The government's latest guidance on guarantor agreements has prompted many landlords to dig out old tenancy paperwork. If your property has a guarantor who signed before 1 May 2026, you may need to review those arrangements to ensure they remain enforceable under the new tenancy rules.
For many landlords, that sounds like a legal housekeeping exercise. What they do not understand is that these reforms can also affect their tax position.
We help you understand exactly this in this article and explain what UK-resident and non-resident landlords should consider.
Key Takeaways
- According to the UK government's guidance on the Renters Rights Act 2025, landlords should review any guarantor agreement entered into before 1 May 2026 and obtain the guarantor's consent if the tenancy agreement is varied in a way that could affect the guarantor's liability
- As provided under the Renters Rights Act 2025, landlords can no longer require rent before a tenancy agreement is signed and, for new tenancies from 1 May 2026, can generally require no more than one month's rent in advance
- According to HMRC, the cash basis is the default method of accounting for most unincorporated landlords; HMRC Property Income Manual PIM1094 and section 271A of the Income Tax (Trading and Other Income) Act 2005 explain how the cash basis operates
- This means rental income is generally taxed when it is received, so restrictions on collecting several months' rent in advance may reduce the one-off income spikes that previously arose from large upfront payments
- As explained in HMRC's Property Income Manual PIM2010, landlords can generally claim tax relief for expenses incurred wholly and exclusively for their property business; this may include costs such as rent guarantee insurance, tenant referencing and professional guarantor services where they are incurred for letting the property
- Whether the new rent-in-advance rules improve, worsen or have little effect on your tax position depends on your individual circumstances, including your accounting basis and rental income pattern
Why Is the Government Telling Landlords to Review Guarantor Agreements?
A landlord should review any guarantor agreement signed before 1 May 2026 because the Renters Rights Act 2025 has fundamentally changed the legal structure of residential tenancies in England. According to the latest government guidance on fees you can charge as part of a tenancy updated on 7 July 2026, guarantor agreements entered into before that date may no longer operate as intended, so landlords should review existing guarantor agreements, obtain the guarantor's consent to any necessary variations and seek independent legal advice where they are unsure whether an agreement is affected.
For tax purposes, however, the more significant change is not the guarantor agreement itself. It is the new restriction on rent-in-advance. Before 1 May 2026, many landlords, particularly those letting to overseas tenants, students or tenants without a suitable UK guarantor, reduced the risk of non-payment by requiring several months' rent upfront. Under the Renters Rights Act 2025, landlords can generally require no more than one month's rent in advance for new tenancies.
Why does that matter for tax? Because most individual landlords use the cash basis, under which rental income is generally taxed when it is received rather than when it is earned. If you received 10 months' rent in one payment before the tenancy began, that entire amount was taxable in the tax year you received it. Now, because landlords can no longer require those large advance payments, the same rental income is more likely to be received month by month. Some of those monthly payments may fall into the following tax year, changing the timing of your tax bill even though your total rental income remains the same.
The rest of this article explains how that change affects landlords, when it may alter your taxable rental income and cash flow, and the practical steps you should take before granting a new tenancy.
How Does the Banning of Rent-in-Advance Affect the Tax on Your Rental Income?
For most landlords using the cash basis, the impact is either good or neutral. You will usually pay the same amount of tax over the life of the tenancy, but you are less likely to pay it all at once simply because you received several months' rent upfront. Instead, your tax liability is more likely to arise gradually as you receive the rent, improving cash flow and reducing temporary spikes in taxable income.
This matters because landlords using the cash basis are taxed when rental income is received, not when it is earned. According to section 271A of the Income Tax (Trading and Other Income) Act 2005, introduced by the Finance (No. 2) Act 2017, the cash basis is the default method of calculating rental profits for most unincorporated property businesses.
Previously, receiving a large advance payment could inflate your taxable rental profits for a single tax year. That could increase your Payments on Account or, if your income was close to an Income Tax threshold, temporarily push part of your income into a higher tax band. Because advance rent can no longer be required for new tenancies, those one-off spikes are less likely to occur.
The key point is that this is a timing benefit rather than a tax-saving measure. You will pay tax on the same rental income overall, but you keep more cash in your business for longer and your tax liabilities are more closely aligned with the rent you actually receive. For many landlords, that makes budgeting easier and reduces the risk of an unusually large tax bill following a tenancy that began with a substantial advance payment.
The position is different for landlords using the accruals basis. According to HMRC's Property Income Manual PIM1101, advance rent is recognised over the period to which it relates rather than entirely when it is received. Those landlords were already spreading rental income across the tenancy, so the new restrictions have little impact on when their rental income is taxed.
Worked Example: Imagine You're Letting to an Overseas Student ...
David owns a one-bedroom flat in Manchester that he lets to postgraduate students. Many of his tenants are foreign nationals with no suitable UK-based guarantor and little or no UK credit history.
Before the Renters Rights Act 2025 came into force, David would require the full academic year's rent before the tenancy began to reduce the risk of rent arrears. Because David uses the cash basis, HMRC would generally treat that advance payment as rental income in the tax year he received it, even though much of the rent related to the following academic year.
As explained in HMRC's Property Income Manual PIM1096, advance rent is generally taxed when it is received under the cash basis. Receiving £15,000 upfront in a single payment could temporarily inflate David's taxable rental profits, increase his Payments on Account and, if his employment income had already used most of his basic rate band, push part of his rental income into the 40% Income Tax band.
Today, David can no longer require that full year's rent in advance for a new tenancy. Instead, he receives the rent in monthly instalments as it falls due. The total rent he earns from the property is exactly the same, and over the life of the tenancy he will pay the same amount of tax. What changes is the timing of that tax.
Rather than paying tax on a single £15,000 receipt, David is now taxed as each monthly rent payment is received. If those payments span two tax years, some of the rental income is taxed later than it would have been under the previous rules. That means David keeps more cash in his business for longer, his tax liabilities are more closely aligned with the rent actually arriving in his bank account and he is less likely to experience a one-off spike in taxable income simply because a tenant paid a year's rent upfront.
For David, the reform does not create a tax saving, it creates a cash-flow advantage. By aligning tax more closely with the monthly receipt of rental income, the new rules make budgeting easier, reduce the likelihood of unusually high Payments on Account and can help landlords whose income is close to an Income Tax threshold avoid crossing it simply because of the timing of an advance rent payment.
How Do These Changes Affect Making Tax Digital Record-Keeping?
The main impact is that you will have more rental transactions to record rather than a single large advance payment.
Making Tax Digital for Income Tax (MTD ITSA) has applied since 6 April 2026 to landlords and sole traders with qualifying income exceeding £50,000, with the threshold reducing to £30,000 from April 2027 and £20,000 from April 2028. For MTD purposes, qualifying income is measured using gross property and/or self-employment income before expenses.
Before the Renters Rights Act 2025, a landlord who received several months' rent in advance might have recorded a single large rental receipt. With rent now generally being received monthly, landlords need to record multiple rental transactions over the course of the year. While this increases the number of entries in your digital records, it also creates a record that more accurately reflects when rental income is actually received.
In practice, these changes shift the administrative burden rather than increase your tax bill. You may spend more time recording rental receipts, but your records will better match the timing of the income you actually receive, making quarterly reporting under MTD more representative of your property's cash flow.
What Does This Mean for Non-Resident Landlords?
Almost nothing changes tax-wise if you are a non-resident landlord. You still pay UK tax on your rental income in the same way. The main difference is that, instead of receiving and potentially having tax deducted from one large advance payment, you are now more likely to receive rent, and any associated tax deductions, in monthly instalment. That is because the Renters Rights Act changes how rent is collected, not how non-resident landlords are taxed.
If you are a non-resident landlord and HMRC has not approved you to receive rental income gross using forms NRL1, NRL2 or NRL3, your letting agent (or, where there is no letting agent and the rent exceeds £100 a week, your tenant) must generally deduct basic rate Income Tax from your rental income and pay it to HMRC each quarter.
Before the Renters Rights Act, a landlord who received several months' rent in advance would often have tax deducted from that single upfront payment. Under the new rules, because rent is received monthly for new tenancies, those deductions are also likely to be spread across the tenancy. This does not increase or reduce your overall UK tax liability. It simply means that both your rental income and any tax withheld are likely to follow the same monthly pattern.
Conclusion
The government's advice to review guarantor agreements is important, but for many landlords the bigger financial consequence lies elsewhere. The restriction on rent-in-advance changes when rental income is received, which can affect cash flow, the timing of your tax liabilities, and the way you maintain your MTD records. It does not change the total tax you pay, but it can change when you pay it and how easily you manage it.
Whether the reforms work in your favour depends on your individual circumstances, including whether you use the cash or accruals basis, your wider income position and, for overseas landlords, how the Non-Resident Landlord Scheme applies to you. Understanding those differences can help you avoid unnecessary tax spikes, improve cash flow and stay compliant with the latest landlord tax rules.
Unsure How These Changes Affect You?
Our ACCA and CIOT-qualified property tax specialists will advise whether the cash or accruals basis is more suitable for your circumstances, identify every allowable expense and manage your tax returns.
Not sure where you stand? Estimate your tax position with our free Rental Income Calculator in seconds!
FAQs
A guarantor agreement is a contract in which a third party, usually a parent or family member, agrees to cover the tenant's rent and certain obligations if the tenant defaults. It sits alongside the tenancy agreement. Under the Renters Rights Act 2025, agreements signed before 1 May 2026 may need reviewing and varying with the guarantor's consent.
No. It changes the timing, not the total. Under the cash basis, rent is taxed when received, so a large advance was taxed in one year. Monthly rent spreads that income across years. Over the life of the let the total taxed is the same, but the smoothing can keep you below a tax band threshold.
Generally yes. Rent guarantee insurance premiums are an allowable revenue expense against rental income under the wholly-and-exclusively rule (HMRC PIM2010, PIM2110), provided the cover relates to the letting business. Because you cannot pass referencing or guarantor costs to tenants under the Tenant Fees Act 2019, these costs fall on you and should be recorded and claimed.
Under the Non-Resident Landlord Scheme, 20% is withheld from your rent unless HMRC approves you to receive it gross (HMRC PIM4810). The advance-rent ban means withholding now applies to steady monthly amounts rather than large upfront sums. You still file Self Assessment to reconcile the tax withheld, and MTD may apply depending on your income level.
It depends on your cash flow and income profile. The cash basis (default since 2017/18 under ITTOIA 2005 s.271A) taxes rent when received and suits most smaller landlords. The accruals basis spreads rent across the period it relates to (PIM1101) and can suit landlords near a tax-band threshold or with irregular receipts. Choosing the wrong basis can cost you, so model both before you elect.
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