Higher taxes on rental income may prompt landlords to reassess the balance between income, potential capital growth and the costs of changing their investments, according to a new report from the Intermediary Mortgage Lenders Association (IMLA).
The report, The October 2026 Budget: Impact on the housing and mortgage markets, examines how the Budget’s further two percentage point increase in tax on rental income will affect individual landlords holding properties in their own names.
Combined with the increase announced last year, this takes the basic, higher and additional rates on rental income to 24%, 44% and 49% respectively from the 2027/28 tax year. These increases do not apply to rental profits generated by properties held through limited companies, which are subject to Corporation Tax.
For landlords with mortgages, the effective tax rate on rental profits can be considerably higher because mortgage interest is no longer deducted in full when calculating taxable income, having been replaced with a basic-rate tax credit.
IMLA’s illustrative example of a £250,000 property with a £150,000 mortgage produces annual rental profit of £4,365 before tax. A higher-rate taxpayer below the personal allowance withdrawal threshold would pay approximately 74% of that profit in tax from 2027/28, while an additional-rate taxpayer (earning more than £130,000) would pay approximately 86%.
For a landlord whose income falls between £100,000 and £125,140, where the personal allowance is progressively withdrawn, the effective rate can exceed 100%. In the report’s example of a landlord earning a £100,000 salary, the tax attributable to the rental income would reach approximately 124% of rental profit in the tax year 2027/28.
However, IMLA emphasises that reduced rental income does not automatically mean landlords will sell up. Decisions will also reflect borrowing levels, local rental yields, expectations for house price growth, investment timescales and the tax liabilities associated with disposing of a property.
The changes further widen the difference in tax treatment between individual and corporate ownership and may accelerate the established trend towards landlords buying properties through limited companies.
More landlords may consider transferring existing holdings into a company, although they cannot do this without incurring stamp duty and potential Capital Gains Tax liabilities. Some may therefore decide to sell a property held in their own name and buy another, which is then held via a company structure.
The implications for tenants will depend on how these individual decisions affect the supply of homes available to rent. The report notes that individual landlords accounted for 81% of tenancies in the English Private Landlord Survey 2024. It also highlights a fall of 157,000 in the number of mortgaged buy-to-let properties between November 2022 and August 2026.
In some cases, properties sold by private landlords may be bought up by other landlords, who will add them to a corporate portfolio.
So it should not be assumed that the exit of some landlords from the PRS, or a reduction in the numbers of properties held by them, will necessarily lead to an equivalent reduction in the number of properties available for rent.
“Landlords will respond differently to these changes, depending on their financial circumstances and what they want from their investment," comments Kate Davies, executive director of IMLA (pictured).
"Some will continue to see a strong case for holding property over the long term, particularly where they anticipate capital growth. Others may decide that lower rental income, alongside their wider costs and commitments, changes that calculation.
“Company ownership can offer a suitable structure for investment, including for those planning to pass their investment properties down to their children, but existing landlords also have to consider the costs of restructuring or selling. Understanding those choices is essential to assessing how the Private Rented Sector will develop.
Kate added, “For tenants, the concern is whether enough suitable homes remain available where they need them and at rents they can afford. Investment by both individual and corporate landlords contributes to that supply. Policy needs to support a sustainable rental market which recognises the range of households who rely on it, including those for whom homeownership is currently – and is likely to remain - out of reach.”
