Tax Planning Tips for Landlords and Buy-to-Let Investors
Buy-to-let investing remains a popular way to generate income and build wealth in the UK. However, recent changes in tax legislation, particularly the introduction of Section 24, have significantly impacted how landlords manage their tax affairs. Effective tax planning has become more important than ever for landlords to protect their profits and comply with the evolving tax rules.
This comprehensive guide covers essential tax planning tips for landlords and buy-to-let investors in 2025. We will explain the implications of Section 24, explore allowable expenses that can reduce taxable income, and evaluate whether incorporating your property business is the right move.
Understanding Section 24: The Tax Law That Changed Buy-to-Let Investing
In April 2017, the UK government introduced Section 24 as part of a wider plan to make the tax system fairer. This rule restricts the amount of mortgage interest landlords can deduct from their rental income when calculating taxable profits.
What Exactly Is Section 24?
Before Section 24, landlords could deduct all their mortgage interest costs from rental income before paying tax. This provided a straightforward way to reduce taxable profits. However, Section 24 phased out this deduction, replacing it with a 20% tax credit on mortgage interest payments.
How Does Section 24 Affect Landlords?
- Tax Relief Cap: Landlords can no longer deduct their full mortgage interest expense from rental income.
- Tax Credit: Instead, they receive a basic rate (20%) tax credit on mortgage interest payments.
- Higher Rate Taxpayers: Landlords in higher tax brackets (40% or 45%) are more negatively impacted since they can only claim 20% tax relief instead of their marginal tax rate.
- Cash Flow Impact: This change has increased the tax bills for many landlords and impacted cash flow, particularly for those with highly leveraged properties.
Who Does Section 24 Apply To?
Section 24 applies to individual landlords and partnerships but does not apply to limited companies. This distinction has driven many landlords to consider incorporation as a way to reduce their tax liability.
Tax Planning Tips to Mitigate Section 24’s Impact
Despite these changes, there are still ways for landlords to plan their tax affairs efficiently:
Maximise Allowable Expenses
While mortgage interest relief has been restricted, many other expenses remain deductible. Understanding allowable expenses is crucial to lowering your taxable rental income.
Consider Incorporation
Given that Section 24 does not affect companies, many landlords weigh the benefits of running their buy-to-let properties through a limited company. We’ll cover the pros and cons later.
Utilise Your Personal Allowances and Tax Bands
Strategic use of tax-free personal allowances and income splitting with spouses or family members can help minimise overall tax liability.
Allowable Expenses for Buy-to-Let Landlords
HMRC allows landlords to deduct a range of expenses from their rental income to arrive at taxable profit. This reduces the amount of tax payable and should be at the heart of any tax planning strategy.
Here are common allowable expenses for landlords:
Mortgage Interest (Post Section 24)
- While you cannot deduct mortgage interest from rental income, you can still claim a 20% tax credit on mortgage interest payments.
Maintenance and Repairs
- Costs of maintaining the property in good condition, such as fixing broken windows, leaking roofs, or faulty boilers, are deductible.
- Note: Improvements or renovations that increase the property’s value are considered capital expenses and are not allowable.
Letting Agent Fees and Management Costs
- Fees paid to letting agents or property management companies are allowable expenses.
Legal and Professional Fees
- Legal fees related to tenancy agreements, eviction notices, or tax advice are deductible.
- Accountancy fees for preparing rental accounts are also allowable.
Buildings and Contents Insurance
- Premiums for landlord insurance policies, including buildings and contents coverage, can be deducted.
Council Tax and Utility Bills (If Paid by Landlord)
- If the landlord pays council tax, water rates, or utility bills for the rental property, these are allowable expenses.
Ground Rent and Service Charges
- Charges levied by freeholders or managing agents are deductible.
Advertising for Tenants
- Costs incurred in advertising the property to find tenants are allowable.
Other Expenses
- Stationery, phone calls, travel expenses related to managing the property (within reason), and direct costs like cleaning or gardening are allowable.
Important Note on Capital Expenditures vs. Revenue Expenditures
One critical distinction for landlords is between revenue expenses (allowable for tax) and capital expenses (not allowable for immediate deduction but may be claimable through capital allowances or upon sale). Understanding this difference is essential when applying effective Tax Planning Tips, as it helps landlords make informed decisions about what can be deducted now and what may benefit them later.
- Revenue expenses are day-to-day running costs, repairs, and maintenance.
- Capital expenses are improvements or renovations that add value, such as adding a new extension or fitting a new kitchen.
Understanding this distinction ensures you claim the correct deductions and do not risk penalties from HMRC.
Incorporation: Should You Set Up a Limited Company?
One of the biggest decisions landlords face under Section 24 is whether to continue as an individual or set up a limited company to hold buy-to-let properties.
Why Consider Incorporation?
- Mortgage Interest Deduction: Limited companies can still deduct full mortgage interest as a business expense.
- Corporation Tax Rate: Companies pay corporation tax on profits, which is often lower than higher personal income tax rates.
- Retained Profits: Profits can be retained in the company and reinvested tax-efficiently.
- Inheritance and Succession Planning: Shares in a company can be easier to transfer as part of inheritance planning.
Pros of Incorporation
- Tax Efficiency: Potentially lower tax bills, especially for landlords with multiple properties or high mortgage interest.
- Limited Liability: Shareholders are generally protected from business debts beyond their investment.
- Professional Image: Some tenants and lenders may view incorporated landlords as more established.
Cons of Incorporation
- Initial Costs and Ongoing Compliance: Setting up a company requires legal and accounting fees, plus annual filing with Companies House and preparation of statutory accounts.
- Mortgage Availability: Not all lenders offer buy-to-let mortgages to limited companies, and rates may be higher.
- Withdrawal of Profits: Extracting profits via dividends or salaries involves tax planning tips and sometimes extra costs.
- Complexity: More administrative burden and accounting requirements.
Who Should Consider Incorporation?
- Landlords with a large portfolio or substantial mortgage interest.
- Those planning to expand property investments.
- Individuals looking for long-term tax planning and succession strategies.
Other Tax Planning Tips for Landlords
Income Splitting With Spouses or Family Members
If your spouse or civil partner has a lower income tax rate, transferring ownership of the property or shares in a company can reduce the overall tax paid on rental profits.
Utilising the Personal Allowance
Each individual has a personal tax-free allowance (£12,570 for the 2025/26 tax year). Make sure you’re making full use of your allowances by distributing income where possible.
Pension Contributions
For landlords running a limited company, making employer pension contributions can be a tax-efficient way to reduce corporation tax while saving for retirement.
Keep Accurate Records
Meticulous bookkeeping ensures you don’t miss any allowable expenses and can provide evidence in the case of HMRC inquiries.
Common Pitfalls to Avoid
Failing to Register for Self-Assessment
If you receive rental income, you must register for self-assessment with HMRC and file tax returns on time to avoid penalties.
Misclassifying Capital and Revenue Expenses
Confusing improvements with repairs can lead to HMRC challenges and additional tax liabilities.
Ignoring Section 24 Implications
Many landlords underestimated the impact of Section 24 and were caught out by higher tax bills.
Not Seeking Professional Advice
Property tax can be complex, and getting tailored advice from a qualified accountant or tax advisor is invaluable.
Conclusion
Tax planning tips for landlords and buy-to-let investors have become more critical than ever, especially with the ongoing impact of Section 24 mortgage interest restrictions. By understanding allowable expenses, considering the pros and cons of incorporation, and employing smart tax strategies, landlords can protect their returns and grow their property portfolios efficiently.
Careful planning, record-keeping, and professional advice will help landlords navigate the complexities of property tax while making the most of the opportunities available in 2025 and beyond.
If you’re a landlord or buy-to-let investor, take time now to review your tax position and plan accordingly — your future profits depend on it.
