Given the recent changes to Section 24 and the increased corporation tax, what's currently the best strategy for a higher-rate taxpayer looking to acquire a new buy-to-let property: personal name or limited company, and when does the company route become clearly more beneficial?
Quick Answer
For higher-rate taxpayers, a limited company structure for new buy-to-let properties can offer significant tax advantages over personal ownership, especially as Section 24's mortgage interest rules impact individuals. The company route typically becomes more beneficial when annual profits reach the Corporation Tax small profits rate threshold.
## Understanding Buy-to-Let Ownership Structures for Higher-Rate Taxpayers
For higher-rate taxpayers in the UK, the decision of whether to purchase a new buy-to-let (BTL) property in a personal name or through a limited company has become complex following recent tax changes. From April 2020, individual landlords can no longer deduct mortgage interest from their rental income before calculating tax, a measure known as Section 24. While this impacts personal ownership, limited companies can still deduct finance costs. Corporation Tax is 25% for profits over £250,000, and 19% for profits under £50,000 (with a marginal rate between these two thresholds). Personal income tax for higher and additional rate payers can be significantly higher than the 19% small profits rate for companies, making the limited company structure a strong contender for new acquisitions.
### Does Section 24 make personal ownership unviable for higher-rate taxpayers?
Section 24 significantly reduces the profitability of personally owned BTLs for higher-rate taxpayers. Instead of deducting 100% of mortgage interest, individual landlords now receive a 20% tax credit on finance costs. For a higher-rate taxpayer (paying 40% income tax), this means that for every £100 of mortgage interest paid, they only get £20 back in tax relief, effectively paying tax on 'phantom profit' that has been used to service the mortgage. This can push some landlords into a higher tax bracket if their gross rental income, before interest, is high enough. Considering Bank of England base rate at 4.75% and typical BTL mortgage rates at 5.0-6.5%, the finance costs on a highly geared property can be substantial, eroding cash flow and actual profits after the 20% tax credit. For example, a property generating £1,200 annual gross rent with £800 in mortgage interest would mean the individual landlord pays tax on £1,200, not £400 (if interest were deductible). With a 40% personal income tax rate, this results in £480 tax liability, less a £160 tax credit (£800 * 20%), amounting to a net tax of £320. If interest were fully deductible, tax on £400 at 40% would be £160.
### How does the limited company structure address Section 24's impact?
A limited company operating a BTL portfolio is treated as a trading entity for tax purposes, meaning it can still deduct all legitimate business expenses, including mortgage interest, from its rental income before calculating Corporation Tax. This is the primary advantage over personal ownership for higher-rate taxpayers. The company then pays Corporation Tax on its profits. For companies with profits under £50,000, the rate is 19%. For profits exceeding £250,000, the rate is 25%. Between these thresholds, a marginal relief applies, resulting in an effective tax rate between 19% and 25%. This allows for more money to be retained within the business for future investments or to reduce debt, as the tax paid on profits is lower than a higher-rate taxpayer's personal income tax rate, which can reach 40% or 45%.
## When does the limited company route become clearly more beneficial?
The limited company route becomes clearly more beneficial for higher-rate taxpayers often when their annual pre-tax profits (after all expenses *except* finance costs) exceed approximately £50,000. At this level, the company can benefit from the 19% small profits rate on a significant portion of its earnings after deducting mortgage interest. The specific break-even point depends on individual circumstances, including the level of mortgage debt, other personal income, and future plans for the rental income. For instance, if a portfolio generates £40,000 in taxable profit within the company (after deducting mortgage interest), the Corporation Tax would be 19% of £40,000, which is £7,600. If this same profit were generated personally by a higher-rate taxpayer, after the Section 24 credit, the effective tax could be significantly higher. Consider a property generating £15,000 gross rent and £8,000 mortgage interest. In a company, taxable profit is £7,000 (£15,000 - £8,000), taxed at 19% = £1,330. Personally, taxable profit is £15,000, resulting in £6,000 income tax (40%) less £1,600 Section 24 credit (20% of £8,000 interest), for a net tax of £4,400. This illustrates the substantial difference. This example doesn't account for how an investor eventually extracts money from the company, which would incur further personal income tax or dividend tax.
### What are the additional costs and considerations for a limited company?
While the tax benefits can be substantial, operating a limited company introduces additional costs and administrative burdens. These include company formation fees, annual accounts filing with Companies House, regular statutory filings, and more complex year-end tax returns requiring an accountant. Legal fees for setting up the company and potentially transferring existing properties can also be incurred. Mortgage products for limited companies (often called 'portfolio mortgages' or 'SPV mortgages') typically have slightly higher interest rates and arrangement fees compared to personal BTL mortgages, though the rates are still within the general BTL range of 5.0-6.5%. The standard BTL stress test of 125% rental coverage at a 5.5% notional rate still applies. There are also personal tax implications when drawing income from the company, for example, through dividends or salary, which are subject to individual income tax rates. Retaining profits within the company avoids these additional personal taxes and allows for tax-efficient reinvestment or debt reduction. For landlords managing several properties, the administrative load of a limited company may already align with their approach to running a property business, making the additional compliance a smaller hurdle.
### Does this strategy work for existing personal properties?
Transferring an existing BTL property from personal ownership into a limited company creates two significant tax events: Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT). For SDLT, the transfer is treated as a new purchase by the company, meaning the additional dwelling surcharge of 5% would apply on top of the standard residential thresholds. For example, transferring a £300,000 property would incur 5% on £300,000 (after first £125k), plus the 5% surcharge, totaling £15,000 (standard) + £15,000 (surcharge) = £30,000, and this can be more onerous for properties over £925k. CGT would be due on any gain made since the property was originally acquired, taxed at the higher/additional rate taxpayer rate of 24%, after the £3,000 annual exempt amount. These upfront costs often make it financially unviable to transfer existing properties, meaning the limited company structure is typically more beneficial for new acquisitions. There are certain circumstances, such as incorporation relief, that may mitigate CGT and SDLT through special purpose vehicles (SPVs) that could be argued as a business transfer, but these are complex and require specialist tax advice. Such relief is not widely available for small portfolios. For new acquisitions, these upfront transfer taxes are not an issue as the company is the original purchaser.
## Investor Rule of Thumb
For a higher-rate taxpayer, if the long-term plan involves retaining and reinvesting rental profits for portfolio growth, a limited company is generally the more tax-efficient route for new buy-to-let acquisitions, especially given Section 24 limitations for individuals.
## What This Means For You
Choosing the optimal ownership structure is a foundational decision that impacts long-term profitability and scalability. Most investors don't falter because they lack market knowledge, but because they pick the wrong structure for their personal tax situation and growth ambitions. If you’re a higher-rate taxpayer looking to expand your portfolio, understanding the implications of Section 24 versus Corporation Tax is critical for ensuring your investments remain highly profitable. Inside Property Legacy Education, we break down these complex tax considerations to help you make informed choices that build a sustainable property legacy.
## What has changed with Corporation Tax on company profits?
Corporation Tax rates for company profits have seen increases, with the main rate now 25% for profits over £250,000. However, the small profits rate, relevant for many property investors, remains at 19% for profits up to £50,000. This means that property companies with profits up to £50,000, after deducting deductible expenses such as mortgage interest, maintain a favourable tax position compared to higher-rate personal income tax rates. There is a tapering marginal relief between £50,000 and £250,000 of profit, meaning the effective rate gradually increases up to 25%. This layered approach to Corporation Tax still makes the limited company appealing for building a portfolio, as profits can be retained within the company at a lower tax rate than if they were distributed and taxed as personal income for a higher-rate taxpayer. The ability to deduct all finance costs as a company, coupled with the potential to pay tax at 19% on profits, makes the company vehicle significantly more attractive for portfolio growth than personal ownership.
## Are there any CGT advantages to a limited company for BTLs?
Capital Gains Tax (CGT) treatment differs significantly between personal and limited company ownership. Personally, CGT on residential property is 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers, with an annual exempt amount of £3,000. For a limited company, there is no CGT. Instead, any profit made from selling a property is treated as a trading profit and is subject to Corporation Tax. This means that if a company sells a property for a gain, that gain is added to the company’s other profits (e.g., rental income) and then taxed at the relevant Corporation Tax rate (19% or 25%). While there's no annual exempt amount for companies, the lower headline tax rate of 19% (for profits up to £50,000) can be advantageous compared to the 24% for higher-rate personal taxpayers. This structure allows for profits from sales to be reinvested into the company or retained for future growth without incurring additional personal taxes until they are extracted from the company.
Steven's Take
The question of owning buy-to-let property in a personal name versus a limited company is a fundamental one for higher-rate taxpayers today. When Section 24 came into full effect in April 2020, removing mortgage interest deductibility for individuals, it fundamentally shifted the viability of personal ownership. For my own portfolio growth, which largely occurred before these changes, acquiring properties in my personal name made sense at the time due to simpler tax structures and potentially easier financing. However, for anyone starting or expanding today, particularly a higher-rate taxpayer, the limited company route becomes clearly more beneficial in most scenarios. Companies can still deduct 100% of mortgage interest from rental income before calculating Corporation Tax, which is either 19% for profits under £50,000 or 25% for profits over £250,000. Compare this to a higher-rate taxpayer paying 40% income tax on rental income that hasn't fully accounted for mortgage costs due to the 20% tax credit. This effectively means you're paying income tax on money that's gone straight to the bank as interest, severely eroding cash flow and profitability. When I look at the numbers, if you plan to hold the property for the medium to long term and reinvest profits, the tax efficiency of a limited company significantly outweighs the administrative burden and initial setup costs. The tipping point often comes down to your personal income tax bracket and your plans for reinvesting rental profits. For basic rate taxpayers planning to draw all profits, personal ownership might still offer simplicity, but for higher-rate taxpayers intending to scale, a limited company is almost certainly the way forward.
What You Can Do Next
Consult a qualified property tax accountant: Engage a specialist property accountant to model your specific situation, comparing net profits and cash flow under both personal and limited company structures for your intended acquisition. Look for professionals with a strong track record in buy-to-let (BTL) specific taxation.
Project cash flow for 5-10 years: Create a detailed proforma for your target property, factoring in current BTL mortgage rates (e.g., 5.0-6.5%), potential rental income, and all operating costs (voids, maintenance, management fees) under both ownership models. This will highlight the impact of Section 24 on your personal ownership cash flow versus the company profit after corporation tax.
Understand the costs of incorporation and ongoing compliance: Research the one-off costs of setting up a limited company (e.g., Companies House fees, legal advice) and the ongoing annual accountancy fees, which are typically higher for a company than for a sole trader. Factor these into your financial projections.
Review your investment strategy for profit extraction: Determine if you plan to reinvest rental profits back into the portfolio (favouring a company due to lower tax rates on retained earnings) or if you need to extract all profits as personal income (where dividend tax and income tax on salary from the company will be relevant).
Assess immediate and future lending options: Speak to a specialist BTL mortgage broker about your eligibility and the rates available for both personal and limited company borrowings. Be aware that company mortgages can sometimes have slightly different terms or fees.
Consider Capital Gains Tax implications for future sales: Understand that if you sell a property owned by a limited company, you will pay Corporation Tax on the gain. Selling personally means paying CGT at 18% or 24% (for higher/additional rate taxpayers) with an annual exempt amount of £3,000. This is a crucial factor if you anticipate frequent disposals.
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