To rent or not to rent

David Whittaker, Partner at Mischon de Reya

"Should I sell it or rent it out?" – it's a question that we know property agents are asked all the time by high-net-worth clients who do not need the liquidity from the sale of their existing home in order to fund their new home. It's also a question posed increasingly often in the current climate in light of the significant new tax changes that are pushing lots of UK resident non-domiciled homeowners out of the UK.

However, there is no 'one-size-fits-all' approach here, and there are a number of (potentially complex) tax considerations that need to be navigated carefully in order for such families to arrive at the best decision for them. The UK tax landscape in relation to UK property ownership has changed significantly over the last decade, especially for non-UK domiciled individuals (who historically have been advised to hold their UK residential properties via offshore company/trust structures). This article seeks to highlight these key UK tax issues to be considered to help those that find themselves in this situation make the right decision for them.

Sale

Let's start with the tax treatment of a sale and onward purchase. The two key taxes here are capital gains tax (CGT) and stamp duty land tax (SDLT).

To the extent the property has increased in value since the original purchase (which is often the case with a long-term main residence), CGT would usually be chargeable on the gain (the current top rate is 24%). However, there is a valuable relief available known as Principal Private Residence Relief (PPR), which acts to completely exempt any gain from tax where the property was the individual's only or main residence. Provided the property was the individual's only or main residence for the entire period of ownership, the gain will be reduced to nil and there will be no CGT. Where a property is sitting at a significant gain, this is an extremely valuable relief.

However, where the property has been occupied as the owner's main residence for only some of the time for which they have owned it, PPR is only available pro rata. More on this later.

On the onward purchase, the buyer will pay SDLT on the purchase price. If the new property will be the buyer's only or main property, they will pay the lower rates of SDLT (up to 12% on any amount over £1.5M), assuming the purchaser is a UK resident.

Renting

The obvious advantage and likely the main objective of renting instead of selling is to monetise a capital asset by generating passive rental income. If the property is held directly by an individual, the rental income will be subject to income tax at the marginal rate regardless of whether that individual is a UK tax resident or not. The rate of tax will depend on whether they fall into the basic (20%), higher (40%), or additional (45%) rate bands for the relevant tax year.

Where the property is subject to a mortgage, it is possible to deduct a proportion of the mortgage payments before tax (it is no longer possible to deduct the full amount) along with other expenses associated with renting the property (estate agent fees, service charges, etc.). To the extent that you jointly own the property with your spouse who falls into a lower tax band, it may be worth exploring a declaration of trust so as to transfer an interest in the property to them to secure a lower aggregate tax rate (although of course this planning requires consideration of other, non-monetary, factors as well).

So, the question becomes: if you are able to retain your main residence and rent it out, why wouldn't you? The potential disadvantages lie in SDLT and CGT.

Where an individual is purchasing a new residential property in the UK which will result in them owning more than one home anywhere in the world (as would be the case if they retained their main residence), a higher rate of SDLT will apply, which effectively adds a 5% surcharge to the purchase price, on top of the existing rates (having increased from 3% following the 2024 Autumn Budget). This is a significant additional cost.

It should be noted that if an individual subsequently sells their previous main residence within 3 years of completing on the new purchase, they would be able to claim a refund of the additional SDLT that was paid on completion. This can be valuable where you intend to rent your main residence out for a short period of time before subsequently selling, thereby removing the SDLT disadvantage. However, it should be noted that the subsequent sale must have completed within the 3-year time limit (it is not enough to have exchanged).

The other issue to consider is the effect renting would have on CGT, more specifically on the availability of PPR. As mentioned above, the relief is available where the property was the individual's main residence throughout their period of ownership. Therefore, if you subsequently rented the property before eventually selling it, PPR would not be available in respect of that period where the property was rented. The effect is that the relief would be pro-rated and you would pay CGT on a portion of the gain.

Where the property is sitting at a very significant gain, paying CGT on even a small proportion of a very large gain could outweigh the benefits of the rental income, especially where that income would be taxed at 45% and you factor in the additional SDLT cost of purchasing a new property.

Inheritance Tax (IHT) Considerations

IHT is a hugely significant consideration in the context of UK residential property – by way of reminder, IHT is charged at 40% (less the nil-rate band, currently £325,000, and any other allowances or reliefs) on the market value of the property on an individual's death. The rules around IHT in relation to UK residential property were changed significantly in April 2017 and, broadly, the result of these changes is that it is no longer possible to use offshore structures to shield UK residential property from the scope of IHT.

However, these changes should also be considered in light of the wider IHT changes that were brought in from 6 April 2025. Whilst a detailed explanation of these changes is beyond the scope of this article, it is relevant to highlight that there may now be individuals (e.g., anyone, including British expats, who has been living outside the UK for more than 10 years) who are now outside the scope of IHT on their non-UK assets, where under the previous rules it was very difficult for such persons to mitigate their exposure to IHT (which was tied to domicile). These individuals now have the opportunity to limit their IHT exposure using planning that was not previously available to them.

As well as for British expats, this is relevant for any individual that has been non-UK resident for more than 10 of the previous 20 tax years, thereby making them 'non-Long-Term Resident' (non-LTR). For a non-LTR, their IHT exposure will be limited to their UK-situated property only. Therefore, in addition to the income tax, CGT, and SDLT considerations above, it should be noted that a non-LTR investing additional funds currently held outside the UK into a second UK property would have the effect of increasing that individual's exposure to IHT.

It is possible to mitigate this IHT exposure, either through the use of a commercial mortgage taken out on acquisition or life insurance coverage, but both of these products come with a cost attached. When looking in the round, it may be more efficient from an IHT perspective for non-LTRs to retain those funds outside of the UK, thereby keeping them outside the scope of IHT (i.e., pointing towards a sale rather than renting).

Offshore Structures

Historically, there were many advantages for non-UK domiciled individuals owning UK residential property through offshore trust/company structures. Prior to April 2015, non-UK residents disposing of UK residential property were not subject to CGT on any gains. In addition, where the property was held through a non-UK company, up until April 2017 the property would also be outside the scope of UK inheritance tax (IHT) on the death of the individual.

However, following a series of changes to the tax legislation, these structures have become significantly less attractive and, in fact, it is now often desirable to seek to extract properties from those structures if possible.

Depending on the tax profile of the settlor/beneficiaries of the trust structure or the ultimate beneficial owner of any offshore company structure, it may be more tax efficient to sell the property from within the structure and extract the sale proceeds in cash, rather than to seek to extract the property itself and retain it in a personal name.

Conclusion

It should be clear from the above that there are a number of (potentially highly complex) UK tax considerations when deciding whether to sell or rent out a property. If the rental yield is likely to be significant and either the owners are not looking to buy a new property or are buying a smaller property such that the additional SDLT due is not so significant, they may reasonably lean towards renting the old property out. However, this should be balanced against the (pro-rated) loss of PPR and continued (or increased) IHT exposure.

The optimal path will always be unique to the particular circumstances of the individual. How long do they intend to rent the property for? What would be the CGT liability on a sale? What income tax band do they fall into, and are they able to transfer an interest in the property to a spouse? Are they intending to take out a mortgage? Are they UK tax resident? Do they own their properties through a company holding structure? Are they a Long-Term Resident for IHT purposes? All of these key questions should be carefully considered, and we would always recommend seeking bespoke, professional advice.