From April 2027, rental profits will be taxed at their own, higher rates — 22%, 42% and 47% — for the first time in UK history (HM Treasury, Autumn Budget 2025). Combine that with Making Tax Digital, which went live for larger landlords this April, and 2026 is the year London landlord tax planning stops being optional. This guide walks through what you owe now, what changes in nine months, the deductions most landlords miss, and the numbers behind the limited company question.
Why 2026 Is the Turning Point for London Landlord Tax
Three separate changes are converging on the 2026–27 window. Making Tax Digital for Income Tax started on 6 April 2026 for landlords with gross property and self-employment income over £50,000. The Autumn Budget 2025 announced the property income surcharge arriving in April 2027. And the compliance costs of the Renters’ Rights Act land in the same period — if you have not read our summary of your Renters’ Rights Act obligations, that is the other half of this year’s homework.
London landlords sit at the sharp end of every one of these. Average London rent is £2,290 a month (ONS, April 2026), which means a single average property grosses £27,480 a year — and gross, not profit, is what the MTD thresholds measure. The capital’s landlords cross these lines faster than anyone else in the country.
One framing note before the detail: this is general information, current as of July 2026, not personal tax advice. The numbers below tell you which questions to take to an accountant — they do not replace one.
Section 24: How Mortgage Interest Relief Actually Works Now
Since the 2020/21 tax year, individual landlords cannot deduct mortgage interest from rental income at all. Instead you receive a tax credit worth 20% of your finance costs — regardless of whether you pay tax at 20%, 40% or 45%.
Run a typical London example. You let a flat for £24,000 a year, pay £3,000 in agent fees, insurance and repairs, and £10,000 in mortgage interest. Your real cash profit is £11,000. But HMRC taxes you on £21,000 — the profit before interest. As a higher-rate taxpayer you owe £8,400, minus the £2,000 credit (20% of £10,000), leaving £6,400. That is an effective tax rate of 58% of your actual profit. The same landlord in 2016 would have paid £4,400.
Section 24 also produces a trap that catches people who think they are basic-rate taxpayers: because taxable income is calculated before interest, the gross rent can push your total income over the £50,270 higher-rate threshold even when your real profit would not. A £40,000 salary plus that £21,000 taxable rental figure makes you a higher-rate taxpayer, with the knock-on losses of child benefit and personal savings allowance that follow.
The April 2027 Property Income Surcharge — Plan for It Now
The Autumn Budget 2025 announcement is the biggest structural change since Section 24 itself. From April 2027, property income moves onto its own rate schedule: 22% basic, 42% higher, 47% additional — two percentage points above the equivalent earned-income rates. The Section 24 credit rises from 20% to 22% at the same time, which softens the blow for basic-rate landlords and does very little for everyone else.
Rerun the example above under 2027 rules: £21,000 × 42% = £8,820, minus a 22% credit of £2,200 = £6,620. Another £220 a year gone, on top of an already punishing position. Multiply across a three-flat portfolio and the surcharge quietly takes £600–£700 annually. If you have been deferring decisions — selling a marginal property, incorporating, or repricing at renewal — the window to act at current rates closes on 5 April 2027.
Making Tax Digital: Who Files Quarterly, and From When
MTD for Income Tax replaces the single annual Self Assessment with digital record-keeping and quarterly updates through HMRC-compatible software.
| From | Who is in | London reality check |
|---|---|---|
| 6 April 2026 | Gross property + self-employment income over £50,000 | Two average London rentals (£54,960 gross) put you in — now |
| 6 April 2027 | Threshold falls to £30,000 | One well-rented London property plus modest freelance income crosses it |
| 6 April 2028 | Threshold falls to £20,000 | Essentially every London landlord with a single property is in |
The mistake we keep seeing: landlords assuming the threshold measures profit. It measures gross rent, before a single expense. The second mistake is waiting — if you crossed £50,000 in your 2024/25 return, you should already be filing quarterly, and penalties accrue under the points-based late-submission system. Spreadsheet-plus-bridging-software is a legal minimum; purpose-built landlord software costs £10–£20 a month and pays for itself in the first missed-receipt it catches.
Capital Gains Tax When You Sell
Residential property gains are taxed at 18% for basic-rate taxpayers and 24% for higher and additional rate — and for most London landlords the gain itself pushes them into the 24% band even if their income does not. The annual exempt amount is £3,000 for 2026/27 (HMRC), a shadow of the £12,300 it was in 2022, so almost the entire gain on a long-held London property is now taxable.
Two deadlines matter more than the rates. You must report and pay CGT on a residential disposal within 60 days of completion — not at the next January Self Assessment, a rule that still catches sellers who last sold before 2020. And your acquisition costs, capital improvements and buying/selling fees all reduce the gain, which is why the receipts folder you never kept is the most expensive filing error in property. A landlord who bought a Croydon flat for £180,000 in 2012 and sells for £320,000 has a £140,000 headline gain; with £15,000 of documented improvements, stamp duty and legal fees, the taxable gain drops by more than a tenth before the calculation starts.
Allowable Expenses London Landlords Routinely Miss
Everyone claims agent fees and insurance. The money is left on the table further down the list.
- Repairs vs improvements — replacing a broken boiler like-for-like is fully deductible now; upgrading to a fundamentally better system is a capital cost you only recover at sale. Describing the work correctly on the invoice matters.
- Replacement of domestic items relief — like-for-like replacement of furniture, appliances and carpets in furnished lets is deductible; the original purchase never is.
- Mileage to and from your rental property for inspections and maintenance, at HMRC’s approved rates.
- Accountancy fees, landlord software subscriptions and the MTD tooling the new rules force you to buy.
- Service charges and ground rent on leasehold flats — obvious, yet regularly forgotten when the freeholder bills annually.
- Pre-letting expenses incurred up to seven years before the first tenancy, claimable as if spent on day one.
The Reliefs Small and Live-In Landlords Still Have
Not every relief has been stripped away, and two of the survivors are London-relevant.
Rent-a-Room relief lets you earn £7,500 a year tax-free from letting a furnished room in the home you live in. In London that threshold actually bites: a lodger at £625 a month sits exactly at the tax-free line, and the capital is one of the few places where spare rooms clear that rent easily. Above £7,500 you choose between paying tax on the excess or switching to normal expense accounting — run both numbers, because with a mortgage the ordinary method sometimes wins.
The £1,000 property allowance covers genuinely small income — a parking space, occasional lets — with no receipts needed. It cannot be combined with actual expenses on the same income, so it is irrelevant to anyone letting a whole London flat, and claiming it by accident instead of real expenses is a common self-filing error that overpays tax.
Two housekeeping points with real money attached. Rental losses carry forward automatically against future property profits — a loss-making year during a refurbishment is a tax asset, but only if you file it. And couples who own jointly are taxed 50/50 by default; where one partner pays a lower rate, transferring beneficial ownership and filing HMRC’s Form 17 moves the income to the cheaper rate. That single form is often worth more than every receipt-level deduction combined.
Should You Incorporate? The Honest Answer
Inside a limited company, mortgage interest is fully deductible and profits are taxed at 19–25% corporation tax instead of income tax rates — which is why incorporation is the most-marketed answer to Section 24, and from 2027 it also sidesteps the property income surcharge. For a higher-rate taxpayer building a portfolio and reinvesting profits, the company usually wins on the arithmetic.
But moving an existing personally-held London property into a company is a sale: you trigger CGT on the accrued gain and the company pays SDLT with the 5% additional-dwellings surcharge on the full market value. On a typical London flat that transfer bill runs into tens of thousands of pounds, and company buy-to-let mortgage rates are consistently higher than personal ones. Extracting the profits as dividends adds another tax layer. Our view: incorporation makes sense for new purchases by growing portfolio landlords, and rarely makes sense as a retrofit for one or two long-held properties — whatever the seminar selling you the restructure says.
If the sums no longer work at all, the alternatives are structural: raising rent to market at renewal, switching strategy — we compare the tax and regulatory position of short lets against standard tenancies separately — or selling while CGT rates sit where they are. For everything beyond tax, from compliance to management, start with our complete guide for London landlords.
Practical Takeaways
- Section 24 means you are taxed on profit before mortgage interest, with only a 20% credit back — check whether gross rent quietly makes you a higher-rate taxpayer.
- From April 2027, property income is taxed at 22%/42%/47%. Decisions about selling, incorporating or repricing are cheaper made before 5 April 2027.
- MTD thresholds measure gross rent, not profit: over £50,000 you file quarterly now; by April 2028 the £20,000 line captures almost every London landlord.
- CGT on a sale is due within 60 days, at 18%/24%, with only £3,000 exempt — keep every improvement receipt from the day you buy.
- Incorporation suits new purchases by portfolio builders; retrofitting one long-held flat into a company usually costs more in CGT and SDLT than it saves.
Make the Numbers Work — With FTR London
Tax efficiency starts with occupancy and rent at market level. List your property on FTR London and reach the capital’s renters directly — every week vacant costs more than most of the deductions in this guide recover.
Renting rather than letting? Browse FTR London’s rental listings across every borough and find your next home from landlords who run their properties professionally.
