How to reduce tax on rental income: a landlord’s guide for 2026/27

Landlords have been squeezed from every direction, including the loss of full mortgage interest relief, higher borrowing costs, and a new set of separate property tax rates arriving in April 2027 that will increase the tax bill. Many landlords are paying more tax on their rental profits than they need to, simply because nobody has sat down and planned it. So what can you legally do to reduce the tax on your rental income in 2026/27, and what changes should you be preparing for now?

How is rental income taxed in 2026/27?

Your rental profit, which is your rental income less allowable expenses, is added to your other income and taxed at your marginal rate of Income Tax: 20%, 40% or 45%. Since mortgage interest relief was restricted to a basic-rate tax credit, higher-rate landlords in particular have watched their effective tax bills climb because they are taxed on rent they never really see.

What is changing in April 2027, and why should you act now?

At the Autumn Budget 2025, the government announced that property income will have its own separate tax rates from April 2027. The property basic rate will be 22%, the property higher rate 42%, and the property additional rate 47%, which is two percentage points above the equivalent rates on earned income in each band. Finance cost relief on your mortgage interest, currently given at the basic rate, will be given at the new property basic rate of 22%.

In plain terms, from April 2027 your rental profits will be taxed more heavily than the same amount of salary. A higher-rate landlord with £30,000 of rental profit will pay £600 a year more purely because of the rate change. That may not sound dramatic on its own, but it comes on top of every other pressure landlords are already facing, making the structural questions below considerably more urgent than they were a year ago.

Warning! April 2027 is not far away, and the decisions needed to respond to it, including incorporation, ownership restructuring and transfers between spouses, all take months to execute properly and can carry their own tax costs if rushed. Landlords who start planning in 2027 will be planning too late. This is the year to model your options.

Are you claiming every allowable expense?

Most landlords quietly overpay because they simply miss deductions. Allowable costs typically include letting agent and management fees, repairs and maintenance, landlord insurance, ground rent and service charges, accountancy fees, the cost of replacing domestic items, and finance cost relief on your mortgage interest. Keeping thorough digital records not only maximises these claims but also prepares you for Making Tax Digital, which brings landlords with property income over £50,000 into quarterly reporting from April 2026.

Note. The line between a repair, which is deductible now, and an improvement, which is not, is one HMRC examines very closely. Replacing a broken boiler with an equivalent one is a repair, whereas replacing it with a substantially better system is an improvement. Having worked inside HMRC, we know precisely where that line sits and how the argument is run, so you can claim confidently without overstepping. Improvements are not lost. Instead, they reduce your Capital Gains Tax when you sell, provided you have kept the relevant records.

Should you own property personally or through a limited company?

Holding property through a limited company restores full relief on mortgage interest, taxes profits at Corporation Tax rates of 19% to 25% rather than Income Tax rates of up to 47%, and allows profits to be reinvested more efficiently. From April 2027, when property income rates rise, the gap widens further and the corporate route becomes even more attractive.

However, incorporation is not automatically better, and firms that market it as a default solution are not doing their clients a service. Moving existing properties into a company is treated as a disposal at market value. It can trigger Capital Gains Tax at 18% or 24% on residential property, as well as Stamp Duty Land Tax, including the 5% surcharge on additional dwellings. Incorporation relief under section 162 TCGA 1992 can defer the capital gain where the letting activity amounts to a genuine business, but it is fact-dependent and HMRC does challenge it. There are also running costs to consider, and mortgage rates for corporate borrowers are typically higher.

Example. The Ahmed family own four rental properties personally and, as higher-rate taxpayers, lose much of the benefit of their mortgage interest. We modelled both routes. Moving the existing four properties into a company would have triggered an immediate SDLT and CGT charge that would have taken more than a decade to recover, so we left them where they are. However, we structured all future acquisitions through a new limited company, which captures the benefit going forward with no entry cost at all. The answer was bespoke, and it was neither “incorporate” nor “do not incorporate”. It was both.

Can you share rental income with your spouse?

If you own property jointly with a lower-earning spouse or civil partner, shifting more of the taxable income to them means more of it is taxed at 20% or 22% instead of 40% or 42%. Property held jointly by spouses is taxed 50:50 by default regardless of the actual ownership split, so to be taxed in line with a different split you must both own it in unequal shares and file a Form 17 declaration with HMRC, supported by a declaration of trust. Done correctly this is a straightforward and entirely legitimate way to cut the family tax bill; done carelessly, or after the fact, it fails.

Planning ahead for Capital Gains Tax

Tax planning does not stop at rental profit. When you sell, Capital Gains Tax is due at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on residential property, and the annual exempt amount is now just £3,000. Planning the timing of a sale across tax years, using both spouses’ exemptions and rate bands, and keeping full records of capital improvements can materially reduce the eventual bill.

Warning! A UK residential property disposal must be reported and the Capital Gains Tax paid within 60 days of completion, not by the following January. This deadline catches landlords out constantly, and late filing means automatic penalties on top of the tax. We handle this reporting for you so nothing slips

Why landlords choose Merit?

As Chartered Tax Advisers, we go well beyond filing your Self Assessment. We build a property tax strategy that covers ownership structure, expense claims, income splitting between spouses, the April 2027 rate change and the eventual disposal, because these decisions interact, and taking them one at a time is how landlords end up trapped. Our HMRC background means your claims are robust and your records are enquiry-ready, which matters more in property than almost anywhere else, since HMRC receives data directly from letting agents and platforms. Because we have built businesses and portfolios ourselves, the advice is grounded in the commercial reality of being a landlord, including cash flow, voids and borrowing, not just the theory.

The practical next steps are to review your last three years of expense claims for anything missed, check whether a Form 17 declaration would help if you are married, and model the April 2027 rate change against your portfolio now, while there is still time to restructure.

Frequently asked questions

Paying too much tax on your rental income  and ready for what April 2027 brings? Merit Accountants are Chartered Tax Advisers and former HMRC insiders who build property tax strategies that stand up to scrutiny and keep more profit in your pocket. Book a landlord tax review today.