The Renters’ Rights Act 2025: the tax consequences landlords need to understand

The Renters’ Rights Act 2025 represents one of the most significant reforms of residential letting law in England for a generation. The principal tenancy reforms came into force on 1 May 2026 and replaced most assured shorthold tenancies with assured periodic tenancies. They also abolished section 21 possession and substantially recast the statutory grounds on which landlords may recover possession.

The Act is not a tax statute. Nevertheless, its changes to the legal and commercial operation of residential letting businesses have consequences across several tax regimes. Those consequences include a potentially significant SDLT issue identified before commencement, changes to the timing and predictability of property income, and renewed importance for the distinction between capital and revenue expenditure.

The central point is not that the Act imposes a new tax on landlords. It is that changes in tenancy law may alter when income is received, when expenditure is incurred, when a disposal can take place and how existing tax rules apply.

SDLT: the growing-lease problem

One of the most immediate tax concerns arose from the conversion of most assured tenancies into periodic tenancies.

For SDLT purposes, a lease that continues beyond its original term may be treated as a lease for a progressively extended term under the “growing lease” rules in Finance Act 2003, Schedule 17A. As the deemed term grows, the net present value of the rent may eventually exceed the residential rent threshold of £125,000. At that point, a tenant may become liable to make an SDLT return and pay tax on the rent element.

This was unlikely to affect most tenants immediately. It could, however, have affected tenancies carrying high rents or continuing for sufficiently long periods. More importantly, it would have imposed an unexpected monitoring and compliance obligation on residential tenants as the deemed term increased.

On 22 April 2026, the Government announced its intention to legislate in the Finance Bill 2026-27 so that the rent element of a residential lease constituting an assured tenancy under the Housing Act 1988, as amended by the 2025 Act, would not give rise to SDLT. The proposed legislation was to have retrospective effect from 1 May 2026. HMRC also stated that it would not collect SDLT on the rent element of an assured tenancy in the intervening period.

The announcement was welcome, but the distinction between administrative forbearance and enacted relief remains important. Until the promised legislation takes effect, advisers should verify the current statutory position before concluding that no filing obligation can arise.

The episode is also a useful illustration of a wider point: alterations to the private-law characteristics of a tenancy may produce unintended tax effects even where Parliament has made no express change to the tax code.

Property income: timing, arrears and void periods

The new tenancy regime may make landlords’ income less predictable. Depending on the possession ground relied upon, landlords may face longer lead times before recovering possession, restrictions on reletting or remarketing, and less flexibility over rent increases.

These rules do not, by themselves, alter the fundamental basis on which property business profits are taxed. They may, however, affect the timing of receipts and the incidence of bad debts and void periods.

For individuals, the profits of a property business are generally calculated on the cash basis where the statutory conditions are met and gross property business receipts do not exceed £150,000. Broadly, income is recognised when received and allowable expenditure when paid. Corresponding rules may apply to certain partnerships whose partners are all individuals, but not to limited liability partnerships.

Where the cash basis does not apply, or where an election is made for generally accepted accounting practice, profits are calculated on the accruals basis. Rent is then ordinarily recognised when it is earned rather than when it is collected, subject to the rules governing bad and doubtful debts and accounting adjustments.

That distinction matters where:

• rent is paid late;
• possession proceedings produce substantial arrears;
• a landlord agrees to waive or compromise rent;
• a former tenant makes a payment after the tenancy has ended; or
• a property remains vacant while possession, sale or remedial work is being completed.

A delay in collecting rent may produce an immediate tax-timing benefit under the cash basis. Under the accruals basis, the position is different: rent may already have been brought into account, and the landlord must consider whether any corresponding impairment or bad-debt treatment is available.

The Act should therefore prompt landlords to improve the connection between their property-management records and tax records. Arrears schedules, rent concessions, possession orders, deposit deductions, insurance receipts and settlement agreements may all affect the calculation of taxable profits.

Finance costs and cash-flow pressure

The restrictions introduced by Finance (No. 2) Act 2015, s 24 remain a central concern for individual residential landlords.

The relevant provisions in ITTOIA 2005 restrict the deduction of finance costs attributable to residential property businesses carried on by individuals. Instead of deducting the relevant costs in calculating property business profits, the taxpayer generally receives a basic-rate tax reduction, subject to the detailed statutory limits.

The restriction may apply to individual landlords and to the shares of individual or trustee partners in a property partnership. It does not ordinarily apply to a company carrying on the property business in its own right.

The Renters’ Rights Act does not change those rules. It may nevertheless intensify their commercial effect. A landlord can have a taxable property profit, calculated without a full deduction for mortgage interest, during a period in which cash receipts have fallen because of arrears, a void or possession-related delay.

This makes it important to distinguish three questions:

1. Is the property business profitable for tax purposes?
2. Does the landlord have sufficient cash to meet the resulting liability?
3. Would a different ownership structure improve the position after taking all entry, annual and exit taxes into account?

The answer to the third question is not automatically incorporation.

Incorporation and company ownership

A company carrying on a property business may generally deduct interest under the corporation-tax loan-relationship rules, subject to the ordinary requirements and any applicable restrictions. That can make company ownership attractive where a portfolio is highly geared and profits are to be retained for reinvestment.

But incorporation is not a cost-free response to the finance-cost restriction. A transfer of personally owned properties to a company may give rise to:

• CGT, subject to the possible availability of incorporation relief under TCGA 1992, s 162;
• SDLT, generally calculated by reference to market value where the transfer is to a connected company;
• refinancing costs and possible early-repayment charges;
• tax on the subsequent extraction of company profits;
• different treatment on death, succession or sale; and
• additional accounting, filing and governance obligations.

The SDLT partnership rules may produce a different result for some genuine property partnerships, but those rules are detailed and highly fact-sensitive. The existence of jointly owned property is not, without more, sufficient to establish a partnership.

A family investment company may be suitable in some succession and governance cases, but it is not a distinct tax status and does not remove the entry costs associated with transferring an existing portfolio. The commercial and tax analysis must be undertaken over the expected period of ownership, rather than by comparing only the annual deduction for interest.

It is also inaccurate to assume that company ownership necessarily produces a higher tax rate on disposal. Companies pay corporation tax on chargeable gains; individuals pay CGT. The economically relevant comparison must include the tax cost of extracting the company’s post-tax sale proceeds.

Possession proceedings and legal expenses

The deductibility of legal expenditure depends on the purpose and character of the expenditure, viewed in the context of the landlord’s property business.

Legal and professional fees incurred in the ordinary administration of a letting business may be deductible where they are incurred wholly and exclusively for that business and are revenue rather than capital in character. Examples may include costs incurred to:

• recover rent arrears;
• enforce repairing or other tenancy obligations;
• address nuisance or anti-social behaviour;
• renew or vary a short lease in the ordinary course of the business; or
• obtain possession so that the property can be relet.

By contrast, expenditure may be capital where it is incurred in acquiring, disposing of, improving or materially altering the landlord’s capital asset or title to it. Legal costs directly attributable to the sale of a property will ordinarily be considered under the capital-gains rules rather than as a deduction from property income.

The use of Ground 1A, under which possession is sought because the landlord intends to sell, does not by itself answer the tax question. The facts may involve several purposes and several categories of expenditure. For example, costs of recovering possession may be followed by separate conveyancing and estate-agency costs incurred on the disposal. Each component should be analysed according to its own purpose and character.

The familiar authorities on purpose and on the capital-revenue distinction remain relevant, including Mallalieu v Drummond [1983] STC 665 and McKnight v Sheppard [1999] 1 WLR 1333. Care should nevertheless be taken when relying on older cases concerning legal expenses: the result depends on the precise nature of the business, the asset and the proceedings.

Invoices should therefore identify separately, where possible:

• arrears recovery;
• tenancy enforcement;
• possession work;
• advice concerning a proposed sale; and
• conveyancing or other disposal costs.

A single undifferentiated invoice can make the correct tax treatment considerably harder to establish.

Repairs, improvements and regulatory works

The distinction between a repair and an improvement is likely to become increasingly important as landlords carry out work connected with electrical and gas safety, energy efficiency, damp and mould, the Decent Homes Standard and building-safety obligations.

The fact that work is required by legislation does not determine its tax treatment. Nor does the fact that it is safety-critical.

The correct analysis ordinarily asks:

• What is the relevant asset?
• Does the work restore that asset or replace it?
• Does it merely return the property to its previous condition?
• Does it produce a significant improvement by reference to modern standards?
• Was the property acquired in a condition in which the expenditure was necessary before it could be used in the business?
• Is any apparent improvement simply the unavoidable result of using modern materials?

A repair does not become capital merely because it is expensive, extensive or overdue. Equally, expenditure does not become revenue merely because it is described as remediation or compliance work.

Cases such as Law Shipping Co Ltd v IRC (1924) 12 TC 621, Odeon Associated Theatres Ltd v Jones [1973] Ch 288 and Conn v Robins Bros Ltd (1966) 43 TC 266 illustrate the importance of the property’s condition on acquisition, the nature of the work and the relationship between the expenditure and the asset as a whole.

Where a programme contains both repairs and improvements, a reasonable apportionment may be available if the evidence permits it. Detailed surveys, specifications, photographs and itemised contractor invoices may therefore be as important for tax purposes as they are for regulatory compliance.

Landlords should also consider whether capital expenditure qualifies for any specific relief. Plant and machinery allowances are restricted in ordinary dwelling houses, but allowances may remain relevant to common parts, commercial elements, qualifying communal installations or non-residential parts of a mixed portfolio.

VAT and the cost of compliance

The grant of an interest in residential property is generally exempt from VAT under VATA 1994, Schedule 9, Group 1. A landlord making only exempt residential lettings will therefore normally be unable to recover VAT charged on related professional fees, repairs and compliance work.

VAT can consequently be a real economic cost. A contractor’s invoice of £100,000 plus VAT may cost an exempt residential landlord £120,000, even if the underlying expenditure is deductible for income-tax or corporation-tax purposes.

Several qualifications are important:

• Some construction services may be zero-rated or reduced-rated if the detailed statutory conditions are met.
• The domestic reverse charge can affect the invoicing mechanism for certain construction services, although it does not convert exempt letting activity into taxable activity.
• A landlord with taxable commercial activity may be partly exempt and able to recover an appropriate proportion of residual input tax.
• The option to tax does not generally convert supplies of dwellings into taxable supplies.

Before major work begins, the VAT treatment should therefore be considered at the procurement stage rather than after invoices have been issued.

Disposal timing and Ground 1A

The Act’s possession regime may also affect the practical timing of property disposals.

For CGT purposes, TCGA 1992, s 28 generally treats a disposal under a contract as taking place when the contract is made, rather than when the transaction is completed, provided the contract is not conditional in the relevant sense. Jerome v Kelly [2004] UKHL 25 confirms the importance of identifying whether and when a binding unconditional contract exists.

Ground 1A does not alter that rule. Its significance is practical. A seller who requires vacant possession may be unwilling or unable to exchange contracts until possession has been recovered. Alternatively, the parties may exchange under a contract whose operation depends on vacant possession or another condition. The drafting and effect of the contract then require careful analysis.

A delay of only a few days around 5 April can move an individual’s disposal into a different tax year. That may affect:

• the applicable CGT annual exempt amount;
• the availability and timing of capital losses;
• the taxpayer’s income-tax band and therefore the CGT rate;
• payments on account or other cash-flow arrangements; and
• the deadline for reporting and paying tax on a UK residential property disposal.

Landlords planning a sale should therefore coordinate possession strategy, conveyancing and tax advice. A notice seeking possession is not itself a disposal, and an intended sale that never reaches an unconditional contract does not crystallise a gain under s 28.

Compensation, deposits and insurance proceeds

The new regime also gives rise to less conspicuous tax issues.

Amounts retained from a tenancy deposit should be analysed according to what they compensate the landlord for. A sum retained for unpaid rent will normally take the character of rent. A sum applied towards the cost of repairing damage may affect the deductible amount of the repair expense. Compensation for permanent damage to, or loss of, a capital asset may fall to be considered under the capital-gains rules.

The same need for characterisation applies to:

• rent-guarantee insurance;
• payments under landlord insurance policies;
• damages and settlement payments;
• court-awarded costs; and
• compensation received from contractors or managing agents.

The label applied to a receipt is not conclusive. Its tax treatment usually follows the nature of the loss, expense or right that the payment replaces.

Record-keeping and practical steps

The principal tax response to the Act should not be a wholesale change of structure. For many landlords, the more immediate need is better evidence and closer coordination between legal, property-management and tax functions.

Landlords should:

1. Record the statutory and commercial purpose of possession proceedings. This will assist in classifying legal expenditure and explaining periods without rental income.
2. Separate legal costs by workstream. Arrears recovery, tenancy enforcement, possession and conveyancing should not be combined unnecessarily.
3. Retain evidence for building work. Surveys, photographs, schedules of condition and itemised invoices are essential when distinguishing repairs from improvements.
4. Reconcile arrears and concessions. The treatment may differ materially between cash-basis and accruals-basis taxpayers.
5. Model incorporation before implementing it. The comparison should include CGT, SDLT, finance, extraction and eventual exit costs.
6. Plan disposals before serving notice. Ground 1A timing, vacant possession and the contractual disposal date must be considered together.
7. Review VAT before commissioning major works. Once a contractor has invoiced on an incorrect basis, the position can be difficult to unwind.

Conclusion

The Renters’ Rights Act 2025 does not create a new landlord tax. It does, however, alter the factual and legal setting in which existing taxes apply.

The movement to assured periodic tenancies exposed an unintended SDLT issue. Longer and more structured possession processes may affect rental cash flow and the timing of disposals. Increased regulatory work makes the distinction between repair and improvement more significant, while exempt residential letting leaves many landlords bearing irrecoverable VAT.

The appropriate response is not necessarily incorporation or any other single structural solution. It is joined-up advice: tenancy strategy, tax treatment, financing, regulatory compliance and disposal planning should be considered together.

For landlords and advisers, the Act is principally a housing-law reform. Its tax consequences, however, are too significant to be treated as an afterthought.