Tax planning for residential landlords
Price Mann • July 21, 2021
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Tax planning for residential landlords
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Planning to take advantage of low interest rates?
After a challenging year for the UK’s residential landlords, you might have read about improvements to the buy-to-let mortgage market in recent weeks.
In the three months to 31 May 2021, the average interest rates for residential landlords had declined. A two-year fixed-rate buy-to-let mortgage fell 0.10 percentage points to 2.95%, while a five-year fixed dropped 0.11 percentage points to 3.30%. For higher loan-to-value (LTV) ratios, the drop was even more significant and as you would expect, it is vice versa for lower LTV. This may partly be down to increased competition.
By April 2021, there were 2,333 buy-to-let mortgage products on offer – more than at any point since the onset of the pandemic.
It all adds up to good news for investors seeking to expand their property portfolio or buy a second home, and this is further enhanced by the fact rental incomes grew 5.9% in April – the fastest growth since January 2015.
If these favourable borrowing conditions appeal to you and you are considering buying a holiday home or further rental properties, here’s a useful overview of the tax landscape and how you can best manage it. Taxes have significantly shifted for landlords over the past five years and it’s not as attractive as it once was to borrow money to fund your purchase.
However, by talking to us you can make sure you are set up in the most efficient way to enjoy your rental income and any capital gains.
Stamp duty land tax taper
Let’s start with a note on the stamp duty land tax holiday. The temporary £500,000 tax-free threshold in England and Northern Ireland no longer applies.
Until 30 September 2021, no stamp duty will be paid on the first £250,000 of residential purchases in England and Northern Ireland. Landlords and second-home buyers can benefit from this, albeit with a 3% surcharge.
To qualify, the deal must be completed before the end of September. So if you were just starting out now, you should be able to benefit assuming you’ve got everything ready to go and the process runs smoothly.
Tax liabilities on rental income
You probably know about your rental income tax obligations if you are an experienced landlord, although it is surprising how many do not. Or you may be getting into property investment for the first time. Either way, much has changed recently.
Rental income is subject to income tax. It is added on to any other taxable income and taxed at the relevant rate. Rental income includes rent, non-refundable deposits, additional costs (such as charges for the cleaning of communal areas in flats), and any refundable deposit you retain. Everyone has a personal allowance of £12,570 in 2021/22. For those whose gross property income is less than £1,000, the property allowance (an extra £1,000 tax exemption).
Rental income which does not see you exceed these limits is not taxable, assuming you have no other source of taxable income, but you might still need to make a declaration.
Generally speaking, after that your tranche of rental profits falling between:
- £12,571 and £50,270 is taxed at 20%
- £50,271 and £150,000 is taxed at 40%
- above £150,000 is taxed at 45%.
If you are married, as with other assets, it can be worth exploring holding properties in your spouse’s name if they are in a lower income tax bracket to you.
Income tax deductions
You can deduct certain costs from your rental income associated with your day-to-day expenses.
These include a range of expenditures from letting agent’s and accountant’s fees, to property maintenance and repair (although not improvement works).
The big change in recent years concerns the rules for buy-to-let mortgage repayments. Prior to 2017, the interest component of these was classed as a deductible expense, often representing a significant saving on income tax.
However, the Government brought in new rules to end this. Between 2017 and 2020, there was a phased regime but mortgage interest payments are no longer deductible. Instead, 20% tax relief can be claimed on your interest payments, subject to certain limits. This is neutral if you pay tax at 20%.
However, if you pay tax at a higher rate it could add a significant cost burden to you and change the dynamics of investing in rental property. Bear in mind that if you extend your property portfolio now, taking advantage of lower interest rates, it might push you into a higher tax bracket.
Property companies
One potential mitigation is to hold your investments in a limited company. Many people do this. Then, rental income is taxed like any business income, with loan interest a deductible expense, currently at a corporation tax rate of 19%. However, there are several knock-on effects.
For example, in addition to the company paying corporation tax, you will probably face personal tax liabilities when withdrawing the money from the company. It is very important to go into such an arrangement fully aware of the implications. We can help you understand the pros and cons.
Capital gains tax considerations
Capital gains tax is a tax levied on any gain you make when you dispose of assets that have gone up in value.
Like income tax, the rate you pay depends on the tax brackets that you are in. For residential property, these are:
- 18% of the gain within the basic-rate band
- 28% of the gain within the higher and additional-rate bands*.
*Uniquely, these are higher capital gains tax rates than for most other asset classes, where the rates are 10% and 20% respectively.
Your primary residence is generally exempt from capital gains tax. But when you own more than one property, such automatic protection is not granted on the additional properties.
It is important to emphasise that capital gains tax is only paid on the profit made on an asset, not the sale price.
You can deduct certain costs; offset some losses on other assets from other years against gains; and everyone has an annual capital gains tax exemption which currently protects the first £12,300 of gains made. This can be arranged to be combined with that of a spouse on joint assets to provide £24,600 annual protection.
Letting relief can reduce the capital gains tax you may pay on a property. However, this is only applicable to people who let out part or all of their own home while residing in it.
Specifically, this tax relief is not available to buy-to-let investors who let out property having never lived in it. Various factors go into working out letting relief, and overall, it is capped at £40,000, or £80,000 for married couples.
Holiday lets
If you are interested in taking advantage of low interest rates to buy a holiday home, these come with their own unique tax rules which can be advantageous.
Strict criteria must be met for a property to qualify as a holiday let, though. These are to do with how often it is made available for hire in the year, who stays in it, and its occupancy rate. If these are met, there are a range of capital gains and income tax allowances that become available.
Optimise your position
If you are attracted by the current low borrowing rates for and are considering buying another property, talk to us first.
The tax rules might have tightened, but we can optimise your returns by compliantly using the appropriate tax allowances.
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Managing risk in your investment portfolio Tips for a balanced investment approach. Investment markets rise and fall, yet the goals that matter to you – retirement security, children’s education, a comfortable buffer against the unexpected – remain constant. Managing risk means giving each goal the best chance of success while avoiding avoidable shocks. You can do that by holding the right mix of assets for your timeframe, using tax wrappers efficiently, and controlling costs and emotions. The 2025/26 UK tax year brings unchanged ISA and pension allowances. This guide explains the key steps, such as diversifying sensibly, rebalancing with discipline, safeguarding cash, and monitoring allowances, so you can stay on track whatever the markets deliver. It is an information resource, not personal advice. Start with a clear plan Define goals and timeframes: Decide what each pot of money is for (for example: house deposit in three years, retirement in 20 years). Time horizon drives how much short-term volatility you can accept. Short-term goals usually need more cash and high-quality bonds; long-term goals can justify more equities. Set your risk level in advance: Ask yourself two questions. Risk capacity: How much loss could you absorb without derailing plans (linked to your time horizon, job security and other assets)? Risk tolerance: How do you feel about market swings? Use a more cautious mix if you are likely to sell in a downturn. Ring-fence cash needs: Keep 3-6 months’ essential spending in easy-access cash before you invest. This reduces the chance of selling investments at a low point to meet bills. Choose simple, diversified building blocks: Broad index funds and exchange-traded funds (ETFs) covering global equities and high-quality bonds provide instant diversification at low cost. Avoid concentration in a single share, sector or theme unless you are comfortable with higher risk. Diversification: Spread risk across assets, regions and issuers Diversification reduces the impact of any single holding. Practical ways to diversify include the following. Assets: Use both growth assets (equities) and defensive assets (investment-grade bonds, some cash). Regions: Combine UK and global holdings. Many UK investors hold too much domestically; global funds spread company and currency risk. Issuers: In bonds, mix UK gilts and investment-grade corporate bonds to diversify credit exposure. Currencies: Equity funds are commonly unhedged (currency moves add volatility but can offset local shocks). For bonds, many investors prefer sterling-hedged funds to lower currency risk. A diversified core helps the portfolio behave more predictably across different market conditions. You can add small “satellite” positions if you wish, but keep any higher-risk ideas to a modest percentage of the whole. Use tax wrappers to reduce avoidable tax and trading frictions Efficient use of ISAs and pensions is one of the most effective risk-management tools because it protects more of your return from tax. ISAs (individual savings accounts) Annual ISA allowance: £20,000 for 2025/26. You can split this across cash, stocks & shares and innovative finance ISAs. Lifetime ISAs (LISAs) are capped at £4,000 within the overall £20,000. Junior ISA (for children under 18): £9,000 for 2025/26 (unchanged). ISAs shield interest, dividends and capital gains from tax. Rebalancing inside an ISA does not create capital gains tax (CGT), which helps you maintain your chosen risk level at lower cost. Note: There has been public discussion about potential ISA reforms, but the current 2025/26 allowance is £20,000. If government policy changes later, we will let you know. Pensions (workplace pension, personal pension/SIPP) Annual allowance: £60,000 for 2025/26 (subject to tapering for higher incomes; see below). You may be able to carry forward unused annual allowance from the three previous years if eligible. Tapered annual allowance: If your adjusted income exceeds £260,000 and threshold income exceeds £200,000, the annual allowance tapers down (to a minimum of £10,000 for 2025/26). Money purchase annual allowance (MPAA): £10,000 for 2025/26 once you’ve flexibly accessed defined contribution benefits (for example, taking taxable drawdown income). Tax-free lump sum limits: The lifetime allowance has been replaced. From 6 April 2024, the lump sum allowance (LSA) caps total tax-free pension lump sums at £268,275 for most people, and the lump sum and death benefit allowance (LSDBA) is £1,073,100. Pensions are long-term wrappers designed for retirement. Contributions usually attract tax relief and investments grow free of UK income tax and capital gains tax while inside the pension. Personal savings: Interest allowances Personal savings allowance (PSA): Basic-rate taxpayers can earn up to £1,000 of bank/building society interest tax free; higher-rate taxpayers up to £500; additional-rate taxpayers do not receive a PSA. Starting rate for savings: Up to £5,000 of interest may be taxable at 0% if your other taxable non-savings income is below a set threshold. For 2025/26, that threshold is £17,570 (personal allowance of £12,570 plus the £5,000 starting rate band). Dividends and capital gains outside ISAs/pensions Dividend allowance: £500 for 2025/26 (unchanged from 2024/25). Dividend tax rates remain 8.75%, 33.75% and 39.35% for basic, higher and additional-rate bands, respectively. The annual capital gains tax (CGT) exempt amount , £3,000 for individuals (£1,500 for most trusts). CGT rates from 6 April 2025: For individuals, 18% within the basic-rate band and 24% above it, on gains from both residential property and other chargeable assets (carried interest has its rate). HMRC examples confirm the £37,700 basic-rate band figure used in CGT calculations for 2025/26. CGT reporting reminder: UK residents disposing of UK residential property with CGT to pay must report and pay within 60 days of completion. Other gains are reported via self assessment (online filing deadline is 31 January following the tax year; if you want HMRC to collect through your PAYE code, file online by 30 December; payments on account remain due 31 January and 31 July). Why this matters for risk: Using ISAs and pensions lowers the drag from tax, allowing you to rebalance and compound returns more effectively. Outside wrappers, plan disposals to use the £3,000 CGT allowance and each holder’s tax bands and consider transfer to a spouse/civil partner (no CGT on gifts between spouses) before selling where suitable. Bonds and cash: Interest-rate and inflation considerations Interest rates: The Bank of England reduced the Bank Rate to 4% at its August 2025 meeting. Bond prices can move meaningfully when rates are high or changing, especially for longer-dated bonds. Consider the duration of bond funds and whether a mix of short- and intermediate-duration exposure suits your time horizon. Inflation: Headline Consumer Price Index (CPI) inflation was 3.6% in the 12 months to June 2025, while the CPI including owner occupiers’ housing costs (CPIH) rose by 4.1%. Inflation affects the real value of cash and bond coupons, and can influence central bank policy, affecting bond prices. Review whether your mix of cash, index-linked gilts and conventional bonds remains appropriate as inflation and interest-rate expectations evolve. Cash strategy: For short-term needs, spread deposits to respect Financial Services Compensation Scheme (FSCS) limits. For longer-term goals, excessive cash can increase the risk of falling behind inflation. Control costs and product risk Keep fees low: Ongoing charges figures (OCFs), platform fees and trading costs compound over time. Favour straightforward funds and avoid unnecessary expenses. Understand the product: Structured products, highly concentrated thematic funds or complex alternatives can behave unpredictably. If you use them, size them modestly within a diversified core. Use disciplined trading rules: Avoid frequent tinkering. Set rebalancing points (see below) and resist acting on short-term news. Rebalancing: Why, when and how Markets move at different speeds. Without rebalancing, a portfolio can “drift” to a higher or lower risk level than you intended. Follow this simple rebalancing framework. Invest in something that will rebalance automatically (i.e. certain ETFs) Frequency: Review at least annually. Thresholds: Rebalance when an asset class is 5 percentage points away from target (absolute) or 20% away (relative). Tax-aware execution: I prefer to rebalance inside ISAs and pensions. Outside wrappers, use new cash or dividends where possible; then consider selling gains up to the £3,000 CGT allowance and factoring in dividend and savings allowances. Implementation tip: If markets are volatile, use staged trades (for example, three equal tranches a few days apart) rather than one large order. Safeguard cash and investments with the right protections FSCS protection (cash deposits): Up to £85,000 per person, per authorised bank/building society group is protected. Temporary high balances from specific life events can be covered up to £1m for six months. The Prudential Regulation Authority has consulted on raising the standard deposit limit to £110,000 and the temporary high balance limit to £1.4m from 1 December 2025 (proposal stage at the time of writing). FSCS protection (investments): If a regulated investment firm fails and your assets are missing or there is a valid claim for bad advice/arranging, compensation may be available up to £85,000 per person, per firm. This does not protect you against normal market falls. Operational risk checks: Use Financial Conduct Authority authorised providers, check how your assets are held (client money and custody), enable multi-factor authentication, and keep beneficiary and contact details up to date. Currency risk: When to hedge For equities, many long-term investors accept currency fluctuations as part of the growth engine, since sterling often weakens when global equities are stressed, partly offsetting losses. For bonds, many prefer sterling-hedged funds to keep defensive holdings aligned with sterling cashflow needs. A blended approach works: unhedged global equities plus mostly hedged bonds. Behavioural risks: Keep decisions steady Common pitfalls include chasing recent winners, selling after falls or holding too much cash after a downturn. Tactics to keep you on track include: automate contributions (regular monthly investing), which spreads entry points write down rules (what you will do if markets fall 10%, 20%, 30%) separate spending cash from investments so you do not sell at weak prices to fund short-term needs use portfolio “buckets” in retirement. Retirement planning: Sequence-of-returns risk and withdrawals If you are drawing an income from investments consider the following. Hold a cash buffer (for example, 12–24 months of planned withdrawals) to avoid forced sales during sharp market falls. Be flexible with withdrawals: Pausing inflation-indexing or trimming withdrawals after a poor market year can help portfolios last longer. Use tax bands efficiently: Consider the order of withdrawals (pension, ISA, general investment account) to make use of personal allowance, PSA, dividend allowance and the CGT annual exempt amount. Take care around the MPAA if you are still contributing to pensions after accessing them. Putting it together: A repeatable checklist Confirm goals and time horizons. Check emergency cash (3-6 months). Map your target asset allocation. Use wrappers first: Fill ISAs and workplace/personal pensions as appropriate. Keep costs low: Prefer broad index funds/ETFs. Set rebalancing rules: Annual review + thresholds. Document tax items: Monitor dividend/CGT use; note 60-day property CGT rule; plan for 31 January/31 July self assessment dates if relevant. Review protection limits: Spread larger cash balances across institutions in line with FSCS; note proposed changes for late 2025. Schedule an annual review to update assumptions for interest rates, inflation and any rule changes. Get in touch if: you are unsure how to set or maintain an asset allocation you plan to draw income and want to coordinate wrappers and tax bands you expect large one-off gains or dividends and want to plan disposals or contributions you have concentrated positions (employer shares, single funds) and want to reduce single-asset risk tax-efficiently you are considering more complex investments. Wrapping up Risk management is not a one-off task but an ongoing discipline. By defining clear objectives, spreading investments across regions and asset classes, using ISAs and pensions to shelter returns, and reviewing allocations at least annually, you create a framework that limits surprises and keeps decisions rational. Document key dates – self assessment payments on 31 January and 31 July, the 60-day CGT rule for property, and the annual ISA reset on 6 April – so tax never forces a sale at the wrong time. Check deposit limits and platform safeguards for peace of mind, and keep a written record of your rebalancing rules to prevent knee-jerk trades. If life events or regulations change, revisit your plan promptly. A measured, systematic approach lets your portfolio work harder while you stay focused on the goals that matter most. Important information This guide is information only and does not account for your personal circumstances. Past performance is not a guide to future returns. The value of investments and income from them can fall as well as rise, and you may get back less than you invest. Tax rules can change and benefits depend on individual circumstances. If you need personalised advice, please contact a regulated financial adviser. If you’d like advice on managing your portfolio, get in touch.
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