UK Property Letting Allowances: What Remains in 2026/27

The landscape for residential landlords has been transformed since 2017. A succession of tax changes has stripped away reliefs that once made property investment highly tax-efficient. But significant allowances remain, and knowing exactly what you can still claim is essential to running a profitable letting portfolio.

The Mortgage Interest Restriction: The Biggest Change

Before April 2017, landlords could deduct mortgage interest and other finance costs directly from rental income to arrive at taxable profit. This was phased out over four years and has been fully restricted since April 2020.

Now, mortgage interest generates only a 20% basic-rate tax credit applied against your tax liability -- not a deduction from profits. For a higher-rate taxpayer, the effective relief has halved. For additional-rate taxpayers (income above GBP 125,140) the credit covers even less of the actual cost.

Illustrative Example

A higher-rate landlord receives:

• Rental income: GBP 18,000
• Mortgage interest paid: GBP 10,000

Under the old system, taxable profit = GBP 8,000 (GBP 18,000 minus GBP 10,000). Tax at 40% = GBP 3,200.

Under current rules, taxable rental profit = GBP 18,000. Tax at 40% = GBP 7,200. Less 20% credit on GBP 10,000 = minus GBP 2,000. Net tax = GBP 5,200 -- more than 60% higher than before.

This is why many portfolio landlords have transferred properties to limited companies, where full interest deduction against corporation tax remains available.

What You Can Still Deduct as Expenses

Despite the mortgage interest restriction, a wide range of letting expenses remain fully deductible:

Allowable Property Expenses in 2026/27

• Letting agent fees and management charges -- agency commission is fully deductible
• Accountancy and legal fees relating to the letting (not purchase or sale)
• Buildings and contents insurance premiums
• Ground rent and service charges on leasehold properties
• Council tax and utility bills paid by the landlord during void periods
• Repairs and maintenance -- but only genuine repairs restoring the property to its previous condition, not improvements
• Advertising costs for finding tenants
• Stationery, postage, and phone costs directly relating to the letting
• Travel costs for visits to the property for maintenance or inspection

The critical distinction is between repairs (deductible) and improvements (capital expenditure, not deductible against income but reducing capital gains on sale). Replacing a broken boiler with an equivalent model is a repair. Upgrading to a higher-specification system with new functionality is an improvement.

Replacement of Domestic Items Relief

Since the Wear and Tear Allowance was abolished, furnished property landlords use replacement of domestic items relief. You can deduct the cost of replacing:

• Furniture (sofas, beds, wardrobes, tables)
• Appliances (washing machines, dishwashers, refrigerators)
• Kitchenware (crockery, cookware)
• Curtains, carpets, and floor coverings

The relief is only for replacements, not initial purchases. If you replace like for like, you deduct the full cost. If you upgrade (say, replacing a standard cooker with a range cooker), you deduct only the equivalent cost of the like-for-like replacement.

The Property Allowance: GBP 1,000 Tax-Free

If your total rental income from all properties is GBP 1,000 or less, you pay no tax and do not need to tell HMRC.

If your income exceeds GBP 1,000, you have a choice:

1. Deduct actual allowable expenses as normal
2. Elect to use the GBP 1,000 property allowance instead

The allowance is worth using only when your actual expenses are less than GBP 1,000. It is particularly valuable for landlords with one or two rooms rented casually -- for example, under the Rent a Room scheme (which has its own separate GBP 7,500 threshold for rooms in your own home).

Furnished Holiday Lettings: Key Changes from April 2025

The Furnished Holiday Lettings (FHL) tax regime -- which gave landlords access to business property reliefs, capital allowances on furniture, and the ability to treat profits as earnings for pension purposes -- was abolished from 6 April 2025. FHL properties are now treated as ordinary residential lettings.

This means former FHL landlords in 2026/27 are subject to the mortgage interest restriction, cannot claim capital allowances on furniture, and profits no longer count as relevant UK earnings for pension contribution purposes.

Pre-Letting Expenses

Expenses incurred before a property is first let may still be deductible, provided they would have been allowable if incurred during the letting and were incurred no more than seven years before the letting began. This covers items like cleaning, minor repairs, and letting agent setup fees.

Capital Expenditure and CGT

Costs that are not deductible against rental income -- such as purchase fees (stamp duty, surveyor costs, legal fees on purchase) and improvement works -- are added to the cost base of the property. This reduces the capital gain when you eventually sell.

With CGT rates on residential property at 24% for higher-rate taxpayers in 2026/27, keeping accurate records of all capital expenditure throughout the ownership period is financially significant.

Record-Keeping Requirements

HMRC expects landlords to retain records for at least five years after the 31 January filing deadline following the relevant tax year. Given the complexity of distinguishing repairs from improvements, and the need to track replacement items separately, a simple spreadsheet updated throughout the year is much easier than reconstructing costs at tax return time.

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Use the CalcHub take-home pay calculator to model your rental income alongside your employment salary and see how your overall tax liability and marginal rate change -- essential if you are deciding whether to expand your portfolio or consider incorporating.