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2% property income tax rise- the last straw for residential landlords?
Will the 2% property income tax rise be the last straw for residential landlords?
The forthcoming 2% increase in property income tax rates from April 2027 represents yet another headwind for residential landlords — a sector already navigating substantial regulatory and financial change. While the rise will undoubtedly squeeze profitability further, it is best understood within the broader context of the reforms and market pressures reshaping residential property investment.
Quantifying the immediate impact
Consider a landlord owning five properties at £250,000 each, earning £1,400 per month gross rent per property, with interest-only mortgage payments of £600 per month, and no other income. The tables below compare their net position across tax years.
Figure 1: No other income — 2025–26 vs 2027–28
| 2025–26 (£) | 2027–28 (£) | |
|---|---|---|
| Income | ||
| Total gross rent | 84,000.00 | 84,000.00 |
| Deductible expenses | ||
| Mortgage interest | — | — |
| Repairs, maintenance & insurance | (9,000.00) | (9,000.00) |
| Taxable profit | 75,000.00 | 75,000.00 |
| Income tax | ||
| £12,570 @ 0% (personal allowance) | — | — |
| £37,700 @ 20% / 22% | (7,540.00) | (8,294.00) |
| £24,730 @ 40% / 42% | (9,892.00) | (10,386.60) |
| Mortgage interest credit (20%/22% × £36,000) | 7,200.00 | 7,920.00 |
| Less mortgage interest (non-deductible) | (36,000.00) | (36,000.00) |
| Net take-home | 28,768.00 | 28,239.40 |
The additional annual tax cost in this scenario is approximately £525 — meaningful but not catastrophic in isolation.
Since April 2020, mortgage interest is no longer fully deductible; landlords instead receive a 20% tax credit on interest paid. Making Tax Digital (MTD) requirements add quarterly reporting obligations from April 2026 (income above £50,000) and April 2027 (above £30,000). Add rising compliance costs and the abolition of the Furnished Holiday Let scheme in April 2025, and the cumulative burden is substantial.
Is incorporation a solution?
The 2% rise naturally prompts landlords to reconsider incorporation. Using the same portfolio in 2027–28, here is how a corporate structure compares — first for a landlord with no other income:
Figure 2: Company vs individual — no other income (2027–28)
| Company (£) | |
|---|---|
| Total gross rent | 84,000.00 |
| Mortgage interest | (36,000.00) |
| Repairs, maintenance & insurance | (9,000.00) |
| Taxable profit | 39,000.00 |
| Corporation tax @ 19% | (7,410.00) |
| Dividend tax (£500 @ 0%; £31,090 @ 10.75%) | (3,342.18) |
| Net take-home | 28,247.83 |
Company net take-home of £28,247.83 vs £28,239.40 as an individual — broadly identical when there is no other income.
Figure 3: £75,000 other income — individual vs company (2027–28)
| Individual (£) | Company (£) | |
|---|---|---|
| Total gross rent | 84,000.00 | 84,000.00 |
| Mortgage interest | — | (36,000.00) |
| Repairs, maintenance & insurance | (9,000.00) | (9,000.00) |
| Taxable profit | 75,000.00 | 39,000.00 |
| Corporation tax @ 19% | — | (7,410.00) |
| Income tax (42% / 47% bands) | (32,743.00) | — |
| Mortgage interest credit | 7,920.00 | — |
| Less non-deductible mortgage interest | (36,000.00) | — |
| Dividend tax on profit (35.75%) | — | (11,114.68) |
| Net take-home | 14,177.00 | 20,475.33 |
For higher-rate taxpayers with other income, incorporation saves over £6,000 per year in this example.
When incorporation makes sense
- You have significant other income pushing rental profits into higher or additional rate tax bands
- The portfolio is heavily leveraged — full mortgage interest deduction within a company becomes increasingly valuable
- Gross rental income alone places you in the additional rate band
- You wish to roll up profits within the company, deferring dividends until retirement when tax rates may be lower
- Succession planning: shares in a family investment company may be simpler to pass on than individual properties
The significant hurdles of incorporation
- Business mortgage rates are typically higher, and switching on incorporation can trigger arrangement fees or early repayment penalties
- Unless incorporation relief applies, transferring properties into a company creates stamp duty land tax (SDLT) and capital gains tax (CGT) liabilities
- Ongoing compliance costs: corporation tax returns, company accounts, and director obligations add administrative and professional fees
The wider pressures
Rental reforms from May 2026 will move all tenancies to rolling assured periodic agreements, introduce extended notice periods, limit advance rent to one month, and restrict annual rent increases. Properties — particularly London flats — have also seen stagnant or declining capital values, eroding one of residential property's historic attractions.
Our view at TTAM Ltd
The 2% income tax increase is unlikely on its own to prompt mass landlord exits. But layered on top of mortgage interest restrictions, MTD compliance, rental reforms, and muted capital growth, it adds to a picture of mounting pressure.
Incorporation is not a universal answer. For smaller portfolios with modest other income, the numbers rarely stack up once CGT, SDLT, and higher financing costs are factored in. For larger, higher-yielding portfolios or those with substantial other income, the case is stronger — particularly with long-term estate planning in mind.
Every landlord's position is different. We strongly recommend a personalised review of your portfolio before making any structural changes.
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