The 2027/28 tax year brings continued Section 24 restrictions for UK landlords, but with a significant twist. From April 2027, separate property income tax rates will fundamentally change how rental profits are taxed. Understanding these changes is crucial for section 24 2027 tax year planning.
This guide examines what stays the same, what changes dramatically, and how landlords can prepare their portfolios for the new tax landscape.
Section 24 Restrictions Continue in 2027/28
The core Section 24 rules remain unchanged in the 2027/28 tax year. Mortgage interest relief is still capped at the basic rate tax credit of 20%, regardless of your marginal tax rate.
For a higher-rate taxpayer with £20,000 annual mortgage interest, the tax benefit remains £4,000 (20% × £20,000). This is significantly less than the £8,000 deduction they would have received before Section 24 when interest was fully deductible at their 40% marginal rate.
What Section 24 Still Covers
- Mortgage interest payments on buy-to-let properties
- Interest on loans for property improvements or purchases
- Arrangement fees and early repayment charges
- Interest on bridging loans for property transactions
The restriction applies to individual landlords only. Limited companies remain unaffected by Section 24 and can still deduct mortgage interest as a business expense.
The Big Change: Separate Property Tax Rates from April 2027
The most significant development for property tax 2027/28 planning is the introduction of separate tax rates specifically for property income. From 6 April 2027, rental profits will be taxed at:
- 22% basic rate (instead of 20%)
- 42% higher rate (instead of 40%)
- 47% additional rate (instead of 45%)
This means property income faces a 2-percentage-point premium over other income types. The change affects all rental profits after allowable expenses, including the restricted mortgage interest relief under Section 24.
Combined Impact: Section 24 Plus Higher Rates
Consider a higher-rate taxpayer earning £60,000 employment income plus £30,000 rental profit with £15,000 mortgage interest:
Under current rules (2026/27):
Rental profit: £30,000
Less mortgage interest deduction: £0 (Section 24 restriction)
Tax on rental profit: £30,000 × 40% = £12,000
Tax credit for interest: £15,000 × 20% = £3,000
Net tax: £12,000 - £3,000 = £9,000
From April 2027:
Rental profit: £30,000
Less mortgage interest deduction: £0 (Section 24 continues)
Tax on rental profit: £30,000 × 42% = £12,600
Tax credit for interest: £15,000 × 20% = £3,000
Net tax: £12,600 - £3,000 = £9,600
The additional tax burden is £600 annually in this example, purely from the higher property tax rates.
MTD Requirements for 2027/28
Making Tax Digital (MTD) for Income Tax becomes mandatory from April 2026 for landlords with gross property income over £10,000. By 2027/28, this will be the established system for property tax reporting.
Key MTD requirements continuing into 2027/28:
- Quarterly digital record-keeping using approved software
- Quarterly income and expense submissions to HMRC
- Annual tax return submission through digital channels
- Penalties for late submissions or incorrect data
MTD compliance will be essential for managing the new property tax rates effectively and avoiding penalties.
Strategic Planning Options for 2027
Incorporation Timing
The introduction of separate property tax rates may tip the balance towards incorporation for many landlords. Limited companies remain unaffected by Section 24 and won't face the higher property tax rates.
Corporation tax rates for 2027/28 are expected to remain at 19% for profits up to £250,000 and 25% above that threshold. This creates a significant rate differential compared to the new 42% higher rate on individual property income.
However, incorporation planning must consider the capital gains tax implications of transferring properties and the ongoing compliance costs.
Expense Optimization
With higher tax rates on property income, maximizing allowable deductions becomes even more valuable. Review all possible expense categories including:
- Repairs and maintenance costs
- Professional fees and property management charges
- Insurance premiums and safety certificates
- Marketing and void period costs
- Capital allowances on furnished lettings
Portfolio Restructuring
Some landlords may consider restructuring their portfolios before April 2027. Options include:
- Transferring properties to lower-rate taxpayer spouses
- Realizing capital gains before higher rates apply to property income
- Converting to commercial property investments (unaffected by Section 24)
- Exploring furnished holiday lettings alternatives post-FHL abolition
Cash Flow and Tax Planning
The combination of Section 24 restrictions and higher property tax rates will impact cash flow planning significantly. Landlords should model their 2027/28 tax liability early to avoid payment on account shortfalls.
Consider setting aside additional reserves for:
- Higher income tax on rental profits
- Potential payments on account increases
- Professional advice costs for restructuring decisions
- MTD software and compliance expenses
Quarterly Tax Planning
With MTD quarterly reporting requirements, tax planning becomes an ongoing process rather than an annual exercise. Regular reviews allow for:
- Real-time monitoring of property income against tax bands
- Timing of repairs and improvement expenditure
- Management of other income sources to optimize overall tax position
- Early identification of incorporation trigger points
Record-Keeping for the New Regime
Effective record-keeping becomes critical under the new system. Maintain detailed records of:
- All rental income by property and date received
- Mortgage interest payments and loan balances
- Expenses by category for MTD reporting
- Capital improvements for future CGT calculations
- Time spent on property activities (relevant for trading vs investment distinction)
Digital record-keeping through MTD-compatible software will be mandatory and should integrate seamlessly with tax calculations under the new rates.
Professional Advice Timing
Given the complexity of combining Section 24 restrictions with separate property tax rates, professional advice becomes increasingly valuable. Consider engaging specialist property accountants for:
- Incorporation feasibility studies
- Tax efficiency reviews before April 2027
- MTD software selection and setup
- Quarterly tax planning and compliance
- Portfolio restructuring advice
Early engagement allows for thorough planning rather than reactive decision-making once the new rates apply.
Preparing for 2027/28: Action Checklist
Start preparing for section 24 2027 tax year planning with these priority actions:
- Model your tax position: Calculate the impact of 42%/47% property tax rates on your portfolio
- Review incorporation options: Assess whether company ownership becomes cost-effective
- Optimize expenses: Ensure you're claiming all allowable deductions
- Consider timing: Plan major expenditure or property disposals around the April 2027 changes
- Prepare for MTD: If not already compliant, establish digital record-keeping systems
- Build cash reserves: Prepare for higher tax bills from April 2027
- Seek professional advice: Engage specialists early for complex portfolio decisions
Looking Beyond 2027/28
The introduction of separate property tax rates represents a fundamental shift in UK property taxation policy. Future changes may include further rate increases or additional restrictions on property investment reliefs.
Successful landlords will need to adapt their strategies to operate effectively under the new regime. This means moving from purely acquisition-focused approaches to sophisticated tax-efficient structures that maximize after-tax returns.
The combination of Section 24 restrictions and higher property tax rates creates a challenging environment for individual landlords. However, with proper planning and professional guidance, many portfolio owners can still achieve strong returns through careful structuring and compliance with the new requirements.