Property income tax rates are changing…
The government have announced they will create a new tax rate for property income. In the same way dividends are subject to their own income tax rates, rental income will become subject to separate rates as follows:
- Basic rate: 22%
- Higher rate: 42%
- Additional rate: 47%
i.e. an additional 2% on the existing rates of income tax.
At the time of writing, we do not expect the new rates to apply to Scottish resident taxpayers as the Scotland parliament have devolved powers to set their own rates for non-savings income. Any changes for Scottish residents will therefore be decided in the next Scottish Budget which is set for January 2026.
How will tax bills increase?
The table below illustrates how tax liabilities will increase depending on the monthly rental:
| Monthly rental | Annual increase in tax |
| £2,000 pcm | £480 |
| £3,000 pcm | £720 |
| £4,000 pcm | £960 |
| £5,000 pcm | £1,200 |
When will the tax rates increase?
From 6 April 2027. The first tax payment under the new tax regime will be due 31 January 2029.
High Value Council Tax Surcharge
Today’s Autumn Budget also confirmed the introduction of a High Value Council Tax Surcharge in respect of properties worth more than £2m from April 2028. The annual charge will be £2,500 rising to £7,500 for properties worth more than £5m. This will be administered alongside existing Council Tax and will be a charge levied on the homeowner rather than the tenant. We do not know whether it will be a deductible expense for landlords. It will unlikely be an allowable credit for foreign tax purposes as it is being referred to as a surcharge.
Any changes to mortgage interest relief?
No. Basic rate taxpayers will continue to be able to deduct in full their mortgage interest. Higher rate and Additional rate payers will continue to be able to claim a basic rate tax deduction which will increase to 22% “Finance Cost Relief”.
Are rental properties held within a Limited company affected by property income tax changes?
Rental properties held within a company are unaffected and the corporation tax remains at 25% (19% for certain companies). We will likely see some landlords look to incorporate their rental business to benefit from the income tax saving. The main hurdle for landlords in incorporating their rental business is however the capital gains tax and stamp duty land tax cost of doing so. The income tax and possible inheritance tax savings need to be carefully weighed up against the cost of transfer. Every situation is different and bespoke advice should be sought.
How are trusts affected?
Discretionary trusts pay income tax at the top rate and therefore trustees will be exposed to 47% income tax on rental income. Interestingly if the trust makes an income distribution to the beneficiary this may not be taxed at the new property rates because the characteristic of the distribution has changed. Hopefully there will be more clarity on this point soon.
A life interest trusts pay tax at the basic rate of tax and therefore will be exposed to 22% income tax.
Maximising your rental deductions
It is as important as ever to keep good (ideally digital records) and ensure you are claiming all allowable expenditure. Especially with the introduction of Making Tax Digital form 2026.
As a reminder, an expense which is incurred wholly and exclusively for the purpose of the rental business is allowable and is not a capital cost is deductible. Repairs are allowable but capital costs which improve the property are not. Deciding whether a property is capital or revenue is not always straightforward and now the tax saving could be 47% versus a capital gains tax saving at 24%. Seeking professional advice is important to maximise relief and minimise an enquiry from HMRC.
Will non-resident landlords be affected?
Yes, there is no separate carve out for non-residents.
The UK usually has primary taxing rights on rental income and even if the income is being taxed in another country it should still be reported in the UK and will be taxable here. Foreign tax credits are usually allowed in the country of residence to avoid double taxation.
Do I need to file a tax return?
HMRC’s guidance confirms that if your net rental profit is more than £2,500 or your gross receipts exceed £10,000, then you will need to file a tax return. This applies to UK and non-UK residents. Non-resident landlords also need to register on the Non Resident Landlord Scheme.
The 0% tax free personal allowance stands at £12,570 but is only available to UK Nationals, citizens of a EEA country or other specified individuals. See here: INTM334580 – Double Taxation applications and claims: applicants/claimants – individuals: Individuals entitled to UK personal allowances – HMRC internal manual – GOV.UK
Navigating the Autumn Budget’s property income tax changes
There was lots of speculation pre Autumn Budget regarding rental income being subject to National Insurance. The change to a new property income tax is therefore bad news for pensioners who will not be exempt but it does mean that income tax bills could be improved by way of pension contributions (if there are relevant earnings) or benefit from loss relief. Should you require any assistance with any of the above topics then please get in touch with me or your usual Mercer & Hole contact.
