There’s a lot changing when it comes to residential property tax, so it’s worth understanding now rather than later.
Let’s break down what’s actually happening, and what it might mean for you.
What’s changing?
From April 2027, the tax rate on rental income are going up by 2% across the board:
- Basic rate: 22% (up from 20%)
- Higher rate: 42% (up from 40%)
- Additional rate: 47% (up from 45%)
Who does this affect?
Good news if you own a property through a limited company: these changes are all about personally held property, so if your rental sits within a company, you’ll carry on paying corporation tax at 19% or 25% as usual. No changes for you here.
What about mortgage interest?
For individual landlords, you still can’t deduct mortgage interest from your rental income before working out your tax. Instead, you get relief as a tax credit, which is also increasing, to 22% (up from 20%).
What does this mean? Your tax is worked out on your profit before interest is taken off, not after. So don’t be surprised if your tax bill doesn’t quite match what ends up in into your bank account. There will be a gap between cash flow and taxable profit, and this is a really common source of confusion for landlords.
Own through a company instead?
Mortgage interest comes off in full before you’re taxed, and what’s left is taxed at the corporation tax rate (either 19% or 25%) rather than the (now higher) personal rental rates.
Is it time to restructure?
Firstly, it is really important to understand that the additional retained profit through incorporating a property needs to be handled correctly to feel the benefit. Essentially, if you took the money out as salary for example, it would get taxed again, which can then eat into the benefit pretty quickly.
So, if you rely on your rental income to live on, and you don’t plan to reinvest, incorporating might not give you the boost you’d hope for and could affect your day-to-day finances.
What else to consider
Before deciding, there are a couple of cost worth noting:
- Capital Gains Tax (CGT): moving a property into a company can trigger CGT, even though you haven’t actually sold anything or received any money.
- Stamp Duty Land Tax (SDLT): the company will need to pay SDLT too, based on the property’s market value, and typically at a higher rate than an individual would pay.
This is before you factor in the extra admin and compliance that comes with running a company. It’s worth thinking about how much of that you’re willing to take on.
Not incorporating? You can still plan
If you don’t want to incorporate a property, there is still planning to consider for personal landlords.
If you own a property jointly, changing the split away from the usual 50:50 can help you make better use of both your tax bands.
Thinking about selling? Transferring shares to a spouse beforehand could help qualify for the basic CGT rate of 18% on residential property, rather than 24%.
Whatever your position is currently, it’s clear you’ll need to become more proactive in ownership structure decisions. Every landlord’s situation is different, so what works really well for one person might not suit another. It will change from case to case.
With the changes happening from April of 2027, it’s time to start thinking about this! (Don’t leave it until next year!)
We’re here to help! Get in touch for tailored guidance on how this will affect you and what any decisions you make will really look like.
You can give us a call on 01872 267 267, message us via WhatsApp on 0777 49 39 111, or email us at [email protected].
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