You put your home on the market expecting a sale. Months later, it is still sitting there. Rather than keep paying the mortgage, insurance and other costs while the property earns nothing, letting it out can look like the obvious way to generate some income.
But renting out a property you originally intended to sell creates a new tax obligation. The rent you receive is taxable, and what you owe depends on your rental profit, your allowable expenses and your wider income.
This article explains how HMRC taxes rental income, which expenses you can deduct, when the £1,000 property allowance applies, when you need to register for Self Assessment, and what happens to the tax position if you eventually manage to sell the property
Key Takeaways
- You pay Income Tax on your rental profit (after allowable expenses) at 20%, 40% or 45%, depending on your overall taxable income
- If your gross rental income exceeds £1,000 in a tax year, you generally need to tell HMRC by 5 October following the end of that tax year that you have rental income to report
- Since April 2020, individual landlords have not been able to deduct residential mortgage interest directly from their rental income
- Instead, they've been receiving a 20% tax credit on their qualifying finance costs
- Since 6 April 2026, landlords with qualifying income of more than £50,000 have been required to keep digital records and submit quarterly updates under Making Tax Digital for Income Tax
- From 6 April 2027, separate income tax rates of 22%, 42% and 47% will apply to property income, increasing the rates currently used to tax residential rental profits
- Letting out your former home can also affect the Capital Gains Tax you pay when you eventually sell it, because the period during which you rent out the property may not receive the same relief as the period when it was your main residence
Why are More Homeowners Becoming Landlords Right Now?
More homeowners are becoming landlords because their properties are taking longer to sell, making renting them out an alternative to accepting a lower sale price. Zoopla research published in August 2026 found that homes were taking longer to sell in 180 of England’s 363 local authorities, with some areas averaging two months or more.
For homeowners stuck in a slow-moving market, letting the property can help them earn an income while they wait for a buyer. But renting out your former home is not simply a way to cover costs while you wait for a sale. It creates a new set of tax responsibilities, from reporting rental income and claiming allowable expenses to understanding how the rental period could affect your Capital Gains Tax position when you eventually sell.
These responsibilities are particularly important in 2026 because Making Tax Digital for Income Tax is now in effect. Homeowners who start letting out a property may need to keep digital records and submit quarterly updates if their qualifying income exceeds the £50,000 threshold.
Do You Pay Tax on Rental Income If You Let Out A Home You Couldn’t Sell?
Yes. If you let out a home you could not sell, the rental income you receive is generally taxable. You normally pay Income Tax on the profit from the property, i.e., your rental income after allowable expenses, at the applicable rate for your overall taxable income. For 2026/27, the main rates are 20%, 40% and 45% for taxpayers in England, Wales and Northern Ireland.
That will change from 6 April 2027. Individual landlords will have separate tax rates for property income of 22%, 42% and 47%, meaning the tax charged on property income will be two percentage points higher at each rate. The new rates were announced at the Autumn Budget 2025 and have since been legislated for in the Finance Act 2026.
There is a £1,000 property allowance, which can make up to £1,000 of property income tax-free if you qualify for full relief. If your property income is more than £1,000, however, that does not automatically mean you must file a Self Assessment Tax Return. HMRC says you generally need to report rental income through Self Assessment if your property income is more than £2,500 after allowable expenses or £10,000 before allowable expenses.
If you are required to file a Self Assessment Tax Return and you are not already registered, you generally need to tell HMRC by 5 October following the end of the tax year in which you first had the income. Your online tax return and any tax due are normally due by 31 January following the end of the tax year.
Worked Example: How Much Tax Could You Pay on £15,000 of Rent?
Suppose you could not sell your former home, so you decide to rent it out instead. The property brings in £15,000 in rent over the year.
That £15,000 is not necessarily the amount you pay tax on. You can deduct allowable costs of running the rental, such as letting agent fees, insurance, repairs and service charges. If those costs come to £3,000, you are left with £12,000 of rental profit to consider for tax.
Here's what that could mean:
Calculation | Amount |
|---|---|
Rent Received | £15,000 |
Less: Allowable Expenses | (£3,000) |
Rental Profit | £12,000 |
Tax at 20% | £2,400 |
Tax at 40% | £4,800 |
So, if the £12,000 rental profit falls within your basic rate band, the Income Tax on it would be £2,400. If it falls within your higher rate band, it would be £4,800.
If the property has a mortgage, there is an important extra rule. Individual landlords generally cannot deduct residential mortgage interest from the rental income in the calculation above. Instead, they receive a 20% tax credit on qualifying finance costs, subject to the relevant rules.
This is a simplified example using the 2026/27 Income Tax rates. Your actual tax bill can be different depending on your other income, allowable expenses and personal circumstances.
What Can You Deduct & What You Can’t
You can deduct many of the ordinary costs of running a rental property, but you cannot deduct every expense you incur. The important distinction is between the day-to-day costs of letting the property and spending that improves or adds to it.
If you pay them yourself, allowable expenses can include letting agent fees, landlord insurance, repairs and maintenance, ground rent, service charges, utilities and Council Tax. Other costs, such as certain legal, accountancy and advertising expenses, can also qualify. The expense generally needs to be incurred wholly and exclusively for your property rental business.
Improvements are treated differently from repairs. Fixing a broken boiler or replacing damaged roof tiles can generally be an allowable expense, but building an extension or upgrading the property beyond its original condition is normally capital expenditure. It therefore does not reduce your taxable rental profit, although qualifying capital costs may be taken into account when calculating your Capital Gains Tax liability when you eventually sell the property.
Mortgage interest is another expense that catches out many new landlords. Individual landlords cannot normally deduct residential mortgage interest directly from their rental income. Instead, qualifying finance costs give rise to a tax reduction calculated at the basic rate. For 2026/27, that means relief at 20%. From 6 April 2027, the relief will be calculated at the new 22% property basic rate.
So, if you have started renting out a home because you could not sell it, keep your rental expenses organised from day one. A repair, an improvement and mortgage interest can all affect your tax differently, and treating them all as ordinary expenses can give you the wrong rental profit and the wrong tax bill.
The Deadlines You Can’t Miss
If you have started letting out a property, there are two dates you need to know.
The first is 5 October. If you have tax to pay on rental income and need to file a Self Assessment Tax Return, you generally need to tell HMRC by 5 October after the end of the tax year in which you first received the rental income. For example, if you first received rent during the 2025/26 tax year, the notification deadline is 5 October 2026. Missing the deadline can result in a failure-to-notify penalty.
The second is the Making Tax Digital deadline that applies to you. MTD for Income Tax became mandatory on 6 April 2026 for landlords and sole traders whose qualifying income was more than £50,000 in the 2024/25 tax year. Those in scope must keep digital records and send quarterly updates to HMRC using compatible software. The threshold falls to more than £30,000 from 6 April 2027, and then to more than £20,000 from 6 April 2028.
That matters for accidental landlords because qualifying income is based on gross property and self-employment income before expenses. So, if you are renting out a former home and also have self-employment income, both can count towards the MTD threshold.
And MTD does not replace your annual tax return. You still have to submit a Self Assessment Tax Return and pay your tax by the usual 31 January deadline.
Conclusion
Letting out a home you could not sell can give you rental income while you wait for a buyer, but you need to account for the tax that comes with that income. Work out your rental profit correctly, claim the expenses you are entitled to, meet your reporting deadlines and keep the eventual Capital Gains Tax position in mind.
If you became a landlord unexpectedly, UK Property Accountants can take care of the compliance for you – from registering with HMRC and calculating your rental income to filing your Self Assessment Tax Return and MTD quarterly updates where required.
Became a Landlord By Accident? Let Us Handle the Tax
UK Property Accountants, and its team of Chartered Certified Accountants and Chartered Tax Advisers register you with HMRC, claim every allowable expense, and file your landlord Self Assessment Tax Return and Making Tax Digital quarterly updates.
FAQs
For 2026/27, you pay tax on your taxable rental profit at 20%, 40% or 45%, depending on your Income Tax position. For example, £10,000 of taxable rental profit would mean £2,000 of tax at 20% or £4,000 at 40%, before taking account of your wider tax position and any applicable reliefs. These rates apply in England, Wales and Northern Ireland; Scotland has different Income Tax rates.
You can receive up to £1,000 of property income tax-free under the property allowance. If your property income is more than £1,000, you can generally choose between claiming the £1,000 property allowance or deducting your actual allowable expenses, but you cannot claim both.
You can deduct the allowable costs of running your rental property when calculating your taxable rental profit. These can include letting agent fees, insurance, repairs and maintenance, service charges, ground rent, and utilities or Council Tax that you pay as the landlord. The expense must generally be incurred wholly and exclusively for the rental business.
Yes, you still pay tax on your rental income if the property has a mortgage. Individual landlords generally cannot deduct residential mortgage interest directly from their rental income. Instead, qualifying finance costs give them a tax credit calculated at the basic rate. For 2026/27, that credit is calculated at 20%.
Yes, renting out your former home can affect the amount of Capital Gains Tax you pay when you sell it. You can generally claim Private Residence Relief for the period it was your main residence, but the period when you let out the whole property may not qualify for the same relief. The eventual CGT depends on the gain and the reliefs available to you.
Yes, letting a UK property while living abroad brings you under the Non-Resident Landlord rules. You still have to pay UK tax on the rental income, and your letting agent or tenant may have to deduct basic rate tax from your rent before paying it to you. You can apply to HMRC to receive the rent without tax being deducted and then report the income through Self Assessment.
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