HMO Tax Guide: Section 24, Corporation Tax & CGT for HMO Landlords (2026)

HMO properties generate significantly higher rental income than standard buy-to-lets — and that means the tax implications are amplified at every level. A six-bedroom HMO mortgage generating £3,000 per month faces very different tax consequences than a single-let property at £900 per month, particularly once Section 24 mortgage interest restrictions are factored in. Yet most tax guidance available to landlords treats all rental properties identically, ignoring the HMO-specific considerations that can make a five-figure difference to your annual tax bill.

This guide covers every tax consideration specific to HMO landlords — from income tax and Section 24 through to corporation tax, capital gains tax, and the full list of allowable expenses. All examples use realistic HMO rental figures, not generic buy-to-let numbers.

> Important: This guide provides general information about HMO taxation. It is not tax advice. Tax rules change frequently and individual circumstances vary. Always consult a qualified accountant or tax adviser for decisions about your specific situation.

How Is HMO Rental Income Taxed?

HMO rental income is taxed as property income, the same as any other buy-to-let. However, the higher yields typical of HMO properties — often £2,500 to £4,500 per month for a single property — mean that tax treatment decisions have a much larger financial impact than they do for standard rental properties.

If you hold HMOs in your personal name, rental profits are added to your other income and taxed at your marginal income tax rate. If you hold them through a limited company, profits are subject to corporation tax instead.

The choice between these two structures is one of the most consequential financial decisions an HMO investor makes. For a direct comparison, see our guide on SPV vs personal name for HMO investment.

For more on this topic, see our guide to HMO Bridging Finance: Complete Guide for Property Investors.

Income Tax on HMO Rental Income — Rates and Bands

For HMOs held in a personal name, rental profit (income minus allowable expenses) is added to your salary, dividends, and other income to determine your tax band.

2025/26 Income Tax Rates

According to GOV.UK income tax rate guidance, the current bands are:

Tax Band	Income Range	Rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 – £50,270	20%
Higher rate	£50,271 – £125,140	40%
Additional rate	Over £125,140	45%

For HMO investors, the critical issue is that rental income stacks on top of employment or other income. A higher-rate taxpayer with a salary of £60,000 pays 40% tax on every pound of HMO rental profit from the first pound — there's no basic rate band left to absorb it.

For more on this topic, see our guide to HMO vs BTL Mortgages: Which Pays More?.

With typical HMO yields, even a single property can push a basic-rate taxpayer into the higher-rate band. Two or three HMOs generating £2,500–£4,000 per month each can create tax bills that fundamentally change the economics of the investment.

Section 24 Explained — How It Affects HMO Landlords Specifically

Section 24 of the Finance (No. 2) Act 2015 removed the ability for individual landlords to deduct mortgage interest as an expense. Instead, landlords receive a basic-rate tax credit (20%) on their mortgage interest payments. This change — fully phased in since April 2020 — disproportionately affects HMO landlords for two key reasons.

Why Section 24 Hits HMO Landlords Harder

1. Higher rental income inflates the tax base. Section 24 requires you to declare your full rental income before deducting mortgage interest. For a standard BTL generating £900 per month, this creates a moderate tax increase. For an HMO generating £3,500 per month on the same property, the inflated income figure pushes you further into higher tax bands — and the 20% tax credit doesn't offset the 40% or 45% rate you're actually paying.

2. HMOs often carry larger mortgages. Because HMO properties are typically larger and more expensive (especially after conversion costs), mortgage interest payments tend to be higher. Larger interest payments that can only be credited at 20% create a bigger gap between your actual tax liability and the relief you receive.

For more on this topic, see our guide to HMO Refurbishment Mortgage Rates & Costs Explained.

For more on this topic, see our guide to HMO Remortgage Rates 2026.

The "Phantom Income" Problem

Section 24 can create a situation where you pay tax on income you haven't actually received in cash terms. Your rental profit after mortgage payments might be £500 per month, but HMRC taxes you as if your profit is £2,500 per month (the full rent minus expenses, but before mortgage interest). The tax credit partially offsets this, but for higher-rate taxpayers, the shortfall is substantial.

Worked Example: Section 24 Impact on a 6-Bed HMO

Let's examine the real impact using a typical 6-bed HMO in the Midlands.

Property Details

Item	Amount
Property value	£320,000
Mortgage (75% LTV at 5.5%)	£240,000
Monthly mortgage payment (interest-only)	£1,100
Monthly gross rent (6 rooms × £550)	£3,300
Monthly allowable expenses (excl. mortgage)	£550
Monthly net profit before mortgage	£2,750
Monthly cash profit after mortgage	£1,650

Tax Comparison: Basic Rate vs Higher Rate Taxpayer

Item	Basic Rate (20%)	Higher Rate (40%)
Annual gross rent	£39,600	£39,600
Allowable expenses (excl. mortgage interest)	−£6,600	−£6,600
Taxable rental profit	£33,000	£33,000
Income tax on rental profit	£6,600	£13,200
Section 24 tax credit (20% × £13,200 mortgage interest)	−£2,640	−£2,640
Actual tax payable	£3,960	£10,560
Annual cash profit after mortgage	£19,800	£19,800
Tax as % of cash profit	20%	53%

For the higher-rate taxpayer, Section 24 means over half their actual cash profit goes to tax. Before Section 24, they would have deducted the full £13,200 mortgage interest from their taxable income, reducing the tax bill to approximately £7,920 — a difference of £2,640 per year on a single property.

Scale this across a portfolio of three or four HMOs, and Section 24 can cost a higher-rate taxpayer £10,000–£15,000 per year in additional tax compared with the pre-2020 rules.

Corporation Tax for Limited Company HMOs

HMOs held through a limited company (typically an SPV — Special Purpose Vehicle) are subject to corporation tax on profits rather than personal income tax.

Current Corporation Tax Rates (2025/26)

According to GOV.UK corporation tax rates:

Profit Level	Rate
Profits up to £50,000	19% (small profits rate)
Profits £50,001 – £250,000	26.5% (marginal relief)
Profits over £250,000	25% (main rate)

The key advantage for HMO investors: mortgage interest remains a fully deductible expense within a limited company. Section 24 does not apply to companies. This means your taxable profit is calculated after deducting mortgage interest — the way it worked for everyone before 2020.

However, extracting profits from the company triggers additional tax (dividend tax or salary/NI), so the total tax burden depends on how much income you need to take out versus leaving it in the company for reinvestment.

For a detailed comparison of structures, read our limited company HMO mortgage guide.

Personal vs Company Tax Comparison for HMO Investors

Using the same 6-bed HMO example above, here's how the tax compares between personal name and limited company HMO mortgages for a higher-rate taxpayer:

Item	Personal Name (40% taxpayer)	Limited Company
Gross rental income	£39,600	£39,600
Allowable expenses	−£6,600	−£6,600
Mortgage interest deduction	Not deductible (credit only)	−£13,200 (fully deductible)
Taxable profit	£33,000	£19,800
Tax on profit	£13,200 (at 40%)	£3,762 (at 19%)
Section 24 credit	−£2,640	N/A
Tax on rental profit	£10,560	£3,762
Annual saving in company	£6,798

The £6,798 annual saving is before accounting for dividend tax on profit extraction. If you reinvest profits (buying more properties), the company structure is significantly more tax efficient. If you need to extract all profits as income, dividend tax narrows the gap — but a company structure still typically saves a higher-rate taxpayer £3,000–£5,000 per year per HMO.

Model these scenarios with our HMO cashflow calculator and rental yield calculator.

Capital Gains Tax on HMO Property Sales

When you sell an HMO, any profit (after deducting purchase costs, improvement costs, and selling costs) is subject to Capital Gains Tax.

CGT Rates on Residential Property (2025/26)

According to GOV.UK capital gains tax rates:

Taxpayer	Rate on Residential Property Gains
Basic rate	18%
Higher rate	24%
Companies	Corporation tax rate (19%–25%)

Key Points for HMO Investors

Annual CGT allowance: Currently £3,000 per individual (reduced from £6,000 in 2023/24). This is negligible for most HMO sales.
Improvement costs are deductible: Money spent on refurbishment that adds value (not repairs/maintenance) reduces your taxable gain. Keep all invoices.
Incorporation gains: Transferring an HMO from personal name to a limited company is a disposal for CGT purposes. Incorporation relief may apply but requires careful structuring. See our SPV vs personal name guide for more detail.
Company sales: If your HMO is held in a company, you don't pay CGT on sale — the company pays corporation tax on the gain. Business Asset Disposal Relief doesn't apply to property investment companies.

Allowable Expenses for HMO Landlords

Claiming all legitimate expenses reduces your taxable profit. According to HMRC's property income guidance, HMO properties have several expense categories that standard buy-to-lets don't.

Standard Allowable Expenses

Mortgage interest (companies only — individuals get Section 24 credit)
Letting agent fees and management costs
Insurance (buildings, landlord, rent guarantee)
Accountancy fees
Legal and professional fees (not purchase costs)
Advertising for tenants
Utility bills (if included in rent)
Council tax (void periods)
Ground rent and service charges
Travel costs for property management (mileage or actual costs)

HMO-Specific Allowable Expenses

These are costs that apply specifically to HMO properties and are often overlooked:

HMO licence fees — Both the initial application and renewal fees
Fire safety maintenance — Fire alarm testing, extinguisher servicing, emergency lighting checks
Fire risk assessment costs — Annual or periodic professional fire risk assessments
Communal area cleaning — Costs of cleaning shared kitchens, bathrooms, hallways
Communal area utilities — Gas, electric, and water for shared spaces (often included in rent for HMOs)
Broadband provision — Wi-Fi costs if provided as part of the tenancy
TV licence — If provided for communal areas
Replacement of communal furniture and appliances — Under the replacement of domestic items relief
HMO-specific compliance costs — Room size surveys, carbon monoxide detector installation and testing
Enhanced refuse collection — Additional waste management costs for multi-tenant properties

HMO Licensing Fees — Are They Tax Deductible?

Yes. HMO licensing fees are an allowable expense against rental income. This includes:

Mandatory HMO licence application fees (typically £500–£1,500 per local authority)
Additional licensing scheme fees
Selective licensing fees
Renewal fees
Any professional fees associated with the licence application (e.g., fire risk assessment required as part of the application)

The fees are deductible in the year they're incurred, not spread over the licence period. If your licence costs £1,200 and runs for five years, you claim the full £1,200 in the year you pay it.

For full details on licensing costs, see our HMO licence costs guide.

Replacement of Domestic Items Relief for HMO Properties

Since the wear and tear allowance was abolished in April 2016, landlords can only claim the cost of replacing domestic items — not an annual flat-rate deduction.

How It Works for HMOs

For HMO properties, the higher tenant turnover and communal use means items need replacing more frequently. You can claim the cost of replacing:

Furniture (beds, wardrobes, desks, communal sofas)
White goods (fridges, freezers, washing machines, dryers, cookers)
Soft furnishings (curtains, carpets, bedding)
Kitchenware (pots, pans, crockery — if provided)
Bathroom fittings (where like-for-like replacement)

The replacement must be like-for-like or a reasonable modern equivalent. If you upgrade (e.g., replacing a basic bed frame with a premium one), you can only claim the cost of an equivalent basic replacement.

Record-Keeping for HMOs

With multiple rooms each containing furniture and appliances, HMO landlords should maintain an asset register listing every item in every room with purchase date and cost. This makes claiming replacements straightforward and protects you in the event of an HMRC enquiry.

Furnished vs Unfurnished HMOs — Tax Implications

Most HMOs are let as furnished or part-furnished. The tax implications are minimal — furnished lettings no longer qualify for the wear and tear allowance (replaced by replacement of domestic items relief as above). However, there are practical considerations:

Furnished HMOs generate higher rents but incur higher replacement costs
Furnished Holiday Lettings (FHL) relief does not apply to standard HMOs — this relief requires short-term holiday lets, not permanent residential tenancies. The FHL regime is being abolished from April 2025 in any case
VAT: Residential letting is exempt from VAT regardless of furnishing level, so this doesn't create a VAT liability

National Insurance on HMO Rental Income

Rental income from HMOs is not generally subject to National Insurance contributions, provided you're a property investor (not a property trader). However, there are exceptions:

If you provide substantial services (meals, laundry, cleaning of occupied rooms) alongside accommodation, HMRC may classify the income as trading income subject to Class 2 and Class 4 NI
Limited company — If you draw a salary from your property company, employer's and employee's NI applies to the salary element. Most accountants recommend drawing a salary at or below the NI threshold (currently £12,570) and taking the rest as dividends

Most HMO landlords providing standard self-contained rooms with shared facilities won't trigger the trading income classification. But if you're running something closer to a guest house or read more, take specific advice.

Tax Planning Strategies for HMO Portfolio Landlords

1. Maximise Allowable Expenses

Many HMO landlords under-claim. Review the HMO-specific expenses list above and ensure you're claiming everything you're entitled to. Common missed deductions include communal utility costs, fire safety maintenance, and HMO licence fees.

2. Timing of Expenditure

If you're approaching a tax band threshold, timing large deductible expenses (e.g., replacing all fire doors, refurbishing a communal kitchen) into a single tax year can reduce your overall tax rate for that year.

3. Split Ownership Between Partners

If one partner is a basic-rate taxpayer and the other is higher-rate, holding the HMO in the basic-rate partner's name (or splitting ownership) can reduce the overall tax bill. This requires careful structuring and potentially a Declaration of Trust.

4. Pension Contributions

HMO rental profits increase your total income, which can push you above thresholds for pension annual allowance tapering. Conversely, making pension contributions reduces your net income and can bring you back below higher-rate thresholds.

5. Capital Improvements vs Repairs

Understanding the distinction between capital expenditure (not deductible against income, but reduces CGT on sale) and revenue expenditure (deductible against income) is important. Repairing a kitchen is revenue expenditure. Installing a kitchen where there wasn't one is capital expenditure. Your accountant can advise on borderline cases.

When to Incorporate — The HMO Investor's Decision Point

The decision to move from personal name to limited company ownership is one of the most significant tax planning decisions for HMO investors. There's no one-size-fits-all answer, but incorporation tends to make sense when:

You're a higher-rate (40%) or additional-rate (45%) taxpayer
You have significant mortgage debt (Section 24 impact is larger)
You plan to reinvest profits rather than extract them as income
You're building a portfolio and want to scale efficiently
You have a long time horizon (20+ years) — the upfront costs of incorporation are amortised over time

Incorporation tends not to make sense when:

You're a basic-rate taxpayer with modest mortgage debt
You need to extract all rental profits as personal income each year
You own properties with large unrealised capital gains (transfer triggers CGT)
You have only one or two properties and don't plan to expand

For the full comparison, including worked examples and a decision framework, see our SPV vs personal name HMO guide.

Finding an HMO-Specialist Accountant

General-practice accountants may not be familiar with HMO-specific tax considerations — licensing fee deductibility, the interaction between Section 24 and HMO yields, or commercial property classification for larger HMOs. Compare options with HMO mortgage lenders who often recommend property tax specialists. Look for an accountant who:

Has other HMO landlord clients
Understands the Section 24 impact specifically for high-yield properties
Can advise on incorporation and SPV structures
Is familiar with HMO-specific allowable expenses
Understands the distinction between residential and commercial property classification for tax purposes

Online property tax specialists (such as Provestor, Property Tax Services, or local firms advertising landlord expertise) are a reasonable starting point. Ask specifically about their HMO experience before engaging.

Sources

FAQs

How much tax will I pay on my HMO rental income?

It depends on your total income and tax band. A basic-rate taxpayer pays 20% on HMO rental profits. A higher-rate taxpayer pays 40%. After Section 24, the effective rate for higher-rate taxpayers can exceed 50% of actual cash profit when mortgage interest is factored in. Use the worked examples in this guide to estimate your liability, and consult an accountant for your specific circumstances.

Can I still claim mortgage interest relief on my HMO?

If you hold HMOs in a personal name, you cannot deduct mortgage interest from rental income. Instead, you receive a 20% tax credit on your mortgage interest payments. This is the Section 24 restriction, fully in force since April 2020. If you hold HMOs in a limited company, mortgage interest remains fully deductible as a business expense — Section 24 does not apply to companies.

What expenses can I claim as an HMO landlord?

All standard landlord expenses (insurance, management fees, accountancy, legal costs, repairs) plus HMO-specific costs including: HMO licence fees, fire safety maintenance, communal area cleaning, communal utilities, read more, fire risk assessments, and enhanced waste collection. See the full list in the allowable expenses section above.

Do I pay CGT when I sell an HMO property?

Yes, if you sell for more than you paid (after deducting allowable costs). Basic-rate taxpayers pay 18% on the gain; higher-rate taxpayers pay 24%. Improvement costs (not repairs) are deductible from the gain. If the HMO is held in a limited company, the company pays corporation tax on the gain rather than CGT.

Is it more tax efficient to hold HMOs in a limited company?

For higher-rate taxpayers with significant mortgage debt, yes — typically saving £3,000–£7,000 per year per HMO compared to personal ownership after Section 24. For basic-rate taxpayers with low mortgage debt who need to extract all profits, the advantage is smaller or negligible. The right answer depends on your tax band, mortgage levels, profit extraction needs, and portfolio plans. See our limited company HMO mortgage guide for a detailed comparison.