As tax laws continue to evolve in the UK, landlords are increasingly considering incorporating their property portfolios to optimise tax efficiency. While incorporation can offer financial benefits, it also comes with potential downsides, so options need to be weighed up carefully.
Pros of Incorporating a Property Business
Lower Corporation Tax Rates
One of the key reasons landlords incorporate is the lower corporation tax rate compared to income tax on rental income. As of 2024, corporation tax ranges from 19% to 25%, while individual landlords can face income tax rates of up to 45% on rental profits.
Mortgage Interest Tax Relief
Since 2017, individual landlords can no longer deduct all their mortgage interest costs from rental income. Instead, they receive only a basic rate (20%) tax credit. However, incorporated landlords can still fully deduct mortgage interest as a business expense, potentially leading to significant tax savings.
Tax-Efficient Profit Extraction
Landlords operating through a limited company can take advantage of tax-efficient ways to withdraw profits, such as dividends (which are taxed at lower rates than income tax) or leaving profits within the company to reinvest in new properties.
Limited Liability Protection
A limited company structure provides personal liability protection, meaning landlords’ personal assets are safeguarded if the business encounters financial difficulties.
Easier Business Succession Planning
Transferring ownership of a company (e.g., passing shares to family members) can be more tax-efficient than passing properties individually, potentially reducing inheritance tax liability. Learn more about our Estate Planning team.
Cons of Incorporating a Property Business
Higher Compliance and Administrative Costs
Running a limited company comes with additional costs, including company registration, annual filing requirements, and accounting fees. Landlords must maintain detailed financial records and file corporation tax returns, which can be time-consuming.
Higher Mortgage Rates for Companies
Buy-to-let mortgages for limited companies typically have higher interest rates and fees compared to those for individual landlords. Lenders may also require a personal guarantee from directors, putting personal assets at risk.
Capital Gains Tax on Transfer of Properties (Latent Gains)
If a landlord transfers personally owned properties into a limited company, they may face Capital Gains Tax (CGT) on any increase in property value since acquisition. This is especially relevant when dealing with latent gains—unrealised capital gains that have accrued on properties before incorporation.
In some cases, Incorporation Relief may allow CGT to be deferred if the landlord is genuinely running a property business, rather than merely holding investments. This means HMRC will assess whether the landlord is actively managing the properties rather than being a passive investor.
Stamp Duty Land Tax (SDLT) on Transfers
The transfer of property to a company is treated as a sale, meaning landlords may have to pay SDLT, including the 3% additional surcharge for second homes and buy-to-let properties.
Dividend Tax on Profit Withdrawals
While dividends can be a tax-efficient way to extract profits, they are still subject to taxation. The tax-free dividend allowance has been reduced in recent years, and higher-rate taxpayers will still face a significant tax bill on dividends.
Are You Running a Property Business or an Investment Portfolio?
One of the most important considerations before incorporating is whether your property activities qualify as a business rather than a passive investment. HMRC assesses this based on several factors, including:
- The level of involvement – typically 20+ hours per week spent managing properties is required for Incorporation Relief.
- Whether the landlord is actively handling tenant issues, property maintenance, and business operations.
- If third-party letting agents fully manage the properties, incorporation relief may be denied, as this suggests a passive investment.
Additionally, landlords who are in full-time employment elsewhere but manage properties on the side may struggle to prove that their property portfolio constitutes a business under HMRC’s criteria.
Is Incorporation Right for You?
Incorporating a property business can offer significant tax advantages, particularly for landlords with large portfolios and those planning to re-invest profits. However, the costs of incorporation, potential tax liabilities on transfer, and increased administrative burden must also be carefully considered.
One Consultancy Solutions can offer incorporation as a possible solution to landlords looking to streamline their businesses. However, no recommendations can be made until a full consultation has been undertaken, and other options considered. Book yours today to explore tailored solutions and create a strategy that fits your unique portfolio.
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