An HMO is taxed on the same skeleton as a standard buy-to-let, but three extras change the numbers: licensing costs, the Business-Rates-versus-Council-Tax question, and the possibility (for larger properties) of a completely different Stamp Duty route. Our worked 6-bed HMO at £320,000 shows how these stack up.
The rent looks great — until Section 24
At £550 per room, the 6-bed generates £39,600 a year — far more than a single-family let of the same value. But it is still personally-held and mortgaged, so the Section 24 restriction applies exactly as it does to a vanilla BTL. In the worked example that leaves roughly £9,552 of tax after the 20% interest credit, on £30,600 of taxable profit.
Licensing and Business Rates
- Mandatory HMO licences apply to most properties with 5+ occupants in 2+ households — the fee and compliance costs are generally deductible against rental profit.
- Many HMOs are assessed for Business Rates rather than Council Tax, and Small Business Rates Relief can reduce or remove the bill — but some councils band per room, which is far less favourable.
- Article 4 directions can force full planning permission on a C3→C4 conversion; it is a planning issue, not a tax, but it can kill the deal before tax matters.
The SDLT wildcard
A large enough HMO (often six or more self-contained units) may access the lower non-residential SDLT scale rather than residential bands plus the 3% surcharge — the same scale that makes commercial property cheaper to buy. The rules are tight and frequently challenged, so never assume it without specialist confirmation.
On exit
CGT applies at residential rates with 60-day reporting. Where the HMO is genuinely run as a business, some investors argue for Business Asset Disposal Relief — but this is adviser territory. If the yield still is not enough, compare the tax profile of a serviced accommodation operation, which trades even higher income for VAT and management complexity.