Is it still worth buying an investment property as a sole trader/individual after Section 24, or do I pretty much HAVE to set up a limited company now to avoid getting hammered on tax? What are the pros and cons of each for a new landlord?

Quick Answer

As a sole trader, you face Section 24 mortgage interest restrictions, but benefit from simpler setup. Limited companies offer tax efficiency for higher earners (25% Corporation Tax, interest deductibility) but incur higher costs and complexity.

## Understanding Property Ownership Structures for Investors Many new investors entering the UK buy-to-let market question the optimal ownership structure for investment properties, especially with the impact of Section 24. From April 2020, individual landlords can no longer deduct mortgage interest from their rental income before calculating their tax liability. Instead, they receive a basic rate tax credit equivalent to 20% of their finance costs. This change significantly influences the decision between purchasing property as a sole trader (individual ownership) or through a limited company. ### Should I Buy as an Individual? Buying an investment property as an individual, often referred to as a sole trader or personal ownership, remains a viable option for many investors, particularly those who are basic rate taxpayers or are just starting out. The process is generally more straightforward and less expensive to set up compared to a limited company. For instance, you avoid the Companies House registration fees and the ongoing administrative costs associated with limited company filings and specialist accountancy. Lenders typically offer more favourable rates and a wider range of products for individual mortgages, even for buy-to-let, compared to limited company products. This can translate to a lower-cost borrowing environment, where typical BTL mortgage rates are 5.0-6.5% for two-year fixed terms, often slightly higher for limited company products. The main advantage for basic rate taxpayers is that while Section 24 removes interest deductibility, the 20% tax credit broadly offsets the impact. For example, if you have £5,000 in mortgage interest, you receive a £1,000 tax credit. This means your net tax position isn't drastically different compared to pre-Section 24 for basic rate taxpayers. Also, capital gains tax (CGT) for individuals is charged at 18% or 24% for higher/additional rate taxpayers, with an annual exempt amount of £3,000, which can be advantageous if you plan to sell one-off properties. This simplicity and lower barrier to entry for individual ownership makes it a common starting point for new landlords. ### Should I Buy with a Limited Company? Setting up a limited company, specifically an SPV (Special Purpose Vehicle) company, has become increasingly popular for property investment since the introduction of Section 24. The primary benefit for companies is that mortgage interest remains a fully tax-deductible expense against rental income. This means that a limited company can deduct 100% of its finance costs before calculating its profit. The current Corporation Tax rate is 19% for profits under £50,000, and 25% for profits over £250,000, which is often lower than the 40% or 45% income tax rates faced by higher and additional rate individual taxpayers. For example, if your company generates £20,000 profit after deducting mortgage interest and other expenses, it would pay £3,800 in Corporation Tax (19%). Importantly, investors can also structure their income by drawing salaries or dividends, potentially managing their personal income tax liability. Another benefit is the potential for easier estate planning and the ability to hold multiple properties under one entity, simplifying portfolio management. Also, should you wish to sell the properties, you sell the company shares, rather than the property itself, which can have different tax implications for some investors. This strategy is particularly appealing to those looking to scale their portfolios and aiming for long-term growth and tax optimisation, such as those earning significant income from other sources. ## Potential Downsides of Each Structure ### Downsides of Individual Ownership The primary drawback of individual ownership, especially after Section 24, is the impact on higher and additional rate taxpayers. These investors, paying 40% or 45% income tax, effectively lose relief on 20% to 25% of their mortgage interest. For example, a higher rate taxpayer with £10,000 in annual mortgage interest will receive a £2,000 tax credit, but still pay tax on an inflated income figure, losing out on £2,000-£2,500 in tax relief they would otherwise have received. This loss of full interest deductibility can significantly reduce net rental profit, making highly geared properties less viable and impacting overall cash flow for properties with higher loan-to-values. Many investors find their 'landlord profit margins' shrinking. Another downside can be the lack of limited liability; personal assets are exposed if significant liabilities arise from the property. Additionally, when it comes to capital gains, the 24% CGT rate for higher rate taxpayers without the Corporation Tax benefits can sometimes be less efficient in the long run if multiple properties are being sold, also considering the annual exempt amount is only £3,000. ### Downsides of Limited Company Ownership While offering significant tax advantages, limited company ownership comes with complexities and higher initial and ongoing costs. Setting up a limited company involves legal fees and accountancy costs to ensure compliance with Companies House and HMRC regulations. Mortgage products for limited companies are generally more limited and often come with higher interest rates (e.g., 0.5-1% higher than individual rates) and arrangement fees. Banks also typically apply stricter stress tests for limited companies, often requiring higher rental coverage (e.g., 145% at a notional rate of 5.5%) compared to the standard 125% for individuals. This stricter stress test can limit your borrowing capacity. There are also costs associated with extracting profits from a limited company. Dividends incur personal taxation once distributed, and salaries come with National Insurance contributions. This means that while the company pays less tax, you still pay personal tax when you take money out. Another consideration is the increased administrative burden; you'll need to file annual accounts with Companies House, a corporation tax return with HMRC, and potentially manage payroll if you draw a salary, all requiring specialist accountancy services. This increased complexity can make 'rental yield calculations' and 'BTL investment returns' appear lower when factoring in these additional expenses, which is an important consideration for a new landlord. ## Steve's Rule of Thumb Always consider your current and projected personal income tax rate, as this is the single biggest factor dictating whether a limited company’s tax efficiency will outweigh its additional costs and administrative burdens. ## What This Means For You For new landlords, deciding on the best ownership structure is a critical first step that has long-term implications for profitability and tax efficiency. Most landlords don't get 'hammered on tax' because they picked the wrong structure; they get hampered because they picked a structure without genuinely understanding the medium to long-term impact on their individual financial situation. If you are struggling to map out the financial implications of each for your specific property deals, this is exactly what we dissect and strategise inside Property Legacy Education.

What You Can Do Next

  1. Assess your current and projected personal income tax rate and other income streams. This is the foundational step to determine how Section 24 impacts your potential profits as an individual.
  2. Speak to a property tax specialist accountant (you can find one via the ICAEW or ACCA websites) to model projected profits and tax liabilities for both individual and limited company scenarios based on your specific financial situation and property goals.
  3. Consult with an FCA-regulated mortgage broker who specialises in buy-to-let mortgages. Discuss the differences in product availability, interest rates, fees, and stress testing for both individual and limited company ownership, as their advice will help you understand 'how much can I borrow'.
  4. Research the administrative costs associated with limited companies, including company formation fees, ongoing Companies House filing fees, and specialist accountancy costs for annual accounts and corporation tax returns.
  5. Evaluate your long-term investment strategy. If you plan to scale a large portfolio or have complex estate planning needs, a limited company might be more suitable, but this needs careful consideration with professional advice.

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