I'm worried about Section 24 and capital gains tax on future BTLs. What's the best way to structure a new buy-to-let purchase in 2026 (e.g., in a limited company) to minimise my tax bill down the line?
Quick Answer
Structuring new buy-to-let purchases from 2026, often via a limited company, can offer tax efficiencies. This allows for mortgage interest deductibility and potentially lower Corporation Tax rates, mitigating the impact of Section 24 and individual Capital Gains Tax.
## Understanding Corporation Tax vs. Personal Income Tax for BTLs
Corporation Tax rates in 2026 are 19% for profits under £50,000, 25% for profits over £250,000, and a marginal relief rate applies between these thresholds. This compares with individual income tax rates, which from April 2027 are set to be 22% for basic rate, 42% for higher rate, and 47% for additional rate taxpayers. The decision between personal ownership and a limited company structure for a new buy-to-let purchase hinges significantly on these differing tax treatments, particularly in light of Section 24.
### How Section 24 Impacts Personal Ownership
Section 24, fully implemented in April 2020, disallows individual landlords from deducting mortgage interest costs from their rental income before calculating tax. Instead, landlords receive a basic rate tax credit equivalent to 20% of their finance costs. For higher or additional rate taxpayers, this means a significant portion of their mortgage interest is not effectively relieved at their marginal rate, leading to a higher taxable profit and often pushing them into higher tax brackets. For example, a higher-rate taxpayer receiving £1,000 in rental income and paying £400 in mortgage interest would still be taxed on the full £1,000, receiving only an £80 tax credit, effectively paying tax on income that isn't truly profit.
### Limited Company Treatment of Finance Costs
In contrast, a limited company can fully deduct all legitimate business expenses, including mortgage interest and other finance costs, from its rental income before Corporation Tax is applied. This is a fundamental difference that makes the limited company route attractive for many investors. For instance, a limited company generating £1,000 in rental income with £400 in mortgage interest would pay Corporation Tax on £600 (assuming no other expenses), a much lower base than an individual higher-rate taxpayer.
## Capital Gains Tax Considerations
Capital Gains Tax (CGT) on residential property for individuals is 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers in 2026/27, with an annual exempt amount of £3,000. When a property held within a limited company is sold, any gain is treated as company profit and is subject to Corporation Tax. This means the gain is taxed at 19-25%, potentially lower than the 24% rate for higher-rate individual taxpayers, especially for gains that push an individual into a higher tax bracket.
### Tax on Extracting Funds from a Limited Company
While the company pays Corporation Tax on profits, investors must also consider how they will extract money from the company. This typically happens via dividends, which are subject to personal income tax (after a tax-free dividend allowance), or salary, which incurs Income Tax and National Insurance. This 'double taxation' is a key consideration. For example, if a company makes £10,000 profit after Corporation Tax (say, at 19%, leaving £8,100), and this is extracted as a dividend, the individual will pay dividend tax on that £8,100 based on their personal income tax band. This cumulative tax burden needs careful calculation against the Section 24 savings.
## Other Structural Advantages and Disadvantages
**Advantages of Limited Company:**
* **Mortgage Interest Relief:** Full deduction of finance costs before Corporation Tax.
* **CGT Potential:** Lower effective tax rate on capital gains compared to higher-rate individual CGT. Funds remain within the company to reinvest tax-efficiently.
* **Succession Planning:** Easier to pass on property portfolios, potentially avoiding inheritance tax issues.
* **Perceived Professionalism:** May enhance perceived credibility with lenders and agents.
**Disadvantages of Limited Company:**
* **Higher Borrowing Costs:** Buy-to-let mortgage rates for limited companies can be slightly higher, and product choices might be more limited. Lender fees may also be higher.
* **Increased Administration:** Requires company accounts, company tax returns, and more complex legal and administrative overhead compared to personal ownership.
* **Cost of Formation:** Setting up and running a company incurs costs for company registration, annual filings, and accountancy fees. These fees are generally tax-deductible as business expenses.
* **SDLT Surcharge:** The additional dwelling surcharge of 5% applies equally to limited companies and individuals purchasing additional properties.
## Investor Rule of Thumb
For new buy-to-let purchases in 2026, a limited company structure is generally more tax-efficient for higher or additional rate taxpayers due to full mortgage interest deductibility, but requires careful consideration of borrowing costs and administrative overhead.
## What This Means For You
Most landlords don't make structural decisions based on guesswork; they analyse the numbers meticulously. Understanding the nuances of Corporation Tax, personal income tax, Section 24, and Capital Gains Tax is critical for long-term profitability. If you want to build a truly tax-efficient portfolio, this is exactly what we analyse inside Property Legacy Education, helping you make informed choices about your investment strategy.
Steven's Take
The shift with Section 24 fundamentally changed the game for personal buy-to-let landlords. For new purchases, especially if you're a higher or additional rate taxpayer, the limited company route often presents a compelling case for tax efficiency. My own journey involved understanding how these structures impact cash flow and long-term wealth accumulation. While it introduces more administrative complexity and potentially slightly higher mortgage costs, the ability to fully offset finance costs against income before Corporation Tax, and the lower effective capital gains tax rate compared to the 24% individual rate, can significantly outweigh these drawbacks. It's not a one-size-fits-all, but it’s certainly the default starting point for many serious investors looking at expansion now.
What You Can Do Next
1. **Consult a Tax Advisor:** Engage with a UK property tax specialist to model your specific financial situation under both personal and limited company structures, considering your income and future investment plans. This will provide a tailored analysis of potential tax liabilities and savings.
2. **Research Mortgage Lenders:** Investigate buy-to-let mortgage products available for limited companies, paying attention to interest rates, fees, and stress test requirements (e.g., 125-140% rental coverage at 5.5% notional rate). Compare these with personal buy-to-let rates via a mortgage broker.
3. **Review Company Formation Costs:** Understand the costs involved in setting up and maintaining a limited company, including annual accountancy fees, company secretarial services, and Companies House filing fees. These details are available from professional accountants or Companies House guidance.
4. **Calculate SDLT Implications:** Use the gov.uk SDLT calculator (gov.uk/stamp-duty-land-tax/residential-property-rates) to compare the Stamp Duty Land Tax liability for both personal and company purchases, remembering the 5% additional dwelling surcharge applies to both.
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