowable expenses. Where actual costs exceed £1,000, claiming expenses produces the better outcome.
| Deduction Type | Position in 2026 | Key Condition |
|---|---|---|
| Mortgage interest | 20% tax credit — not a full deduction | Section 24 fully phased in; applies to all personal landlords |
| Repairs and maintenance | Allowable if restoring, not improving | Must be wholly and exclusively for the letting business |
| Replacement of domestic items | Actual like-for-like replacement cost only | Cannot claim initial furnishing costs |
| Rent-a-Room relief | £7,500 gross income exempt | Own home, furnished room; halved if income is shared |
| Property Allowance | £1,000 gross income exempt | Cannot combine with expense deductions |
How Do SDLT and Capital Gains Apply?
Every additional residential property purchase in England and Northern Ireland attracts a 5% Stamp Duty Land Tax surcharge on top of the standard residential rates — a surcharge that applies from the first pound of consideration and significantly increases the upfront cost of portfolio expansion. The surcharge rose from 3% to 5% in the 2024 Autumn Budget, making the acquisition calculus materially different for landlords who were last active in the market before that change.
Capital gains on the disposal of residential property are taxed at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers. The Annual Exempt Amount stands at £3,000 for the 2025/26 tax year. Critically, any capital gain on UK residential property must be reported and the tax paid within 60 days of completion — not at the following January self-assessment deadline. Missing this window generates automatic penalties.
The Finance Act 2026 legislated separate rates of income tax on property profits from 6 April 2027: a basic rate of 22%, a higher rate of 42%, and an additional rate of 47% — an increase of 2 percentage points across all bands. Finance cost relief will also be recalculated at the new 22% property basic rate rather than the current 20%. Two details that change the modelling: the separate rates apply in England, Wales and Northern Ireland only, and from April 2027 allowances and reliefs are set against other income first, and only then against property, savings and dividend income — which can push more property profit into the higher band than a naive calculation suggests. HMRC estimates 2.4 million landlords will pay more by 2029/30. Model this now rather than in April 2027.
MTD for Income Tax
Check if you are required to sign up for Making Tax Digital for the 2026 deadline.
SDLT Calculator
Calculate the 5% surcharge on additional residential properties.
Capital Gains for Property
Report and pay CGT within the mandatory 60-day window.
This article reflects our understanding of the law at the time of publication. It is for general guidance only and does not constitute legal advice. Always verify against GOV.UK or seek qualified legal advice before acting.
Sources
- gov.uk — Find out if and when you need to use Making Tax Digital for Income Tax
- gov.uk — MTD for Income Tax: reducing the mandation threshold to £20,000 from April 2028
- gov.uk — Income Tax: changes to tax rates for property, savings and dividend income
- gov.uk — Tax relief for residential landlords: how it is worked out
- Finance Act 2026
- gov.uk — Stamp Duty Land Tax: residential property rates
Change log: 19 Sep 2026 — sources added and review date set. Corrected the £20,000 MTD phase from "expected, not yet confirmed in legislation" to confirmed for 6 April 2028, based on qualifying income in 2026/27. Property income rates of 22/42/47% from April 2027 verified, along with finance cost relief moving to 22%. Added that the separate rates do not apply in Scotland, and that from April 2027 allowances are set against other income first.
