It has been a tumultuous decade or so for landlords. There have been tax changes impacting the rental sector on an almost yearly basis since 2013 and a surprise announcement in Budget 2026 kept the pressure on landlords, with further implications for rental profitability and investment decisions.
Whilst the political rationale behind taxing landlords is clear, the impact of this latest tax raid is likely to have wide-ranging implications.
The tax changes for landlords
Whilst we were already aware of a 2% hike in the tax rates on rental income (as well as savings income) being introduced, the unexpected Budget development was that this was being further increased to 4%. This means that, from 6 April 2027, rental profits will be taxable at a maximum of 49% for additional rate taxpayers.
However, this isn’t the end of the story. Given previous tax changes, specifically in relation to the restriction on the deduction of mortgage interest, this can lead to disproportionate outcomes where the landlord has a highly leveraged portfolio.
The impact on landlords
Let’s take an example of a landlord who has used significant mortgage borrowings to build a rental portfolio. Their gross rental income amounts to £200,000, with £50,000 of allowable expenses, such as letting fees, insurance, etc. They also have £100,000 of mortgage interest payable, due to the recent increase in interest rates, which gives them an economic profit of £50,000 to live off.
Prior to the numerous changes, the £50,000 would be subject to income tax at the taxpayer’s marginal rates. Assuming the taxpayer has no other income, this would be tax of roughly £7,500, at an effective rate of just under 15%
However, this position from 6 April 2027 is very different. The taxable profit is now £150,000. Tax is payable at the new, higher rates, giving a gross tax bill of around £59,700. Relief for mortgage interest is given as a basic rate deduction, so only £24,000 is able to be credited against the gross tax. This gives a net tax bill of £35,700 at an effective rate of over 71%.
The fallout
The above example, whilst extreme in the level of mortgage interest to profit, is not unheard of. It also doesn’t take into account the higher Stamp Duty Land Tax (SDLT) on additional properties, potential higher rate of council tax and general cost of living pressures.
The interesting point on these changes is that they all apply to individual landlords and not companies. Companies already have a lower top rate of tax, at 25% compared to the new 49% rate, and can get full relief on mortgage interest costs (subject to niche corporate interest restrictions).
As such, you could be forgiven to think that the easy route for landlords is just to incorporate their rental business. However, this can lead to significant capital gains tax and SDLT liabilities which can make this option unviable.It may therefore be the case that a lot of existing landlords will need to sell up due to the increased tax burden, or increase rents.
Could we also see a concentration of corporate landlords creating a monopoly on the rental market?
Whilst UK property is still seen as a popular investment, this highlights the complexity surrounding the industry, and the need for good tax advice in order to structure any investment from the outset.
Explore our Autumn Budget 2026 Hub to discover the latest tax, business and financial services insights following the Chancellor’s announcements.
