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.
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.
| 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.
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:
| 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.
| 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.
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.
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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