Rachel Reeves to stage ANOTHER tax raid on landlords as income tax on rents is ratcheted up
Landlords have been dealt a hammer blow by the Chancellor these days Budget.
Rachel Reeves announced that the tax paid by investors on rental income will be charged at higher rates as of April 2027.
The change would ensure homeowners are taxed 2 percentage points above regular income tax rates. Landlords paying a basic rate of tax will see their rental income taxed from 20 per cent to 22 per cent.
Meanwhile, homeowners paying higher rate tax will see their rental income taxed at 42 per cent, up from today’s 40 per cent, while additional rate taxpayers will be taxed at 47 per cent, up from 45 per cent currently.
The Office for Budget Responsibility (OBR) says this is estimated to bring the Treasury £500 million a year from 2028-29.
Buy-to-rent coup: Income tax applied to homeowners on rental income will increase by 2 percentage points from 2027
The changes will reduce incomes for homeowners who have already suffered from higher taxes and increased regulations since 2016.
Rachel Reeves had added 2 percent to her previous budget in October 2024. stamp duty The extra 3 percent surcharge that homeowners already pay adds thousands of pounds to the cost of renting and second home purchases.
Homeowners who own property in their own name rather than through a company structure are also no longer able to fully offset their mortgage interest costs from their tax bills as before.
Jason Tebb, chief executive of property portal OnTheMarket, thinks the additional tax on rental income is ‘catastrophic’ for landlords.
‘This reform will see more and more landlords withdraw from the private rental sector to further reduce rental supply,’ he said.
How much tax will homeowners pay?
Landlords who currently hold buy-to-let property in their own name rather than through a limited company are currently paying income tax through rental profits.
The amount a landlord receives in rent is added to other income he earns to determine the tax rate he pays.
A landlord with an annual income between £12,571 and £50,270, including earnings from rent and wages, therefore pays 20 per cent tax.
Above this, they pay 40 per cent tax on earnings between £50,271 and £125,271, and 45 per cent tax on earnings above that.
This means that a basic rate taxpayer making a rental profit of £10,000 would pay income tax of £2,000 on the rental profit, while a higher rate tax paying landlord making a rental profit of £10,000 would pay income tax of £4,000 on the rental profit.
Rental profit is the amount remaining after deducting other expenses such as agency fees and repairs.
The Chancellor’s announcement today will mean that a landlord paying basic rate tax with a rental profit of £10,000 will see his tax bill rise from £2,000 to £2,200, while a landlord paying a higher rate of tax will see his tax bill rise from £4,000 to £4,200.
Homeowners with mortgages on their properties will feel the pinch more acutely as their expenses are higher. This is the case for around 2 million homeowners, according to UK Finance figures.
| Rental income (after expenses) | £12,000.00 | £18,000.00 | £24,000.00 | £30,000.00 |
|---|---|---|---|---|
| Extra tax for basic taxpayer | £240.00 | £360.00 | £480.00 | £600.00 |
| Extra tax for higher taxpayer | £240.00 | £360.00 | £480.00 | £600.00 |
| Extra tax for additional rate taxpayer | £240.00 | £360.00 | £480.00 | £600.00 |
| Source: Hargreaves Lansdown |
New tax could mean rents rise
Real estate industry experts say the new tax could be the last straw for many landlords who are already struggling with increased legislation, including the Tenants’ Bill of Rights, which comes into force on May 1 next year.
The OBR says successive tax increases on private landlords’ returns will reduce the supply of homes for rent in the long term, and if demand for properties exceeds supply ‘this creates a risk of a steady long-term increase in rents’.
Colleen Babcock, property expert at Rightmove, thinks landlords will increase their rents to cover the extra 2 per cent income tax.
‘Landlords may seem like an easy target, but rental market taxes are often detrimental to tenants looking to rent a home,’ says Babcock.
‘The simple truth is that investors need to be able to raise the sums to provide tenants with much-needed homes.’
Julian Bradshaw, director of chartered accountants Smith & Pinching, thinks a 2 per cent increase in property income tax will leave thousands of homeowners struggling to collect the sums.
‘Unless they can remortgage into a much cheaper mortgage, most people will see their profits completely wiped out,’ says Bradshaw.
‘Capital appreciation has also weakened as official data shows property prices slowly rising and even falling in some parts of the country.
‘As a result, many amateur or ‘accidental’ homeowners may conclude that the hassle of owning a property is no longer worth the meager income it generates.’
Major tax change: Landlords paying higher rates of tax will see their rental income taxed at 42% from 2027, up from 40% today
More homeowners will buy companies
Homeowners who buy real estate have two options; to do so in their own name or to establish a limited company and purchase the property within that company. Features can be changed from one to another.
Given tax changes in recent years, many homeowners see buying within a limited company as a way to pay less tax.
Companies have surged in recent years, and a record 70,000 companies are expected to be established by the end of 2025, according to the Hamptons.
Mark Harris, managing director of mortgage broker SPF Private Clients, said: ‘This Budget is the final nail in the coffin for homeowners who own property in their own name.
‘With the limited company structure, it is very difficult to make a profit unless you own property.
‘We have seen an increasing number of clients either purchasing investment property this way or moving existing portfolios into a limited company structure in their own name, and we now expect this trend to increase.’
Owning a limited company allows property investors to fully offset any mortgage interest from their rental income before paying taxes.
Tax benefits: As the gap between personal and corporate tax rates widens further thanks to the budget, more homeowners are likely to incorporate their own taxes.
This is different from homeowners who own property in their own name. They only get a tax deduction of 20 percent of their mortgage interest payments.
This is less generous for higher-rate taxpayers, who received a 40 percent tax break on mortgage costs before the rule change in 2016.
A higher rate taxpayer homeowner paying £500 a month in mortgage interest on a property rented for £1,000 a month now pays tax on the full £1,000, with a rate of 20 per cent on the £500 used for the mortgage.
A landlord who owns a limited company paying £500 a month in mortgage interest on a property rented for £1,000 a month will only pay tax on £500 of this income.
Simply put, individual landlords are effectively taxed on turnover, while company landlords are taxed only on profits.
There are other advantages to buying property through a limited company; Including that the corporate tax paid in a company structure is lower than the income tax paid for homeowners who own property in their own name.
This allows homeowners to make a profit in-house and they can use this to reinvest in another property sooner than they would normally be able to if they had it in their own name.
