With a further 2% rise in property income tax looming in April 2027, residential landlords face a potential tipping point that could accelerate exits from the sector, reshape investment structures, and force a fundamental rethink of long-term planning. Caroline Foulger, Partner at Hunters Law LLP, examines the implications.
The announcement of a 2% increase in property income tax rates, set to take effect in April 2027, represents a pivotal point for property owners and investors. This additional tax burden may prove to be the decisive factor that pushes property owners beyond their capacity to absorb further costs. This may mean a decision to incorporate or leave the market completely and invest differently. It may also cause some to focus on wider estate planning as part of the process.
There have been many incremental changes over recent years, and those that are coming mean that being a residential landlord is less and less appealing:
- Since April 2020, mortgage interest is no longer fully deductible. Instead, landlords receive a 20% tax credit for mortgage interest incurred. For those who were heavily geared, this had a significant impact
- Mortgage interest rates have remained high since the Autumn of 2022. Whilst, as of writing, rates have fallen to below 4% that does not help those coming off three or five year fixed deals who are feeling the effects of the increase in interest rates.
- Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) will require landlords with rental income above certain thresholds landlords with £50k+ rental income from April 2026 and those with £30k+ from April 2027) to submit quarterly updates rather than one annual return. It is important to note that the thresholds are the communication of rental income and self-employed income – the threshold for MTD does not include employment, pension, dividend or savings income. That administrative burden and cost may be off-putting for some, and mean incorporation looks less onerous than it may have done previously.
- For those whose rental income was from Furnished Holiday Let (FHL), the abolition of the FHL scheme in April 2025 saw the loss of full interest deduction for income tax and capital allowances, and Business Asset Disposal Relief (BADR) for Capital Gains Tax (CGT)
- Rental reforms from May 2026 will make being a landlord more challenging. Tenancies will all be rolling assured periodic tenancies continuing monthly until ended by tenant (two months’ notice) or landlord, under which landlords must issue a Section 8 notice with valid grounds. There may be extended notice periods e.g. four months for sale, four weeks for arrears. Landlords cannot accept more than one month’s rent in advance. Rent can only be increased once a year, with two months’ notice, and tenants can challenge the increase at tribunal. Landlords cannot refuse tenants based on having children or being on benefits; blanket bans are prohibited. Renters have a statutory right to request pets; landlords must respond within 28 days with reasonable grounds if refusing.
- Many rental properties are flats, and prices of these, certainly in London and the South East, have been stagnant or falling in the last few years. Property may no longer be the highly appreciating asset it once was, therefore losing part of its appeal.
What might you suggest to residential landlords who want to stay in the sector;
- Consider what rent reviews are possible now before May 2026, and take into account expenses coming down the line by 2027 given rental increases will be harder under the new renters’ legislation.
- Any new tenancies should be agreed with the rule changes and income tax rate changes in mind as well as potential increases to mortgage interest if they will come off a fixed rate soon.
- Most will have looked at incorporation before but may now want to look at it again in light of the income tax rate change and MTD. If there is the option to go into partnership first to benefit from CGT reliefs, then the review should be sooner rather than later, if to be in place by April 2027.
- They should be considering how to invest best in their properties to command the best rents, best tenants and be ready for the requirement for properties to have an EPC rating of C by 2030
- They should be getting ready for MTD in terms of sourcing software and organising tracking of expenses if they want to keep tax administration costs to a minimum.
- A general review of their estate planning in light of reduced net income overall and whether the level of capital investment in property is warranted given the net income yield.
In summary, the landscape for residential landlords is shifting and weathering these changes and securing long-term returns will depend on ensuring matters are reviewed fully and holistically in the near future.
