If you’re already a property owner collecting rental income, you’re facing an increasingly complex rental property tax landscape. From Section 24 restrictions that have fundamentally changed how mortgage interest is treated, to evolving record-keeping requirements under Making Tax Digital, understanding your ongoing obligations isn’t just a compliance exercise. You must fully understand the rules to protect your profitability.
Whether you’re a seasoned landlord with multiple properties or someone who’s recently completed their first buy-to-let purchase, this guide reveals the strategies that separate profitable property investors from those struggling with unexpected tax bills.
Section 24: The Game Changer Every Landlord Must Understand
Section 24 mortgage interest restrictions represent the most significant change to rental property tax in decades. Understanding how these rules work is crucial for maintaining profitable rental investments.
How Section 24 Works
Previously, mortgage interest was fully deductible against rental income before calculating tax. Now, mortgage interest relief is restricted to basic rate (20%) only, regardless of your actual tax rate. This makes rental property tax for higer-rate and additional rate taxpayers particularly unpalatable.
The Real Impact on Your Tax Bill
Consider higher-rate taxpayer, Marcus from part one of this series. His North London property generates £24,000 annual rental income with £10,000 in mortgage interest and £6,000 in other allowable expenses.
Old System (pre-Section 24)
- Rental income: £24,000
- Less: Mortgage interest: £10,000
- Less: Other expenses: £6,000
- Taxable profit: £8,000
- Tax at 40%: £3,200
Current System (with Section 24)
- Rental income: £24,000
- Less: Other expenses: £6,000
- Profit before mortgage relief: £18,000
- Tax at 40%: £7,200
- Less: Basic rate relief on mortgage interest (20% × £10,000): £2,000
- Final tax bill: £5,200
Section 24 costs Marcus an extra £2,000 annually in income tax, significantly impacting his investment returns.
Strategic Responses to Section 24
For higher-rate taxpayers, limited company ownership often provides better tax efficiency. Companies can still claim full mortgage interest relief, and corporation tax rates of 19% (on profits up to £50,000) or 25% (above £50,000) often prove more favourable than higher-rate income tax.
Rental Income Taxation: Maximising Your Allowable Expenses
Understanding what you can and cannot claim against rental income directly impacts your tax liability. Many landlords miss legitimate deductions or incorrectly claim expenses, both of which prove costly.
Fully Allowable Expenses Include:
- Letting agent fees and advertising costs
- Insurance (buildings, contents, landlord liability)
- Repairs and maintenance (but not improvements)
- Professional fees (accountancy, legal, surveying)
- Travel costs for property management
- Utility bills when property is vacant
- Council tax during void periods
- Safety certificates and compliance costs
The £1,000 Property Allowance Strategy
For smaller rental incomes, the £1,000 property allowance can be valuable. This allows automatic expense deduction without receipts, instead of claiming actual expenses. It works best when:
- Your actual allowable expenses are less than £1,000
- Record-keeping is challenging
- Rental income is relatively small
However, most North London landlords with typical rental yields find claiming actual expenses more beneficial.
Repairs vs Improvements: A Crucial Distinction
This distinction affects your immediate tax position and future capital gains calculations.
Repairs (allowable against rental income):
- Fixing broken windows or doors
- Repairing damaged flooring
- Replacing like-for-like fixtures
- Maintaining existing heating systems
Improvements (not allowable, but reduce capital gains):
- Installing new kitchens or bathrooms
- Adding conservatories or extensions
- Upgrading heating systems significantly
- Installing new driveways
Keep detailed records of improvements—they reduce your capital gains tax when you eventually sell.
Advanced Tax Optimisation Strategies
Spouse/Partner Tax Planning
If you’re married or in a civil partnership, transferring rental income to the lower-earning partner can reduce overall rental property tax liability. Property ownership can be changed to maximise use of both partners’ basic rate bands.
Example: James earns £60,000 from employment, while his wife Sarah earns £20,000. If James owns rental property generating £15,000 profit, he pays 40% tax (£6,000). Transferring ownership to Sarah would result in 20% tax (£3,000)—saving £3,000 annually.
Company Structure Benefits for Existing Landlords
While transferring existing properties to a company triggers capital gains tax, it might still be worthwhile for higher rate taxpayers with significant portfolios. Professional advice is essential to model the costs and benefits accurately.
Managing Multiple Property Portfolios
Larger portfolios require sophisticated record-keeping and tax planning. Consider:
- Separate accounting for each property
- Strategic timing of repairs and improvements
- Cash flow management for tax liabilities
- Succession planning for property businesses
Record-Keeping Requirements That Save Money
Essential Documentation
HMRC expects contemporaneous records of all transactions. Your record-keeping system should capture:
- All rental income received (including deposits applied to damage)
- Every business expense with supporting receipts
- Mileage logs for property-related travel
- Dates and details of repairs vs improvements
- Tenant deposits and their treatment
Technology Solutions
Modern accounting software eliminates much of the manual work. Features to look for include:
- Bank feed integration for automatic transaction import
- Receipt capture via smartphone apps
- Mileage tracking capabilities
- Rental income tracking across multiple properties
- Automatic categorisation of expenses
Making Tax Digital Compliance
From April 2026, landlords with rental income over £50,000 (reducing to £30,000 from April 2027) must comply with Making Tax Digital requirements. This means:
- Quarterly digital submissions to HMRC
- Compatible accounting software
- More frequent record-keeping obligations
Starting now gives you time to adapt systems and processes before the requirement becomes mandatory.
Common Costly Mistakes North London Landlords Make
Mixing Personal and Business Expenses
Using the same bank account for personal and rental transactions creates unnecessary complications. HMRC investigations become more complex, and you risk missing legitimate business expenses or incorrectly claiming personal costs.
Inadequate Expense Claims
Many landlords don’t claim all allowable expenses. Common oversights include:
- Travel costs for property visits
- Professional development (landlord training courses)
- Home office costs for property administration
- Bank charges on rental accounts
- Professional subscriptions (landlord associations)
Poor Tax Liability Planning
Rental income doesn’t have tax deducted at source like employment income. Many landlords underestimate their liabilities, leading to cash flow problems when tax bills arrive.
Rule of thumb for tax planning:
- Basic rate taxpayers: Save 25-30% of rental profits
- Higher rate taxpayers: Save 45-50% of rental profits
- Additional rate taxpayers: Save 50-55% of rental profits
These percentages account for income tax and National Insurance implications.
Ignoring Capital Gains Planning
Current rental property improvements reduce future capital gains tax. Maintaining detailed records of enhancement expenditure saves money when you eventually sell.
Professional Support for Rental Property Tax Optimisation
The complexity of rental property tax, combined with frequent legislative changes, makes professional advice invaluable. Specialist property accountants understand:
- Section 24 mitigation strategies
- Optimal ownership structures for your circumstances
- Advanced rental property tax planning opportunities
- Making Tax Digital compliance requirements
Regular reviews ensure you’re claiming all allowable expenses, managing tax liabilities effectively, and positioned optimally for changing legislation.
Is Section 24 costing you thousands? Our property tax health check identifies exactly how much you could save through optimal structure planning and expense maximisation.
Contact Green & Peter today for your comprehensive rental property tax review. Our North London property tax specialists help landlords across Hampstead, Islington, Finchley, and surrounding areas maximise their rental profits whilst ensuring full HMRC compliance.
Call 0208 446 8100 or complete our online contact form to book your consultation with chartered accountants who understand the complexities of North London property investment.
This article provides general guidance on rental property tax. Tax rules change regularly and professional advice specific to your circumstances is essential for optimal tax planning.
