Landlord Tax Changes: Section 24, Capital Gains, and Making Tax Digital

The UK property investment landscape has undergone a seismic shift in recent years, driven largely by a series of significant tax reforms. For landlords, understanding and adapting to these changes is no longer optional—it's fundamental to maintaining a profitable and compliant portfolio. The trifecta of Section 24 landlord tax restrictions, the looming possibility of Capital Gains Tax property 2026 changes, and the administrative overhaul of Making Tax Digital landlord requirements creates a complex web of obligations that demands proactive planning. Many UK teams now handle this with dedicated property inventory software.

This article cuts through the complexity to provide clear, actionable advice. We will explore the enduring impact of the mortgage interest relief restrictions, assess the potential future of Capital Gains Tax (CGT) for property disposals, and offer a practical guide to preparing for the digital tax revolution. The goal is to equip you with the knowledge for effective landlord tax planning, ensuring your property business remains both efficient and fully compliant with HMRC.

The Enduring Impact of Section 24: Mortgage Interest Relief Restrictions

Introduced gradually from 2017 and fully implemented by April 2020, Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how individual landlords (not limited companies) can deduct finance costs. Previously, landlords could deduct their mortgage interest and other finance costs from their rental income before calculating their tax bill. Now, they receive a basic rate (20%) tax reduction on their finance costs instead.

The impact is most severe for higher-rate (40%) and additional-rate (45%) taxpayers. Under the old system, a higher-rate taxpayer effectively received 40% tax relief on their mortgage interest. Under Section 24, they only receive a 20% tax credit. This can push landlords into a higher tax band or create a tax liability even when their actual cash profit (after paying the mortgage) is low or negative. It's crucial to understand that the restriction applies to all finance costs, including mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out or repaying mortgages.

Strategic Responses to Section 24

Landlords have several strategic avenues to explore in response to Section 24, each with its own pros and cons:

• Incorporation: Transferring your property portfolio into a limited company structure. Corporation Tax is currently lower than higher-rate Income Tax, and finance costs remain fully deductible as a business expense. However, this triggers Capital Gains Tax and Stamp Duty Land Tax charges on transfer, and mortgage rates for limited companies are often higher.
• Reviewing Rental Income: Ensuring rents are at a sustainable market level to absorb the increased tax burden. This must be balanced against tenant affordability and local market conditions.
• Maximising Allowable Expenses: Diligently claiming every legitimate expense to reduce the taxable profit figure. This includes repairs, maintenance, insurance, letting agent fees, accountancy fees, and a proportion of running costs.
• Utilising the Property Allowance: For those with very low rental income, the £1,000 property allowance may be more beneficial than deducting actual expenses.

Capital Gains Tax on Property: What Could Change by 2026?

Capital Gains Tax (CGT) is levied on the profit made when selling or disposing of an asset that has increased in value. For landlords, this is a critical consideration when selling a rental property. Currently, individuals have an annual CGT tax-free allowance (the Annual Exempt Amount), which has been significantly reduced to £3,000 for the 2024/25 tax year. The CGT rate for residential property gains is 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.

Speculation about future changes often centres on the possibility of aligning CGT rates more closely with Income Tax rates, a recommendation made by various think tanks and the Office of Tax Simplification in the past. While no such change is currently legislated, the political and fiscal landscape means it remains a possibility in future budgets, potentially by 2026. Any such move would dramatically increase the tax cost of selling a property.

Proactive CGT Planning for Landlords

Given the potential for increased rates and the already reduced allowance, proactive planning is essential:

1. Keep Meticulous Records: Maintain records of all costs associated with acquiring, improving, and selling the property. These 'allowable costs' (purchase fees, stamp duty, improvement works, estate agent and solicitor fees) are deducted from the sale price to calculate the gain.
2. Understand Private Residence Relief (PRR): If you have lived in the property as your main home at any point, you may be entitled to PRR for that period plus the final 9 months of ownership, which can significantly reduce the taxable gain.
3. Consider Timing: If you are contemplating a sale, model the tax impact under current rates versus potential future rates. Spreading a disposal across two tax years can also help utilise two years' Annual Exempt Amount.
4. Explore Other Reliefs: Look into Gift Hold-Over Relief if gifting property, or Business Asset Disposal Relief if you are selling a business (though this rarely applies to standard buy-to-let).

Making Tax Digital for Income Tax: The Digital Compliance Revolution

Making Tax Digital (MTD) for Income Tax is HMRC's flagship initiative to digitise the UK tax system. For landlords, it represents the biggest change to tax administration in a generation. Under MTD for Income Tax Self Assessment (ITSA), landlords with gross rental income over £50,000 (from April 2026) or over £30,000 (from April 2027) will need to use MTD-compatible software to:

• Keep digital records of their income and expenses.
• Submit quarterly updates to HMRC directly from their software.
• Submit an End of Period Statement (EOPS) and a final declaration (replacing the traditional SA100 tax return).

The mandate for those with income over £50,000 starts on 6 April 2026 >. Landlords with income between £30,000 and £50,000 will join from 6 April 2027. HMRC has also signalled its intent to eventually include those with income over £20,000, though no date has been set.

A Practical Roadmap to MTD Compliance

Preparation is key to avoiding last-minute stress and potential penalties. Here is a step-by-step guide:

1. Assess Your Income: Determine your gross rental income (before expenses) to identify your MTD start date.
2. Research Software: Begin exploring MTD-compatible software now. Popular options for landlords include Xero, QuickBooks, FreeAgent, and specialist property software like Landlord Vision. Ensure it is on HMRC's list of compatible software.
3. Digitise Your Records: Transition from spreadsheets or paper records to digital ones. Your software must be able to record each transaction (date, category, amount) and store digital copies of receipts.
5. Understand the Quarterly Updates: These are not full tax calculations. They are simply updates of your cumulative income and expenses for each quarter (e.g., 6 April to 5 July). The software will generate and submit these.
6. Engage with Your Accountant: If you use an accountant, discuss MTD with them immediately. They will likely manage the software and submissions on your behalf, but you will still need to provide digital records.

"The shift to Making Tax Digital is not just a change of form; it's a change of mindset. Landlords who embrace digital record-keeping early will not only ensure compliance but will also gain a much clearer, real-time view of their property business finances." - ARLA Propertymark

Integrating Your Tax Strategy: A Holistic Approach

The most effective landlord tax planning does not treat Section 24, CGT, and MTD as isolated issues. They are interconnected elements of your overall tax position. For example, the increased taxable profit caused by Section 24 could push you into a higher tax band, which in turn affects the CGT rate you pay on a disposal. Similarly, the digital records required for MTD will provide the precise data needed to accurately calculate your finance cost credit and allowable expenses.

Building a relationship with a qualified accountant who specialises in property tax is highly recommended. They can help you model different scenarios, such as the long-term cost-benefit of incorporation versus remaining as a sole trader, and ensure you are claiming all allowable expenses. Bodies like the NRLA (National Residential Landlords Association) and ARLA Propertymark offer resources and guidance to help you stay informed.

Conclusion: Staying Ahead of the Curve

The UK landlord tax environment is characterised by ongoing reform and increased digital oversight. The key to navigating it successfully lies in education, planning, and professional advice. To summarise:

• Section 24 is here to stay; model its impact and review your business structure.
• Capital Gains Tax may change; meticulous record-keeping and strategic timing of disposals are vital.
• Making Tax Digital is imminent; start your digital transition and software research now.

By taking a proactive, integrated approach to your tax affairs, you can mitigate liabilities, ensure compliance, and secure the long-term profitability of your property investment. The time for landlord tax planning is not when a tax return is due or a sale is agreed—i