Here's How You Can Exit MTD if Your Income Falls: The Three-Tax-Year Income Exemption for Landlords

You have been in Making Tax Digital for Income Tax Self-Assessment for two years. Your rental income has dropped. A tenancy ended badly and the void period stretched. You sold a property and the portfolio shrank. A spousal Form 17 election shifted the income split and your individual share is now well below the threshold. You are still filing four quarterly updates a year, plus an end-of-period statement, plus a final declaration, for a tax return that the headline mandate would no longer pull you into if you were registering today.

The exit route exists. It sits at regulation 24 of the Income Tax (Digital Obligations) Regulations 2026 (SI 2026/336), which on 1 April 2026 revoked the earlier Income Tax (Digital Requirements) Regulations 2021 (SI 2021/1076) where the equivalent three-tax-year income exit sat at regulation 22. The substantive mechanic carries over; the regulation number has migrated. It is precise, it is operationally specific, and it is not automatic. This page sets out the statutory mechanic, the cohort-threshold rule that determines which income figure you test against, the single-year-spike clock reset, the joint-property per-individual rule, the relationship with the separate digital-exclusion exemption at regulation 18, and the boundary between exiting MTD ITSA and ceasing self-assessment entirely.

The statutory hook: regulation 24 of SI 2026/336

The mandate framework sits at Schedule A1 of the Taxes Management Act 1970, inserted by Schedule 14 of the Finance (No. 2) Act 2017, and operative under SI 2026/336. Part 7 of SI 2026/336 ("Exemptions") contains the routes out of active MTD ITSA participation, including:

• Regulation 18 (read with reg 19 and reg 20): digital-exclusion exemption via exclusion notice (age, disability, remoteness, religion, or any other reasonable circumstance making digital tools impracticable; TMA 1970 Schedule A1 paragraph 14(2) supplies the "excluded" definition). The notice remains in place while qualifying circumstances persist; circumstance-based.
• Regulation 25 (qualifying income) and Regulation 27 (qualifying amount): the income-threshold architecture that governs entry as well as exemption.
• Regulation 24: the three-tax-year income exit. Once the digital requirements have applied for three tax years AND qualifying income has been below the cohort threshold for three consecutive tax years, the landlord can notify HMRC and exit from the next digital start date.

Regulation 24 is the exit you want when your income has dropped after mandate. Regulation 18 (with reg 19 and reg 20) is the exit you want when your circumstances make digital tools impracticable even though your income has not changed. Sessions writing on the income drop must not conflate the two: HMRC characterises the routes as alternatives, and an exclusion-notice claim by a landlord who simply has low income (rather than a digital-access difficulty) will be rejected.

The cohort-threshold rule: test against the phase you were mandated at

The exit test runs against the qualifying-income threshold at which the landlord was originally mandated, not against whichever phase threshold currently bites. The three-phase MTD ITSA schedule:

• Phase 1: mandated from 6 April 2026, qualifying income above £50,000. The phase 1 cohort tests against £50,000 for the regulation 24 exit.
• Phase 2: mandated from 6 April 2027, qualifying income above £30,000. The phase 2 cohort tests against £30,000 for the exit.
• Phase 3: mandated from 6 April 2028, qualifying income above £20,000. The phase 3 cohort tests against £20,000 for the exit.

The cohort threshold is sticky. A phase 1 landlord mandated at £50,000 in April 2026 whose income subsequently drops to £29,000 tests against £50,000 for the regulation 24 exit, not against £30,000. The income is well below the cohort threshold; three consecutive years at £29,000 satisfies regulation 24 for the phase 1 cohort.

The reverse is also true. A phase 3 landlord mandated at £20,000 in April 2028 whose income sits at £24,000 in subsequent years tests against £20,000; that income does NOT satisfy regulation 24 because it is above the cohort threshold. The phase 1 framework does not bail out a phase 3 landlord because the cohort threshold is the operative figure.

What "qualifying income" means for the exit test

Qualifying income for the regulation 24 exit is the same gross-of-deductions figure that governs entry under regulation 25: gross self-employment income plus gross property rental income, aggregated, before any deductions for mortgage interest, agent fees, repairs, or other allowable costs. The test mirrors the entry test exactly.

That has two operational consequences. First, a landlord whose gross income is comfortably above the cohort threshold cannot exit even if the net profit is small (the gross-test trap that catches high-interest BTL portfolios). Second, a landlord whose self-employment side income falls and whose rental income holds steady must still aggregate both streams for the exit test; the streams cannot be tested independently.

Three complete consecutive tax years (with the precondition that MTD has applied)

Regulation 24 of SI 2026/336 governs the three-tax-year income-exemption exit. Two preconditions need to be read together:

• The digital requirements have applied to the landlord for at least three tax years. This is the "in for three" condition. A landlord cannot enter MTD ITSA in April 2026 and claim regulation 24 in April 2028.
• The landlord's qualifying income has been below the cohort threshold for three complete consecutive tax years. This is the "below for three" condition.

The two conditions overlap in practice but are not identical. A landlord mandated in 2026/27 whose income drops to below threshold in 2027/28 has a regulation 24 window opening at the end of 2029/30 (three complete tax years below threshold), by which time the "in for three" condition is also satisfied. A landlord mandated in 2026/27 whose income only drops below threshold in 2030/31 needs to wait until the end of 2032/33 for the three-year window to close.

The single-year spike reset

One year crossing the cohort threshold during the three-year window resets the clock entirely. This is the most operationally significant feature of regulation 24.

Mr and Mrs Mawell (a couple, mandated at the £50,000 phase 1 cohort) have qualifying income figures of £35,000 in 2027/28, £52,000 in 2028/29, £37,000 in 2029/30, £38,000 in 2030/31. The 2028/29 spike, caused by a one-off insurance settlement classified as rental income, kills the clock entirely. The earliest regulation 24 notification is now at the end of 2032/33 (three consecutive years below threshold starting 2030/31), not at the end of 2030/31. The three years already accumulated are wiped.

There is no averaging mechanic. There is no smoothing across the window. A single year above triggers a full reset. The discipline for a landlord targeting an exit is to know what counts as rental income for the qualifying-income test (which can include service-charge recoveries, insurance proceeds attributed to lost rents, and other items that look incidental) and to manage the timing of one-off receipts where possible.

The notification mechanic: exit is claimed, not automatic

The exit operates by positive notification to HMRC. Three consecutive years below threshold do not, by themselves, lift the landlord out of MTD ITSA. Until HMRC receives a regulation 24 notification and confirms the exit, the landlord remains subject to all quarterly digital obligations.

The operational route as of May 2026:

• Through the agent services account (ASA) where the landlord has an accountant authorised under the MTD ASA flow. The agent submits the notification on the landlord's behalf and receives the confirmation through the ASA dashboard.
• Through the landlord's individual Personal Tax Account where there is no engaged accountant. The notification page sits within the MTD ITSA section of the Personal Tax Account.

HMRC processes the notification, runs an internal review of the cohort threshold and the three-year qualifying-income figures, and confirms the exit. The exit then takes effect from the NEXT digital start date (typically 6 April following the confirmation), not from the date of notification itself.

The in-year quarterly cycle continues until exit takes effect. A landlord notifying in November 2030 expecting the exit to land in April 2031 still files the November and February 2031 quarterly updates plus the end-of-period statement.

Worked example: phase 1 landlord exits after a portfolio sale

Mrs Patel was mandated into MTD ITSA from 6 April 2026 as a phase 1 landlord with five buy-to-let properties generating gross rental income of £64,000 in 2026/27. In October 2027 she sells two properties, reducing the portfolio to three units. Her qualifying-income figures over the following years:

• 2027/28: £38,000 (mid-year disposal, full-year figure includes both the disposed and retained properties up to October).
• 2028/29: £39,000 (full year on the three retained properties).
• 2029/30: £41,000 (steady-state).

All three years fall below the cohort threshold of £50,000. The "in for three" precondition is also met (Mrs Patel has been in MTD ITSA since April 2026, so by end of 2029/30 she has had three full tax years inside the regime). At the end of 2029/30 Mrs Patel notifies HMRC under regulation 24. HMRC processes and confirms. The exit takes effect from 6 April 2030.

Between October 2027 and 6 April 2030 Mrs Patel continues to file all quarterly updates and the end-of-period statement for each tax year. The exit is not retroactive; the historic quarterly obligations remain valid filings.

From 6 April 2030 Mrs Patel returns to annual self-assessment. She continues to be chargeable to income tax on her £41,000 rental profit and continues to file an SA return each January. The exit is from the quarterly digital cycle, not from chargeability.

Worked example: a spike kills the window

Mr Mawell, also a phase 1 landlord, has qualifying-income figures of £35,000 in 2027/28 and £41,000 in 2028/29. In 2028/29 he receives an insurance settlement of £18,000 for lost rents during a fire-damage period. HMRC treats the settlement as rental income for the qualifying-income test, taking the 2028/29 figure to £59,000.

The 2028/29 spike crosses the £50,000 cohort threshold. The three-year window resets. Mr Mawell must now accumulate three new consecutive tax years below £50,000 before regulation 24 engages, starting with 2029/30.

The 2028/29 spike does not trigger any penalty exposure. Mr Mawell remained in MTD ITSA throughout, complying with the quarterly cycle, so there is no failure-to-notify and no inaccuracy. But the spike has cost him three years of exit timing, and any subsequent one-off receipt during 2029/30 to 2031/32 would reset the clock again.

The joint-property rule

For jointly-owned property, the qualifying-income test under SI 2026/336 applies to each individual joint owner's share of the rental income, not to the property's total. The default 50:50 spouse split applies absent a Form 17 election; a Form 17 election can produce an uneven split.

The regulation 24 exit operates on the same per-individual basis. Each spouse or co-owner tests independently against the cohort threshold each was mandated at, and each claims the exit independently if the three-year condition is met.

Mr and Mrs Singh own four BTL properties as joint tenants. Combined gross rental £56,000 in 2026/27 (£28,000 each). Neither spouse is mandated at the April 2026 £50,000 phase 1; both are mandated at the April 2027 £30,000 phase 2 (each share is below £50,000 but above £30,000). From 6 April 2027 both spouses run separate MTD ITSA quarterly cycles.

If joint income subsequently falls to £45,000 (£22,500 each) for three consecutive tax years from 2028/29, both spouses can independently notify under regulation 24 at the end of 2030/31. Each spouse's notification is processed separately. If one spouse's quarterly compliance during the window had been imperfect, that does not block the other spouse's exit.

A Form 17 election can shift the income split mid-window. Where the election produces a sustained shift below the cohort threshold for one spouse and above for the other, the regulation 24 windows operate asymmetrically.

Regulation 18 versus regulation 24: choose the right route

Both regulations sit inside Part 7 of SI 2026/336 ("Exemptions"). Both operate as exemptions from the digital requirements. They are not interchangeable.

Mrs Carmichael is 72 years old, runs a two-property portfolio generating £42,000 gross rental income annually, and lives in a rural area with intermittent broadband. She was mandated into MTD ITSA from the April 2027 £30,000 phase 2 cohort. Three months into the first quarterly cycle, she struggles operationally.

• The regulation 24 three-year income-drop exit is NOT available. Her income is stable at £42,000, well above her £30,000 cohort threshold. The route does not engage on the income test.
• The regulation 18 digital-exclusion exclusion-notice route IS available if she can demonstrate that age plus rural-broadband circumstances make digital tools impracticable. Regulation 18 (read with reg 19 and reg 20) is the appropriate route.

The two routes have different bases. Regulation 24 is income-based and operates after three tax years below threshold. Regulation 18 is circumstance-based and operates via an exclusion notice that remains in place while qualifying circumstances persist, regardless of income. A landlord whose income has not dropped but who faces operational difficulty with digital tools should claim the exclusion notice under reg 18 directly, not wait for regulation 24 eligibility.

Re-engagement if income rises again

Once a landlord has exited under regulation 24, the digital requirements can re-engage if qualifying income subsequently crosses the cohort threshold. Regulation 5 of SI 2026/336 (Digital start date) governs the re-engagement. The lookback test applies to the most recent complete tax year.

Mrs Patel, exiting at 6 April 2030 with qualifying income at £41,000, holds steady for two tax years then in 2032/33 buys two additional properties and pushes her qualifying income to £58,000. The 2032/33 SA return (filed in the ordinary course by 31 January 2034) shows qualifying income above the £50,000 cohort threshold. HMRC re-engages the digital requirements; the new digital start date is 6 April 2034.

The re-engagement is not punitive. The previously-exited landlord enters the quarterly cycle on the same footing as a newly-mandated landlord at the same threshold. The earlier MTD compliance history sits in HMRC's records but does not change the operational status.

Exiting MTD ITSA is not exiting self-assessment

The most common confusion at the exit gate. Regulation 24 removes the landlord from the MTD ITSA quarterly cycle. It does not remove the landlord from the income tax regime or from self-assessment.

A landlord exiting at 6 April 2030 with £41,000 of rental profit is still chargeable to income tax on that profit. The landlord still files an annual SA return each January. The only change is the absence of the four quarterly updates and the end-of-period statement. The final declaration becomes the annual SA return again.

Ceasing self-assessment entirely (no UK chargeability at all) is a separate process. It happens on emigration with full disposal of UK rental property, on cessation of all rental and self-employment activity with no remaining liability, or on death (in which case the personal representatives complete a final-period return). Those routes operate under TMA 1970 section 7 and HMRC's published cessation procedures, distinct from regulation 24.

What to do during the three-year window

There is no "preparing to exit" status in regulation 24. During the three-year window the landlord continues full MTD ITSA compliance: four quarterly updates per business stream per tax year, the end-of-period statement, the final declaration. The software stack, the agent services account authorisation, and the quarterly discipline all continue.

The only operational change is the planning awareness. A landlord tracking toward a regulation 24 exit should:

• Maintain clean quarterly records that evidence the qualifying-income figures across the window. HMRC's review at notification stage will reference the SA-return figures for each of the three years.
• Avoid one-off receipts that would spike a single year above the cohort threshold. Where a non-recurring item is unavoidable (insurance settlement, service-charge true-up), document the character carefully.
• Diary the earliest notification date. The window opens at the end of the third complete tax year below threshold (and only once MTD has applied for three tax years). Notification in the months immediately after that closing date secures the exit from the next digital start date.
• Engage the accountant on the ASA flow ahead of notification. The exit goes through the same authorisation channel as the quarterly cycle; a lapsed ASA delays the exit.

If you have been in MTD ITSA for two or three years and your qualifying income has fallen below the cohort threshold at which you were mandated, the regulation 24 route is worth diarising carefully. We work with landlords on the exit-timing decision, the cohort-threshold analysis, the joint-property arithmetic where one spouse exits ahead of the other, and the boundary against regulation 18 where digital-access difficulty layers on top of the income drop.