Making Tax Digital for Muslim landlords with Islamic buy-to-let finance

By Mehreen Ajaz ACA · September 2026

You chose Islamic buy-to-let finance to avoid interest. HMRC still has to decide how to treat the payments you make to the bank, and many landlords get this wrong on their tax return. At the same time, Making Tax Digital (MTD) is changing how every landlord reports rental income.

This guide covers both, in plain English.

1. Does MTD apply to you?

MTD for Income Tax means keeping digital records and sending quarterly updates to HMRC through compatible software, alongside a final declaration after the tax year ends. It applies based on your qualifying income:

Qualifying income is your gross rent before expenses, added to any self-employed turnover. Wages, pensions, dividends and partnership profits do not count. If you own a property jointly, only your share counts.

Example: you and your spouse jointly own two flats that bring in £48,000 a year in rent. Your share is £24,000. If you also run a side business turning over £8,000, your qualifying income is £32,000, so MTD applies to you from April 2027.

2. How HMRC treats the rent you pay the bank

With most Islamic buy-to-let finance, often called a buy-to-let purchase plan, you and the bank buy the property together. Each month you pay the bank rent for using its share, and often an extra payment to buy more of that share.

For tax, these two payments are treated very differently:

• The rent you pay the bank is treated in the same way as mortgage interest. The law covers any return that is "economically equivalent to interest", so you are not disadvantaged for choosing a Sharia-compliant product.
• The acquisition payments that buy the bank's share are capital. Like the capital part of a repayment mortgage, they get no tax relief.

This means the same rules as a conventional mortgage apply. If you own the property personally, you cannot deduct the rent you pay the bank from your rental income. Instead you get a tax credit of 20% of that cost. If the property is owned by a limited company, the rent paid to the bank is normally deductible in full against the company's profits.

The common mistake: deducting the whole monthly payment, acquisition payments included, or leaving the finance cost off entirely. The first overstates your relief and can lead to penalties. The second means you pay more tax than you need to.

3. What to track each quarter

Under MTD, you send figures every quarter, so you need these records throughout the year, not just in January:

1. Rent received, property by property
2. Letting agent fees, repairs, insurance, service charges and ground rent
3. Rent paid to the bank, kept separate from acquisition payments. Your provider's annual statement should show the split.
4. Any fees for arranging the finance
5. Anything spent on improvements, kept separate from repairs

The quarterly deadlines are 7 August, 7 November, 7 February and 7 May, and you still make a final declaration after the year ends.

4. Personally or through a limited company?

Because a company can deduct the rent it pays the bank in full, some landlords look at moving their portfolio into a company. This can make sense, but it is not automatic:

• Moving existing properties into a company can trigger capital gains tax and stamp duty land tax.
• Your provider must offer Islamic finance for limited companies, and the terms may differ.
• Taking money out of a company means paying tax on salary or dividends.

Work through the numbers with an accountant and speak to your broker before you commit.

5. A short checklist

• Work out your qualifying income for 2025-26 to see if MTD applies from April 2027
• Get your provider's annual statement showing rent and acquisition payments separately
• Keep records property by property, in software that works with MTD
• Check your past returns claimed the finance cost correctly
• If you are considering a limited company, get advice before you move anything