Practical tax information to help you navigate through the tax system and plan tax efficiently by providing you with an overview of the key tax rules.
Throughout this guide you will find a number of tax tips and checklists to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action. We would be happy to help with advice on your specific position.
The rules, rates and allowances in this guide relate to the 2025/26 tax year and these may be different for other tax years.
Property investment
Investment in residential property has always been a popular form of investment. The tax consequences of investing in non-residential property will differ; these are only covered at a high level in this guide but do let us know if you would like to discuss further.
Buy to let - direct ownership
Traditionally, buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings. However the gross return from buy to let properties can change. Investors also need to take a view on the likelihood of capital appreciation exceeding inflation. Investors should take a long-term view and choose properties with care.
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When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the short and long term. An investment strategy based purely on saving tax is not appropriate. |
Acquisition of properties
Stamp Duty Land Tax (SDLT) applies in England and Northern Ireland, Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales. SDLT, LBTT and LTT are all calculated on a banded basis with different rates applicable depending on the level of consideration or deemed consideration and whether the property is residential or non-residential.
Higher rates of SDLT, LBTT and LTT apply on purchases of additional residential properties. The higher rates of SDLT are 5% above the SDLT rates. For LBTT an Additional Dwelling Supplement of 8% is payable. The bands applicable to LTT for higher residential rates differ; the effect is that the higher rates of LTT range from 2.5% to 8.5% above the equivalent ‘normal’ residential rate.
Tax on rental income
A property allowance of £1,000 per annum is available. Individuals with gross property income of £1,000 or less do not need to declare or pay tax on that income.
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As with the trading allowance, if you have property income above £1,000 you can choose whether to calculate your taxable profit either by deducting actual expenses or by simply deducting the property allowance. Which approach is best will depend on your circumstances and the level of actual expenses you have, please contact us to discuss further. |
Where an individual does not claim the property allowance, income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include agent letting fees, repairs and maintenance and the cost of replacing furnishings.
Relief for finance costs
Mortgage interest on non-residential properties can be deducted as an allowable expense from rental income.
The same treatment does not apply to finance costs on residential property. Instead relief for landlords is given by way of a basic rate tax reducer – 20% of the finance costs may be deducted from the income tax liability of the landlord.
Jointly owned property
For assets which are owned jointly the split of property income depends on whether the owners are spouses or not.
Where the owners are not spouses, profits are typically split according to the ownership percentage of the property unless another division of profits is mutually agreed. However where spouses own a property jointly, any income is deemed to be shared equally between the spouses unless an election is made to split the income in the same proportion as the ownership of the asset.
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A buy to let property is owned three quarters by Phoebe and one quarter by her husband Felix. If no election is made the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. |
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You can choose whether or not to make the election dependent on the relative income levels of the individuals. If, for example, Phoebe was a higher rate taxpayer and Felix a basic rate taxpayer then it may be preferable not to make the election so that Felix is taxed on a greater proportion of the income. |
Multiple properties
Profits and losses across all UK properties are amalgamated together in a single UK property business. Current year losses on individual properties are therefore automatically set off. Where there is a loss in the overall UK property business this is carried forward and may be used to reduce taxable property income in future years.
If you own any property overseas then this will be treated as an overseas property business and any profits or losses are treated separately from UK properties.
Buy to let - property investment company
Sometimes it may be preferable to operate the property investment business through a company. Clearly there will be non-tax issues to consider (as for Running a business) but some of the key tax differences are:
- generally lower rates of corporation tax than income tax on rental profits
- interest on loans to purchase the property will be deductible from profits in a company regardless of the type of property (rather than as a tax reducer for interest on residential property for individuals)
- capital gains for companies are subject to corporation tax rather than CGT
- no Annual Exempt Amount for companies
- extraction of funds from the company will often result in additional tax charges
- additional taxes may be payable where residential properties worth more than £500,000 are held through a company.
Clearly there are both advantages and disadvantages of operating through a company rather than holding the properties directly. Which approach is best will depend on your individual circumstances so please do get in touch if you either already have or are thinking of starting a property investment business.
Disposal of buy to let property
Disposing of a buy to let property may result in a chargeable gain subject to CGT (if held directly by an individual) or corporation tax (if held by a company).
Generally, Private Residence Relief (see Disposals and CGT) will not be available on the disposal of buy to let properties unless they have been your main residence at some point during the period of ownership.
Renting a room
There has been an increasing number of individuals seeking to generate income from their own home either by taking on a lodger or through ad-hoc lettings such as Airbnb or Vrbo.
Rent a Room relief
Income from letting a room within your main residence is property income. However, if gross rents for a tax year do not exceed £7,500, no income tax is payable. This relief is known as Rent a Room relief.
If rents exceed £7,500, the taxpayer has a choice whether to deduct actual expenses or £7,500.
The £7,500 limit is a maximum which can apply to either a property or a person, so if two individuals jointly own a property and take in a lodger, they must share the limit at £3,750 each.
Capital gains
Having a single lodger sharing the use of facilities such as the kitchen should not impact a taxpayer’s ability to claim Private Residence Relief (see Disposals and CGT).
We can help
Contact us if you:
- Own a second or multiple properties either yourself, jointly with your spouse or others, or in a formal partnership arrangement
- Want to buy a second property or start up a property investment business
- Let out a room or part of your own home
- Are increasing the amount of properties you own
- Own a property overseas
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
