Tax-Efficient Landlording

Most landlords focus on rent, costs, and maybe yield. But tax is often the largest single line item eating into returns — and it's the one they understand least.

You don't need to become an accountant. But understanding how property income is taxed, and what legitimate options exist to reduce it, can meaningfully improve your net position. The difference between a naive approach and a thoughtful one can be thousands of pounds a year.

How Rental Income Is Taxed

Rental income is taxed as income, not capital gains. That means it's added to your other earnings and taxed at your marginal rate: 20%, 40%, or 45% depending on the band you fall into.

If you're a higher-rate taxpayer, almost half of every pound of profit goes to HMRC. That's before National Insurance (if applicable) and after you've already covered mortgage interest, maintenance, and compliance.

This is why gross rent is misleading. A landlord earning £10,000/year in rental profit might keep only £5,000–£6,000 of it. The taxman is your silent partner, and a senior one.

Allowable Expenses

The first lever is ensuring you claim everything you're entitled to. Many landlords leave money on the table simply by forgetting to deduct legitimate costs.

Allowable expenses include:

Letting agent fees and property management costs
Repairs and maintenance (but not improvements — the distinction matters)
Insurance premiums (landlord, building, contents)
Accountancy and legal fees related to the property
Advertising costs for finding tenants
Ground rent and service charges (for leasehold properties)
Council tax and utilities (if you pay them during voids)
Travel costs for property inspections and management

Keep receipts. Log mileage. Track everything. The more complete your records, the lower your taxable profit.

Mortgage Interest: The Section 24 Problem

Before 2017, landlords could deduct mortgage interest in full from rental income. Section 24 changed that. Now you can only claim a 20% tax credit — which means higher-rate taxpayers effectively lose relief on part of their interest.

This change hit leveraged landlords hardest. If your mortgage interest is high relative to rent, your taxable profit can exceed your actual cash profit. You can owe tax on money you never saw.

The only real solutions are structural: pay down the mortgage, refinance to reduce interest, or hold the property in a company (more on that below).

Holding Property in a Limited Company

One increasingly common strategy is to own rental properties through a limited company rather than personally.

Companies pay corporation tax, currently 25%, instead of income tax. That's lower than the higher personal rates. And mortgage interest is still fully deductible against company profits — Section 24 doesn't apply.

The catch: extracting profits from the company triggers additional tax (dividends or salary). And transferring existing properties into a company usually crystallises capital gains tax and stamp duty, making it impractical for most.

But for new purchases, or landlords building portfolios from scratch, a company structure is worth serious consideration. Speak to an accountant before deciding — the right answer depends on your income, plans, and how long you intend to hold.

Capital Gains and Exit Planning

When you sell, capital gains tax applies to the profit. Rates are 18% or 24% depending on your income, and you get an annual allowance (currently £3,000).

Timing matters. Selling multiple properties in the same tax year can push you into a higher band. Spreading disposals across years — or using your spouse's allowance — can reduce the bill.

There's also principal private residence relief if you've ever lived in the property, and lettings relief in limited circumstances. These are shrinking over time, but worth checking if you're planning to exit.

The Bigger Picture

Tax efficiency isn't about dodging obligations. It's about understanding the rules and structuring your affairs so you don't pay more than you owe.

Good record keeping, proper expense claims, thoughtful ownership structures, and smart exit timing — these aren't aggressive tactics. They're what professional landlords do. The amateur approach is to ignore tax until January, then scramble. The professional approach is to plan for it all year round.

If you're serious about yield, get serious about tax. It's the lever most landlords ignore — and the one that often matters most.