You Own a Rental. But Do You Know How It's Actually Taxed?

You've got a rental. Maybe two. Maybe more.

You're watching the tax landscape shift beneath your feet.

Furnished Holiday Let regime? Gone.

New property income tax rates? Coming.

Quarterly digital reporting? On the horizon.

And while everyone's running around panicking or burying their heads in the sand, you're here. Looking for answers.

Good. Because I'm about to give you the complete picture.

This isn't a quick summary. This is everything you need to know about how UK rental properties are taxed right now, what's already changed in 2025, and what's coming down the pipeline through 2028.

Bookmark this page. You'll need it.

The Big Picture: April 2025 Changed Everything

Let's start with what just happened.

On 6 April 2025, the Furnished Holiday Lettings (FHL) tax regime was abolished.

For decades, FHL properties enjoyed special tax treatment. Full mortgage interest deductions. Capital allowances on furniture. Business Asset Disposal Relief when you sold. Pension contribution advantages.

All gone.

If you owned a qualifying FHL before April 2025, you were playing a different game to regular buy-to-let landlords.

Now? Everyone's on the same pitch.

Short-term lets, holiday rentals, serviced accommodation - they're all taxed exactly like standard rental properties.

Some landlords saw this coming and restructured. Most didn't.

If you're still operating as if the old rules apply, you're about to get a nasty surprise from HMRC.

This Isn't Passive Income Anymore

The minute you step into short-term letting, you're not just a landlord.

You're a business owner.

Doesn't matter if it's in your personal name or a limited company.

You're playing a new game now - one with new rules, higher stakes, and less room for error.

And the rules just got tighter.

Personal Name vs. Limited Company - The 2025 Reality

Let's keep it simple:

Personal Ownership (Current - Tax Year 2025/26):

• Rental income taxed at your personal income tax rate - 20%, 40%, or 45%
• Mortgage interest? Only 20% offset via a basic-rate tax credit (Section 24)
• Sell the property? Capital Gains Tax at 18% (basic rate) or 24% (higher rate)
• No more capital allowances on furniture and fixtures
• No more Business Asset Disposal Relief on sale

Limited Company Ownership:

• Pay corporation tax on profits - currently 25% (19% on profits under £50k)
• Mortgage interest? Still fully deductible as a business expense
• Reinvest profits or pay yourself via dividends
• Dividend tax rates rising from April 2026

The Bottom Line?

Personal ownership is simpler but increasingly punished by the tax system.

Company ownership is more strategic - especially as your portfolio grows and if you're leveraged.

But transferring existing properties to a company triggers Stamp Duty and potentially CGT. It's not a decision to make lightly.

The Section 24 Elephant in the Room

Here's where most landlords lose money without realising it.

Section 24 (the mortgage interest restriction) still applies to all individually-owned rental properties.

How it works:

You can't deduct mortgage interest from your rental income.

Instead, you get a tax credit worth 20% of your mortgage interest.

Sounds similar? It's not. Not even close.

Example:

• Rental income: £20,000
• Mortgage interest: £12,000
• Other expenses: £3,000

Old system: Tax on £20,000 - £12,000 - £3,000 = £5,000 profit

Section 24: Tax on £20,000 - £3,000 = £17,000 profit, then a 20% credit on the £12,000 mortgage interest

If you're a higher-rate taxpayer, you're paying 40% on £17,000 but only getting back 20% on £12,000.

That's a brutal difference.

For highly leveraged landlords, Section 24 can turn a profitable property into a cash-flow disaster - especially when you factor in the new rates coming in 2027.

New Property Income Tax Rates - April 2027

Here's what most landlords don't know yet.

The Autumn Budget 2025 introduced a separate, higher tax rate specifically for property income starting April 2027.

That's a 2% increase across the board on rental profits.

What does this mean in real money?

A higher-rate taxpayer landlord with £30,000 annual rental profit will pay an extra £600 per year in tax.

Multiply that across a portfolio. Add in the Section 24 restrictions. Factor in rising mortgage rates.

The margins are getting squeezed from every direction.

One small silver lining: The mortgage interest tax credit will rise from 20% to 22% to match the new basic rate. But that doesn't help higher-rate taxpayers much.

Dividend Tax Changes - April 2026

If you operate through a limited company and pay yourself dividends, heads up.

From April 2026:

• Ordinary rate: 8.75% rises to 10.75%
• Upper rate: 33.75% rises to 35.75%
• Additional rate: 39.35% (unchanged)
• Dividend allowance: £500 (unchanged)

Combined with corporation tax at 25%, the total effective tax rate on extracting profits via dividends is creeping up.

Still better than personal ownership for many landlords - but the gap is narrowing.

Making Tax Digital - The Quarterly Reporting Revolution

This is the one that's going to catch people off guard.

From April 2026, landlords with gross rental income over £50,000 must comply with Making Tax Digital for Income Tax.

From April 2027, the threshold drops to £30,000.

From April 2028, it drops again to £20,000.

What does this mean?

No more annual tax returns.

Instead, you'll submit quarterly updates to HMRC via approved digital software.

Plus a final declaration by 31 January.

What you'll need:

• MTD-compatible accounting software (Xero, QuickBooks, FreeAgent, etc.)
• Digital records of all income and expenses
• Quarterly submission discipline

HMRC aren't providing free software. You'll need to pay for it.

If you've been running your rentals off the back of a spreadsheet and an annual chat with your accountant, that model is dead.

Business Rates vs. Council Tax - The Loophole (Updated)

Here's the hack landlords used to love:

If your property was:

• Available for letting 140+ days per year
• Actually let 70+ days per year

You could get it classed as a business, not a domestic dwelling.

That meant business rates instead of council tax.

And if the rateable value was under £15,000? You'd qualify for Small Business Rate Relief (SBRR). Under £12,000? 100% relief. Zero bill.

Beautiful.

What changed in 2025?

Small Business Rate Relief is still alive and well. That hasn't changed.

What did change is Retail, Hospitality and Leisure Relief - a totally different scheme that got cut from 75% to 40% from April 2025, with a cap of £110,000 per business.

If you're running a larger portfolio through one company, that's a squeeze.

But for single-property landlords or smaller setups? SBRR still applies - assuming your rateable value is low enough.

The catch: Getting that rateable value can be like pulling teeth. The Valuation Office Agency is slow, some councils play awkward, and if your property's in a personal name, you might get more resistance.

Still - if you qualify, business rates with SBRR can save you a serious chunk compared to council tax.

Just don't confuse the reliefs, and definitely don't assume it's automatic.

The FHL Abolition - What You Lost

Let's be specific about what disappeared on 6 April 2025:

1. Full Mortgage Interest Deduction

FHL owners could deduct 100% of mortgage interest against rental income.

Now? Same 20% tax credit as everyone else (Section 24).

2. Capital Allowances

FHL owners could claim capital allowances on furniture, fixtures, and fittings - including 100% first-year relief on things like fitted kitchens.

Now? You get Replacement of Domestic Items Relief instead - only covering the replacement cost of beds, sofas, appliances, etc. Not the same thing at all.

Transitional rule: If you had capital allowance pools before 5 April 2025, you can continue claiming writing-down allowances on that existing expenditure. New purchases after April 2025? No capital allowances.

3. Capital Gains Tax Reliefs

FHL owners could claim Business Asset Disposal Relief (10% CGT rate on the first £1m of lifetime gains instead of 24%).

They could use Rollover Relief to defer gains by reinvesting in other business assets.

They could use Gift Hold-Over Relief when passing properties to family.

All gone for sales after April 2025 - unless your FHL business ceased before April 2025 and you sell within 3 years.

4. Pension Contributions

FHL income used to count as "relevant UK earnings" for pension contribution calculations.

Not anymore.

Joint Ownership Alert - Critical Deadline Passed

If you and your spouse or civil partner owned an FHL together, you had a critical deadline in April 2025.

FHL properties were exempt from the automatic 50:50 profit split rule for married couples.

After abolition, the default 50:50 split now applies - unless you filed Form 17 within 60 days of 6 April 2025.

If you missed this and want unequal profit allocation, you may need to restructure ownership. Speak to a solicitor.

How Profit Is Actually Calculated

This is where most landlords fall flat.

It's not: "What rent I got" minus "What I paid the bank" equals Profit.

That formula is for amateurs.

Here's how it really works:

• Collect all guest revenue from Airbnb, Booking.com, direct bookings
• Deduct operational costs - cleaning, linen, restocking, maintenance, management fees
• Calculate your net operating income
• Deduct allowable fixed costs - business rates/council tax, utilities, insurance, broadband
• The result is your taxable profit

Then apply Section 24 rules on mortgage interest (20% tax credit, not a deduction).

Then apply the relevant income tax rate to your profit.

That's what determines your actual tax bill.

What You Can and Can't Offset

Allowable expenses include:

• Cleaning and laundry
• Linen and restocking
• Consumables (tea, coffee, toiletries)
• Management fees
• Maintenance and minor repairs
• Insurance (building, contents, landlord liability)
• Council tax or business rates
• Utilities (if you pay them)
• Broadband, TV licences, streaming subscriptions
• Accounting and legal fees
• Replacement of domestic items (beds, sofas, appliances - like for like)

You can't deduct:

• Property improvements or upgrades (new kitchen, loft conversion, extension)
• Your own time
• Personal expenses
• Mortgage interest (this goes through Section 24 as a tax credit instead)

If you own via a limited company, you also get full relief on mortgage interest as a business expense. That alone can make a huge difference to profitability.

Capital Gains Tax - What You'll Pay When You Sell

Current CGT rates on residential property:

• 18% for basic-rate taxpayers
• 24% for higher and additional-rate taxpayers

Annual CGT allowance: £3,000 (down from £12,300 in 2022/23)

No changes were announced in the Autumn 2025 Budget - but with the allowance already slashed, the tax hit on sale is bigger than ever.

Planning tip: If you're considering selling, the timing matters. Utilise your annual allowance. Consider if your spouse has unused allowance. Think about the tax year you're selling in.

The High Value Property Surcharge - From 2028

One more thing on the horizon.

From April 2028, a "mansion tax" style council tax surcharge applies to properties valued over £2 million:

• £2m - £5m: £2,500 - £7,500 annual surcharge (banded)
• Over £5m: £7,500 annual surcharge

Based on 2026 valuations. Levied on property owners, not tenants.

Most landlords won't be affected - but if you're playing in the high-end market, factor this in.

Action Checklist: What to Do Now

Immediate (Before April 2026):

1. Review your mortgage interest exposure and model the impact of Section 24
2. If you had FHL capital allowance pools, ensure you're still claiming writing-down allowances
3. Consider whether limited company ownership makes sense for future purchases
4. Get proper accounting software set up - you'll need it for MTD

Before April 2026 (If gross income over £50k):

1. Sign up for Making Tax Digital testing phase
2. Establish quarterly record-keeping habits
3. Choose MTD-compatible software

Before April 2027:

1. Model the new 22%/42%/47% property income tax rates into your projections
2. Review your dividend extraction strategy if operating via a company
3. Consider income-splitting with lower-earning spouse if applicable

The Bottom Line

Short-term lets are still powerful.

They still offer strong cash flow, solid returns, and flexibility that long-term lets can't match.

But the margin for error is shrinking.

The tax system is getting more complex. The reporting requirements are getting stricter. The reliefs are getting smaller.

If you don't understand how this works - or you're still operating on 2024 assumptions - you'll get blindsided.

THE PROPERTY DON doesn't just manage properties.

We build profitable systems, track every pound in and out, and help landlords run these assets like the businesses they are.

Because that's what they are now. Businesses. And businesses that don't know their numbers don't survive.

Want to stop guessing and start earning with clarity?

Book a call with Don. Let's make sure you're playing this game with your eyes open.

Tax rules and reliefs change frequently. This guide was fully updated on 29 November 2025 to reflect the Autumn Budget 2025 announcements and FHL abolition. Always consult a qualified accountant or tax adviser for guidance specific to your situation. This is not financial or tax advice.