TL;DR
- The additional-property SDLT surcharge is 5% on top of every standard band. On a £300,000 HMO purchase in 2026 that means £20,000 of SDLT. (GOV.UK SDLT residential rates)
- Conversion works can qualify for the 5% reduced VAT rate as a "conversion into multiple occupancy dwellings" under section 7 of VAT Notice 708. On £60,000 of works that is £9,000 saved against the default 20%. (HMRC VAT Notice 708, updated 26 June 2025)
- Mortgage interest relief for individual landlords is restricted to a 20% basic-rate credit (Section 24, fully in force since April 2020). (GOV.UK landlord finance-cost relief guidance)
- From 6 April 2027, income tax rates on property income rise by 2 percentage points to 22%, 42% and 47% (Autumn Budget 2025). (House of Commons Library briefing CBP-10450)
- CGT on a personal-name sale runs at 18% or 24% from 6 April 2026, with a £3,000 annual exempt amount. (GOV.UK CGT rates)
You have found the four-bed terrace, the room rents stack, and the refurb quote is in. Before you offer, this is the tax that sits on each stage of an HMO conversion in 2026: purchase, build, rental operation, and exit. Five minutes here is the difference between modelling the real deal and modelling a fantasy one.
One thing first: this guide is general information, not tax advice. HMO tax rewards specific structuring and punishes sloppy structuring. Speak to a property-specialist accountant before you commit to a purchase, not after.
SDLT on the purchase: the surcharge does the damage
Almost every HMO purchase is an additional residential property (you already own a home, or you are buying through a company), so the 5% surcharge applies on top of the standard bands from the first pound (GOV.UK SDLT residential rates). The surcharge was raised from 3% to 5% at the October 2024 Autumn Budget and is unchanged in 2026.
| Portion of purchase price | Standard rate | Additional property rate |
|---|---|---|
| Up to £125,000 | 0% | 5% |
| £125,001 – £250,000 | 2% | 7% |
| £250,001 – £925,000 | 5% | 10% |
| £925,001 – £1,500,000 | 10% | 15% |
| Over £1,500,000 | 12% | 17% |
On a £300,000 purchase at additional-property rates: £6,250 + £8,750 + £5,000 = £20,000. That is non-recoverable acquisition cost, and it is £6,000 more than the same deal under the pre-October-2024 3% surcharge.
Four points developers get wrong:
- Converting after purchase is not an SDLT event. SDLT is charged once, on the state of the property at completion. The conversion itself adds no SDLT.
- First-time buyer relief never applies to an investment purchase. It is an owner-occupation relief.
- Companies and SPVs always pay the surcharge. There is no first-property exemption for a new SPV.
- Six or more dwellings in one transaction can be taxed at non-residential rates instead (which start at 0% up to £150,000), with no surcharge. Rarely relevant to a single-house conversion, and do not confuse it with Multiple Dwellings Relief, which was abolished on 1 June 2024.
Get the exact figure for your deal in 30 seconds with the SDLT calculator; it covers the 2025/26 bands, the 5% surcharge and company purchases.
VAT on the conversion works: the 5% rate is the biggest single lever
The default VAT rate on building work is 20%. HMO conversions are one of the few residential projects with a statutory route to 5%, and it is worth real money: on £60,000 of qualifying works, 5% VAT is £3,000 against £12,000 at the standard rate.
Two qualifying routes matter here, both in HMRC VAT Notice 708 (last updated 26 June 2025):
- Conversion into a multiple occupancy dwelling (section 7). Converting a single household dwelling into an HMO is a qualifying conversion for the reduced rate, alongside conversions that change the number of dwellings. The conditions in section 7 must be met, so read them against your exact scope before you price the deal.
- Renovation of premises empty for 2+ years (section 8). If the property has been unoccupied for the two years before works start, renovation and alteration work qualifies at 5%. HMRC expects evidence: council tax records, the electoral roll, utility company records, or confirmation from the council's empty property officer.
The mechanics: it is your VAT-registered contractor who charges 5% instead of 20% on their invoices. If you are not VAT-registered (most small landlords are not), you cannot reclaim VAT, so the saving only exists if the builder invoices at the reduced rate. Raise it at tender stage, keep an evidence folder from the day you exchange, and keep invoices line-itemised so qualifying and non-qualifying work are separable.
Income tax on the rent: Section 24 now, higher rates from April 2027
Once tenants are in, the structure you bought through drives the tax.
Personal name. Rental profit is taxed at your marginal rate. Mortgage interest is not deductible; instead you receive a tax credit at the basic rate, currently 20% of finance costs (GOV.UK guidance). For a higher-rate taxpayer paying £12,000 a year of interest, that is £2,400 of relief where a full deduction would have been worth £4,800.
And it gets heavier: the Autumn Budget 2025 confirmed that from 6 April 2027 income tax rates on property income rise by 2 percentage points, to 22% (basic), 42% (higher) and 47% (additional) (Commons Library briefing CBP-10450). If you are modelling a 2026 conversion on a 5-year hold, most of that hold sits under the higher rates.
Limited company. Profits are taxed at corporation tax rates: 19% up to £50,000 of profits, 25% above £250,000, with marginal relief between (GOV.UK corporation tax rates). Mortgage interest is fully deductible for companies, and the April 2027 property income rise does not apply to corporation tax. Extracting profit to yourself (dividends or salary) is a separate tax event, so the comparison is whole-journey, not headline-rate.
Allowable expenses: what you can and cannot deduct
The running costs of an HMO are deductible against rent where they are wholly and exclusively for the letting (GOV.UK rental income guidance): letting and management fees, insurance, landlord-paid council tax and utilities (standard in HMOs), accountancy, ground rent and service charges, and repairs.
The lines that catch people:
- Repairs vs improvements. A repair restores an asset to its original condition and is deductible. The conversion itself (new en-suites, partitions, an extension) is capital improvement: not deductible against rent, but it does reduce your capital gain at exit (see below).
- Replacement of domestic items relief. Furnished lettings can deduct the cost of replacing furniture, furnishings and appliances on a like-for-like basis. The initial fit-out does not qualify; only replacements do.
- Capital allowances are mostly blocked. Plant and machinery allowances are not available for assets in a dwelling-house (CAA 2001 s35), and HMRC's published view is that in a typical shared-facilities HMO the bedrooms plus the shared kitchen and lounge together form the dwelling-house (HMRC Property Income Manual PIM3010). Treat any firm promising large capital-allowance claims on HMO communal areas with caution and take specialist advice before paying survey fees.
CGT when you sell (or corporation tax if a company holds it)
On a personal-name sale, CGT applies at 18% within your basic-rate band and 24% above it from 6 April 2026, after a £3,000 annual exempt amount (GOV.UK CGT rates). Private Residence Relief does not apply to an HMO that was never your main home.
What reduces the gain: the purchase price, the SDLT you paid, buying and selling fees, and the capital improvement spend (the conversion works). This is where the conversion cost finally earns tax relief.
A company pays corporation tax on the gain instead of CGT, and getting the proceeds out of the company is a second tax event. Indexation allowance for companies has been frozen since December 2017, so there is no inflation adjustment on post-2017 holdings.
Worked example: £300,000 purchase, £60,000 conversion
Personal-name buyer, higher-rate taxpayer, already owns a home. Sells after 5 years at £420,000. Buying and selling professional fees £8,000 combined.
| Stage | Tax line | Amount |
|---|---|---|
| Purchase | SDLT at additional-property rates | £20,000 |
| Conversion | VAT at 5% on £60,000 of qualifying works | £3,000 (vs £12,000 at 20%) |
| Operation | Extra annual income tax vs a full interest deduction (£12,000 interest, Section 24) | £2,400/yr |
| Exit | Gain: £420,000 less £300,000 less £60,000 improvements less £8,000 fees less £20,000 SDLT = £32,000; less £3,000 exempt; 24% on £29,000 | £6,960 |
The two swing factors are the VAT route (a £9,000 delta decided before works start) and the holding structure (Section 24 plus the April 2027 rate rise vs corporation tax with deductible interest). Both are decisions you make before exchange, which is why the tax modelling belongs in the appraisal, not the completion statement.
For the build side of the same deal, see our HMO conversion costs 2026 guide.
FAQ
How much is the SDLT surcharge on an HMO purchase in 2026?
5% on top of every standard band, from the first pound, for anyone who already owns a residential property or buys through a company (GOV.UK). On a £300,000 purchase the total SDLT is £20,000.
Does an HMO conversion qualify for 5% VAT?
Often, yes. Converting a single household dwelling into a house in multiple occupation is a qualifying conversion under section 7 of VAT Notice 708, and renovating a property empty for 2+ years qualifies under section 8. Your contractor charges the reduced rate; agree it at tender stage and keep the evidence.
Can I deduct mortgage interest from HMO rental income?
Not as an individual. Since April 2020 you receive a 20% basic-rate tax credit on finance costs instead of a deduction (GOV.UK). Companies can still deduct interest in full against corporation tax.
What Capital Gains Tax will I pay when I sell an HMO?
18% or 24% from 6 April 2026 depending on your income tax band, after the £3,000 annual exempt amount (GOV.UK). Purchase costs, SDLT, fees and the conversion spend all reduce the taxable gain.
Before you offer
None of this replaces a property-specialist accountant, and this article is not tax advice. But the order of operations is fixed: SDLT and the VAT route get decided before exchange, the holding structure before solicitors are instructed, and the exit tax before you set your target sale price. Run the acquisition numbers now: get your exact SDLT figure, then run the whole deal through the 30-second Quick Check to see whether the post-tax margin still works.