HMO Landlord Tax Guide UK 2026/27: Income Tax, Capital Gains and Licensing
Houses in multiple occupation (HMOs) can generate significantly higher rental yields than single-tenancy buy-to-lets, but they also carry greater regulatory complexity and more demanding tax compliance. This guide covers everything HMO landlords need to know in 2026/27: how your income is taxed, what you can deduct, how Section 24 affects you, and the licensing rules you must follow.
An HMO (house in multiple occupation) is a property rented to three or more people from more than one household who share basic facilities such as a kitchen or bathroom. The definition is set out in the Housing Act 2004 and applies across England and Wales.
The key distinction from standard buy-to-let is the "multiple households" element. A family of four sharing a house is one household -- not an HMO. Three students or three young professionals each having their own room, even in a small terraced house, constitutes three households sharing facilities -- an HMO. The arrangement does not need to be in a large Victorian house; a three-bedroom flat with three tenants each on separate agreements qualifies.
For tax purposes, HMOs are treated as part of your UK property business. The same income tax rules apply as to any other residential rental property -- which means Section 24 mortgage interest restriction, the replacement of domestic items relief, and the same CGT rates on disposal.
HMO Income Tax: How Your Rental Profits Are Taxed
HMO rental income is taxed as part of your UK property business income. You calculate total receipts from all UK rental properties, deduct all allowable expenses, and pay income tax on the net profit. The rates for 2026/27 are: basic rate 20% (income up to £50,270, above the £12,570 personal allowance); higher rate 40% (£50,271 to £125,140); and additional rate 45% (above £125,140).
Because HMOs typically generate higher gross rents than comparable single-let properties, landlords operating multiple HMOs often find themselves in the higher-rate band or above. This makes the Section 24 mortgage interest restriction (which denies full interest deduction and substitutes a 20% credit) particularly painful -- a higher-rate landlord effectively pays 20% income tax on the mortgage interest element of their rental income.
Rental income from HMOs should be reported on the UK property pages (SA105) of your Self Assessment return. Where total income from property exceeds £10,000 in a year, you are required to file Self Assessment. Most HMO landlords will exceed this threshold easily.
Section 24 Mortgage Interest Restriction
Section 24 of the Finance (No.2) Act 2015 removed the ability for residential landlords to deduct mortgage interest as a revenue expense. It was phased in between 2017 and 2020 and is now fully in effect for 2026/27.
Example: HMO with £40,000 gross rent and £15,000 mortgage interest (higher-rate landlord)
Gross rent: £40,000
Allowable expenses (excl. mortgage): £10,000
Taxable profit: £30,000 (mortgage interest not deducted)
Tax at 40%: £12,000
Less 20% tax credit on mortgage interest: £15,000 x 20% = £3,000
For landlords with high mortgage-to-rent ratios, Section 24 can push effective tax rates above 60% of actual cash profit. This has driven many higher-rate landlords to explore incorporation or to sell properties.
Allowable Expenses for HMO Landlords
Careful expense tracking is critical for HMO landlords. Revenue expenses (those relating to the ongoing cost of letting the property) are deductible; capital expenditure (improving or extending the property) is not deductible but is added to the CGT base cost.
Letting agent and property management fees
Buildings and contents insurance premiums
Gas, electricity, water (if the landlord pays them)
Council tax and any bills paid by the landlord between tenancies
Repair and maintenance costs (not improvements)
Replacement of domestic items (like-for-like only)
HMO licensing fees
Professional cleaning between tenancies
Accountancy and legal fees related to the letting
Advertising and tenant referencing costs
Mortgage arrangement fees (spread over the loan term or claimed in year)
The replacement of domestic items relief allows a deduction for the cost of replacing an item (sofa, fridge, bed) on a like-for-like basis. If you upgrade -- for example replacing a basic boiler with a high-efficiency combi boiler -- only the equivalent cost of the like-for-like replacement is deductible; the premium for the upgrade is capital.
CGT When Selling an HMO
When you sell an HMO, any gain is taxed as a residential property disposal. The CGT base cost is the purchase price plus allowable capital expenditure (improvements, legal fees on purchase, SDLT) minus any capital allowances claimed in prior years. The gain is then reduced by the annual exempt amount (£3,000 in 2026/27) before applying the CGT rate.
CGT rates for residential property: 18% for gains falling within the basic-rate band; 24% for gains above the higher-rate threshold. These are the same rates as standard buy-to-let property and apply regardless of how many tenants occupy the HMO.
All residential property disposals generating a gain must be reported to HMRC and any CGT paid within 60 days of completion via the UK Property Reporting Service. If you file Self Assessment, you will also need to include the disposal on your SA return for the relevant tax year. Private Residence Relief does not apply unless you lived in part of the HMO as your principal private residence at some point during ownership.
Key HMO Facts at a Glance (2026/27)
Mandatory licensing threshold
5+ tenants, 2+ households
Unlicensed HMO penalty
Up to £30,000 per breach
Mortgage interest treatment
20% basic-rate tax credit only (Section 24)
Capital allowances
Not available; replacement of domestic items relief applies
CGT rates on disposal
18% (basic) / 24% (higher)
CGT reporting deadline
60 days from completion
Annual CGT exemption
£3,000 per person (2026/27)
Min room size (1 adult)
6.51 square metres
Frequently Asked Questions
Frequently Asked Questions
What makes a property legally an HMO?
A property is an HMO (house in multiple occupation) if it is occupied by 3 or more people forming more than one household, and they share facilities such as a bathroom or kitchen. A "household" is a family unit (including cohabiting couples and their dependants) or a single person. Two housemates sharing a house constitute two households even though they may be friends. An HMO does not need to be large -- three students in a terraced house sharing a bathroom qualifies.
Does my HMO need a licence?
It depends on the type. Mandatory HMO licensing applies to any HMO occupied by 5 or more people from 2 or more households in England. This includes houses, flats, and purpose-built blocks. Additionally, your local council may operate an Additional Licensing scheme (covering smaller HMOs) or a Selective Licensing scheme (covering all private rented property in a specific area). Failure to licence a licensable HMO is a criminal offence carrying a fine of up to £30,000 per breach, and tenants can apply for a rent repayment order covering up to 12 months of rent paid.
How does Section 24 mortgage interest restriction affect HMO landlords?
Section 24 applies to HMOs in exactly the same way as to standard buy-to-let properties. You cannot deduct mortgage interest payments as an expense against rental income. Instead, you receive a tax credit equal to 20% of the finance costs incurred. If you are a higher-rate taxpayer, you pay tax at 40% on the gross rental profit (including the portion that covered your mortgage interest) but receive only a 20% credit -- effectively paying 20% tax on the mortgage interest portion. For many higher-rate HMO landlords this significantly increases the effective tax rate and can make some properties tax-negative even when cash-flow positive.
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What expenses can I deduct from HMO rental income?
Allowable expenses for an HMO include: mortgage arrangement fees (spread over the loan term), letting agent fees, property management fees, advertising costs, buildings and contents insurance, gas and electricity bills (where the landlord pays them), water and council tax (where landlord pays), repair and maintenance costs (not improvements), professional cleaning, legal fees for tenancy agreements, accountancy fees, ground rent and service charges, and the cost of replacing domestic items (replacement of domestic items relief). Capital expenditure (improvements, extensions, major refurbishments) is not deductible but may be added to the CGT base cost.
Can I claim capital allowances on furniture in my HMO?
No, not under the plant and machinery capital allowances regime. Residential landlords (including HMO landlords) cannot claim capital allowances on furniture, white goods, or other furnishings. Instead, you can claim the replacement of domestic items relief, which covers the cost of replacing a like-for-like item when an existing item wears out. This is a revenue deduction in the year of replacement. It does not cover the original purchase of items when you first furnished the property -- only replacements.
Could my HMO be subject to business rates instead of council tax?
Possibly, if it is large enough. Purpose-built HMOs and large houses let to 5 or more tenants may be assessed for business rates rather than council tax, particularly if the property is used wholly as rental accommodation and has no owner-occupied element. Business rates assessments depend on the individual property and the Valuation Office Agency assessment. If business rates apply rather than council tax, the landlord typically becomes the ratepayer and may qualify for small business rates relief if the rateable value is low enough.
What are the CGT rates when selling an HMO?
HMOs are residential property for CGT purposes. The CGT rates on gains from residential property disposals are 18% for gains falling within the basic-rate band and 24% for gains above the higher-rate threshold. The CGT annual exempt amount is £3,000 for 2026/27. Gains must be reported to HMRC and any CGT paid within 60 days of completion via the UK Property Reporting Service. Private Residence Relief does not apply to HMO property unless part of the property was your main home at some point during ownership.
Are HMO licensing fees a deductible expense?
Yes. HMO licence fees paid to the local council are an allowable revenue expense deductible from rental income. This includes both mandatory licence fees and additional or selective licensing fees. The licence fee is usually charged for a fixed period (commonly 5 years) and can be spread across the licence term or claimed in full in the year paid, depending on the accounting treatment -- check with your accountant. Costs of preparing the licence application, including professional fees, are also deductible.
Is incorporating my HMO portfolio into a limited company worth it?
Incorporation allows a company to deduct 100% of mortgage interest against rental income (companies are not subject to Section 24). The company pays corporation tax at 19% or 25% on profits, which can be lower than 40% income tax for higher-rate landlords. However, incorporation is not straightforward: transferring property to a company triggers SDLT on the purchase price and CGT on the gain (unless incorporation relief applies), and there is no main residence exemption. Ongoing costs include accountancy, company filing, and dividend tax on profits extracted. The decision requires detailed modelling of both short and long-term tax positions.
What are the minimum room size requirements for an HMO?
Under the 2018 HMO regulations (which apply to all licensed HMOs in England), sleeping rooms must meet minimum floor area requirements: rooms used by one adult must be at least 6.51 square metres; rooms used by two adults must be at least 10.22 square metres; rooms used by a child under 10 must be at least 4.64 square metres. Rooms below 4.64 square metres cannot be used as sleeping accommodation at all. Councils can impose higher standards. Breaches of room size requirements can result in council enforcement action and civil penalties.