Should you own rental property through a limited company?

Whether to hold property personally or through a company is the most common question landlords ask, and the honest answer is that it depends on numbers most people have not yet worked out. This guide sets out the moving parts so you can see which way they point for you.

How each structure is taxed

Personally: rental profit is added to your other income and taxed at income tax rates, which for property income become 22%, 42% and 47% from April 2027. Mortgage interest is not deductible; you get a 20% credit instead (see our guide to Section 24). Gains on sale are taxed at 18% or 24% after a £3,000 annual exempt amount.

Through a company: rental profit is taxed at corporation tax rates: 19% on profits up to £50,000, 25% above £250,000 and a marginal rate between. Mortgage interest is fully deductible. Gains on sale are taxed as corporation tax, with no annual exempt amount. Money left in the company is taxed once; money taken out as salary or dividends is taxed again in your hands.

The four questions that decide it

1. Do you need the income now? If you live on the rent, the company's advantage shrinks because dividends are taxed on the way out. If you are reinvesting, paying 19% to 25% and compounding inside the company is usually better than paying 42% and reinvesting what is left.

2. How much interest do you pay? The higher your borrowing, the more Section 24 costs you personally and the more a company's full interest deduction is worth. A portfolio with little or no debt gains far less from incorporating.

3. What is your other income? Basic-rate taxpayers with modest portfolios often do fine personally. Higher-rate taxpayers with leveraged portfolios are the classic case for a company.

4. Are you buying new or moving existing properties? Buying new properties through a company is straightforward. Moving properties you already own is where the costs bite.

The cost of moving existing properties in

Transferring a property you own to your company is a sale at market value:

• Stamp duty is payable by the company at the additional-dwelling rates (5% surcharge on top of standard bands). Relief is available where the properties were held in a genuine partnership before the transfer, which is why partnership status, evidenced over time, matters so much.
• Capital gains tax is due on the gain since you bought, unless incorporation relief under section 162 applies. That relief requires the property activity to be a business (typically meaning significant time spent managing it, as in the Ramsay case), and all the business assets to be transferred in exchange for shares. The gain is then rolled into the base cost of the shares rather than charged now.
• Mortgages must be redeemed or novated, usually meaning a full refinance at company rates, with early repayment charges on existing fixes.
• Legal and valuation costs for each property.

For a landlord with large gains, high leverage and a partnership history the reliefs can make incorporation almost cost-free. For a landlord with one or two properties and no partnership the costs often outweigh the benefit, and the better answer is to buy any new properties through a company and leave the old ones where they are.

Things people forget

• Company mortgage rates and fees are higher, and lenders require personal guarantees.
• A company holding a dwelling worth over £500,000 falls within the annual tax on enveloped dwellings regime. Lettings businesses can claim relief, but a return is still required.
• Corporation tax, accounts, confirmation statements and a separate bank account add running costs and admin every year.
• Inheritance tax planning is different, and can be better, with shares rather than properties.
• Changing structure after buying is expensive, so decide before the next purchase.

A sensible way to decide

Model both structures over ten years using your actual rent, costs, interest, income and expected growth, including what it costs to extract the money you need to live on. Then add the one-off cost of moving in any existing properties. The structure with the higher after-tax wealth at the end, with a margin that survives a rate rise and a bad year, is the answer.

AIRPROP builds exactly this model for clients and works alongside your accountant on the tax detail. This guide is general information rather than advice; the decision should be confirmed with a qualified tax adviser before you act on it.