This guide explains the fundamental framework for how rental income from UK property is taxed. Whether you own a single buy-to-let flat or a portfolio of commercial properties, understanding these core principles is essential for reporting property income correctly.
HMRC treats property letting as a business activity for tax purposes, with specific rules governing how profits are calculated, which expenses can be deducted, and how losses are treated. The system applies to both residential and commercial property, furnished and unfurnished lettings, and covers individuals, companies, partnerships, and trustees.
This overview sets out the key features of UK property taxation and explains how HMRC's Property Income Manual structures these rules.
What HMRC Means by a Property Business?
A UK property business includes all activity for generating income from land in the UK. This definition comes from section 264 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA05) for taxpayers charged to Income Tax, and section 205 of the Corporation Tax Act 2009 (CTA09) for taxpayers charged to Corporation Tax.
Profits from UK land or property are treated, for tax purposes, as arising from a business as per UK property taxation guidelines. However, this does not mean the taxpayer is actually treated as if they are trading; unless they meet the normal trading tests. For example, capital gains tax reliefs available to traders are not normally available to property landlords.
The broad scheme is that property business profits are computed using the same principles as for calculating the profits of a trade, but the activity remains distinct from trading activity.
Who Carries On a Property Business?
Any person or body of persons carries on a UK property business if they:
Own or have an interest in land or property in the UK, and
Enter into transactions that produce rents or other receipts liable to Income Tax or Corporation Tax from that land or property
Those who carry on a property business includes:
Individuals
Partners
Trustees
Personal representatives
Trustees in bankruptcy
Companies, including non-residents with UK property income
A person carries on a property business even if they engage an agent to handle it for them. The person carries on the business through the agent. The agent does not become the person running the business for tax purposes under UK property taxation laws.
Under section 271 of ITI5, the person liable to income tax is the person receiving or entitled to the profits. A person carries on a UK property business if they are entitled to income generated from land in the UK, regardless of whether they hold the legal title to the property.
Single Business Treatment
In most cases of UK property taxation, all the various types of income from land and property in the UK are treated as parts of the same, single property business. It does not matter how many properties the taxpayer has, or how many different types of income from land and property. This is clear from section 264(a) (UK property businesses) and section 265(a) (overseas property businesses).
This means that normally all property business receipts and expenditure can be amalgamated. Therefore, the expenses on one property can be deducted from the receipts of another property.
However, if a landlord has income from property in the UK and income from property outside the UK, the landlord is treated as having two businesses: a UK property business and an overseas property business. Legislation does not amalgamate them, meaning losses from one cannot be offset against profits from the other.
How UK Property Taxation Works? The Key Features:
Tax Year Basis for Income Tax
Profit and loss computations must be on a tax year basis. The profit for the year ended 5 April 2024 is charged for 2023-24, and so on for later years.
The basis period for a property business carried out by an Income Tax customer is the tax year (6 April to 5 April), noting that for accounting dates between 31 March and 4 April, the profit or loss from the day after the accounting date to 5 April is treated as nil.
Two exceptions previously applied, property let by a trading or professional partnership used the trade basis period, and the trade basis period applied where letting amounted to a trade (such as hotels or guest houses). These trade basis period rules ceased to apply from 6 April 2024 following transitional arrangements in 2023-24. However, the rules on spreading transition profits apply only to trading income and not to property income as defined by UK property taxation standards.
UK Property Taxation Applies to All LettingsTax applies to both furnished and unfurnished lettings. This includes:
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How Profits Are Calculated for UK Property Taxation?
For Income Tax customers (individuals, partnerships, and non-UK resident companies up to April 2020):
Since the 2017-18 tax year, the cash basis is the default way of reporting profits or losses of a property business for most Income Tax customers. This is subject to certain exceptions. Before this change, the vast majority of landlords had to use Generally Accepted Accounting Practice (GAAP).
Profits and losses under the cash basis are computed by reference to receipts and payments in the tax year, rather than amounts earned or incurred. Specific rules apply to determine which expenses are allowable under the cash basis.
For Corporation Tax customers (companies, including non-UK resident companies from April 2020):
Profits and losses are computed in the same way as trading profits or losses, as applied by section 210 CTA09. Normal trading income rules are used, commencing with accounts drawn up in accordance with Generally Accepted Accounting Practice and subject to appropriate adjustments.
Corporation Tax customers cannot use the cash basis, they must use GAAP-based accounting.
Replacement of Domestic Items Relief
Replacement of domestic items relief allows a deduction for certain capital items. This replaced the previous wear and tear allowance and applies to the cost of replacing domestic items such as furniture, furnishings, household appliances, and kitchenware in residential properties.
Property Allowance
From tax year 2017-18, a property allowance is available which allows property income under £1,000 to be fully relieved. Where property income exceeds that threshold, partial relief may be available. This is an Income Tax relief and does not apply to Corporation Tax customers.
Mortgage Interest and Finance Cost Restriction
From 6 April 2017, there has been a restriction on relief for residential mortgage and other loan interest for Income Tax purposes. The changes were phased in from April 2017.
Under these rules, relief for finance costs (mortgage interest and similar) in respect of a dwelling-related loan is restricted for tax years 2017-18 onwards for Income Tax customers. The restriction does not apply to Corporation Tax customers; companies can continue to deduct finance costs as an expense when calculating property business profits.
Self-Assessment
The self-assessment rules for payments on account and balancing payments apply to property income in the same way as for other income. Taxpayers must report property business profits in their tax returns and pay any tax due under the normal self-assessment deadlines and payment rules.
Income Tax vs Corporation Tax: Difference in UK Property Taxation
The rules for taxing property income differ depending on whether the taxpayer is subject to Income Tax or Corporation Tax.
Current legislation for property businesses carried out by individuals or partnerships is within Part 3 ITTOIA05. For 2005-06 onwards, the main Income Tax rules for taxing UK property income have been brought together in this Part.
Current legislation for property businesses carried on through a corporate entity is within Part 4 CTA09, which applies to accounting periods ending on or after 1 April 2009.
How the Rules Apply in UK Property Taxation?
Income Tax | Corporation Tax | |
|---|---|---|
Basis Period | The basis period is the tax year (6 April to 5 April), subject to the exceptions noted above | Tax is chargeable on profits arising in an accounting period |
Computation Method | Most customers use the cash basis from 2017-18, subject to certain exceptions. Those excepted from the cash basis use normal trading income principles | Profits are computed using normal trading income principles (GAAP-based), as applied by section 210 CTA09 |
Finance Cost Restriction | Relief for finance costs on dwelling-related loans has been restricted from 2017-18 onwards | The finance cost restriction does not apply. Companies can deduct finance costs as normal business expenses |
Property Allowance | The £1,000 property allowance is available | No property allowance applies |
Loss Relief | Individuals follow the Income Tax property loss rules. | Companies follow the Corporation Tax loss relief rules |
Non-UK Resident Companies in UK Property Taxation from 2020
From 6 April 2020, non-UK resident companies that carry on a UK property business came within the charge to Corporation Tax from that date. A company with an existing UK property business at that date was chargeable to Income Tax on the profits of that business until 5 April 2020, and to Corporation Tax from 6 April 2020.
This change meant these companies moved from the Income Tax regime (Part 3 ITTOIA05) to the Corporation Tax regime (Part 4 CTA09), with corresponding changes to how profits are calculated and how losses can be used.
UK Property Taxation vs Overseas Property Taxation
If a landlord has income from property in the UK and income from property outside the UK, the landlord is treated as having two businesses:
A UK property business
An overseas property business
Legislation does not amalgamate these two businesses. This separation has important consequences for loss relief. Losses from one business cannot be offset against profits from the other.
Overseas Property Definition
The definition of an overseas property business is identical to the definition of a UK property business, except that the land from which the income arises is outside the UK. The legislation is contained in section 265 of ITTOIA05 (for Income Tax) and section 206 of CTA09 (for Corporation Tax).
Furnished Holiday Lettings
If a landlord has Furnished Holiday Lettings (FHLs), the profits are part of the taxpayer's UK or overseas property business, depending on where the property is located. FHLs are not a third category of property business. They form part of either the UK or overseas property business.
However, special property tax rules apply to income and gains from FHLs, giving them characteristics closer to trading income in some respects. The furnished holiday lettings rules cease to apply in tax years commencing on or after 6 April 2025 for Income Tax and Capital Gains Tax, and 1 April 2025 for Corporation Tax and Corporation Tax on chargeable gains.
Special Cases and Exceptions of Property Tax in the UK
Activities Carried on in Different Capacities
In UK property taxation law, an individual can act in different legal capacities. Property business activities are treated as parts of a single business where carried on by the same person in the same legal capacity.
However, spouses or civil partners living together are generally treated as entitled to income in equal shares under section 836 ITA07 unless a valid declaration on form 17 is made to tax income according to beneficial ownership. Where different legal capacities are involved, different property businesses result.
An individual might have property income in several different capacities. They could, for example:
Hold property in their own right
Be a member of a partnership with a part share in property which the partnership lets
Be a trustee of a trust receiving rental income
These would all have to be treated as belonging to different property businesses. A loss on one cannot be set against a profit on another.
Trustees, executors, and partners are common examples of cases where a person acts in a different legal capacity. Executors act on behalf of the estate of the deceased, not for themselves. Any property business conducted in a different capacity must be kept separate from any personal property business.
Priority Over Trading Income
Section 4(1) of ITTOIA05 makes clear that a charge under Part 3 (property income) generally has priority over a charge under Part 2 (trading income).
The sort of receipt to which this rule might apply is rent received by a property developer from the temporary letting of land awaiting development. The rent is taxed as property income, even if it could properly be regarded as a trade receipt.
Exceptions to this priority rule exist for certain specific types of income, such as wayleaves and rent from property outside the UK in certain circumstances.
Commercial Lettings
There are special rules for properties which are not let on commercial terms. Where property is let at below market rent, or where letting arrangements are primarily for non-commercial reasons, the normal property business rules may be modified or restricted.
Rent-a-Room Scheme
Receipts from letting a room or rooms in the taxpayer's own home may be covered by the rent-a-room scheme. This is an Income Tax relief only and provides an annual exemption for rent-a-room income up to a specified threshold.
Summary of UK Property Taxation Principles
UK property taxation treats rental activities as a business for tax purposes, encompassing individuals, companies, partnerships, and trustees, regardless of whether the property is residential, commercial, furnished, or unfurnished. All UK property income typically forms a single property business, and for Income Tax customers, profits are generally calculated using the cash basis from the 2017-18 tax year, with the tax year running from 6 April to 5 April.
For Corporation Tax customers, profits are calculated based on normal trading income principles following GAAP-compliant accounts. Key features include the £1,000 property allowance for Income Tax customers, restrictions on relief for mortgage interest and finance costs (phased in from 2017-18), and the replacement of domestic items relief for capital expenditure on domestic items.
Property businesses in the UK are treated separately from overseas property businesses, with losses from one jurisdiction not being offset against profits from the other. Non-UK resident companies transitioned from Income Tax to Corporation Tax for UK property income from 6 April 2020.
When individuals carry on property businesses in different legal capacities—such as an individual, partner, trustee, or executor—each must be treated as a separate business. The furnished holiday lettings regime, which previously allowed special treatment for certain lettings, will cease to apply from April 2025. In cases where both property income and trading income could apply to the same receipt, property income generally takes priority, though there are some specific exceptions.
