From April 2027, Britain is going to tax property income differently from ordinary earned income.

For individual landlords, the new property income rates will be 22%, 42% and 47%. That is two percentage points above the corresponding basic, higher and additional rates applying to other income.

On its own, that is a tax rise. But for mortgaged residential landlords it lands on top of a much older change that already makes the tax calculation look very different from the cash economics of running a property: Section 24.

What Section 24 actually does

Before the restriction, an individual landlord could generally deduct qualifying mortgage interest when calculating rental profit. Section 24 changed that treatment for residential property finance costs.

The restriction was phased in from April 2017 and has applied in full since the 2020/21 tax year. Individual residential landlords no longer deduct mortgage interest from rental income in the normal way when calculating taxable property profit. Instead, qualifying finance costs can generate a 20% basic-rate tax reduction, subject to HMRC’s limits.

That distinction matters enormously for higher-rate taxpayers and for heavily mortgaged properties.

How can a landlord owe tax when the property barely made money?

Take a deliberately simple example. A landlord receives £12,000 of rent and pays £8,000 of mortgage interest, with no other costs included here purely to isolate the Section 24 effect.

Economically, there is £4,000 left before tax. But the taxable property profit used in the income-tax calculation is not simply £4,000, because the £8,000 interest is not deducted in the normal way.

A higher-rate landlord can therefore be taxed by reference to a much larger property-profit figure and then receive only the restricted finance-cost tax reduction. Add repairs, insurance, agent fees, compliance costs or a period without a tenant and the cash position can deteriorate further.

In sufficiently leveraged circumstances, it is possible for the resulting income-tax liability to exist even when the property has produced little or no cash profit after finance costs. That is the real issue behind the phrase “tax on a loss”. It is not that HMRC literally labels an accounting loss as profit; it is that the tax rules and the landlord’s cash economics can diverge sharply.

Then the 2027 property tax rates arrive

Budget 2025 created separate income-tax rates specifically for property income from 6 April 2027: 22% at the property basic rate, 42% at the property higher rate and 47% at the property additional rate.

The measure applies to individuals and partnerships receiving property income. Companies are treated differently: the residential finance-cost restriction does not apply to companies in the same way, and companies pay Corporation Tax rather than these personal property-income rates.

Will tenants end up paying some of it?

This is where the debate becomes more interesting than simply “landlords pay more tax”.

The Office for Budget Responsibility’s costing explicitly incorporates a small pass-through of the higher property tax into rents. In other words, the government’s independent fiscal watchdog does not assume the entire tax increase simply disappears from landlords’ returns with no effect elsewhere.

That does not mean every landlord can simply add the tax bill to the rent. Rents are ultimately constrained by local supply, demand and what tenants can afford. But when costs rise across a market with constrained rental supply, some pressure can feed through into rents, while some landlords may instead sell or restructure.

Taxing landlords and taxing tenants are not the same thing. But pretending the two can never interact ignores how a rental market actually works.

The incentives matter

The government expects the new property-income rates to raise around £590 million in 2028/29, according to its policy costing. That costing also anticipates some behavioural response, including a limited number of landlords choosing to operate through companies.

There are costs and tax consequences to incorporation, so it is not a magic switch. Nor should anybody restructure a property business purely because of one headline tax rate without professional advice.

But incentives do change behaviour. An individual landlord comparing a highly leveraged rental property with genuinely passive alternatives will naturally compare the return after financing, regulation, maintenance and tax.

What landlords should check before April 2027

1. Calculate the real post-tax cash flow. Do not confuse taxable property profit with the money actually left in your bank account.
2. Stress-test higher interest costs. Section 24 becomes more painful as finance costs consume more of the rent.
3. Understand which 2027 property rate applies to you. The rates will be 22%, 42% and 47%, but the actual bill depends on your wider tax position.
4. Do not incorporate blindly. Moving personally owned property into a company can trigger tax, financing and transaction consequences.
5. Review each property individually. A strong unleveraged property and a weak highly leveraged property can behave completely differently under the same tax rules.

The bigger housing question

The political argument around landlords often gets reduced to whether landlords deserve sympathy. That is the wrong test for housing policy.

The better question is what happens to rental supply, rents and investment when the return from supplying a home changes.

A tax can be justified and still have behavioural consequences. A landlord can absorb some of a tax rise, pass some through where the market allows, reduce investment, repay debt, incorporate or leave the sector. The eventual outcome is determined by all of those responses together.

From April 2027, we are about to get another real-world test of that.

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Sources

• HMRC: Tax relief for residential landlords and the finance-cost restriction
• HMRC: Working out rental income and allowable expenses
• HM Treasury: Budget 2025 policy costings
• Office for Budget Responsibility: Economic and fiscal outlook, November 2025

This article is general information, not individual tax advice. Tax outcomes depend on personal circumstances and rules can change.

Written by Aren Deu | The Anxious Investor