I'm considering purchasing my first buy-to-let property; how heavily should Section 24 influence my choice between buying in my personal name versus setting up a limited company?
Quick Answer
Section 24 is a critical factor for BTL investors. It removes mortgage interest tax relief for individuals, making limited companies generally more tax-efficient for new purchases, especially with higher borrowing.
## Navigating Buy-to-Let Ownership: The Section 24 Impact
When buying your first buy-to-let property, the choice between personal ownership and a limited company structure is critical, predominantly due to Section 24. This regulation significantly changed how individual landlords can offset finance costs, making the limited company route increasingly popular for many investors. Understanding these differences is key to building a profitable portfolio.
* **Mortgage Interest Relief:** For individual landlords, Section 24 has phased out the ability to deduct mortgage interest from rental income when calculating taxable profit. Instead, you receive a basic rate tax credit (20%) on finance costs. For example, if you pay £6,000 in mortgage interest, you no longer deduct this from your rental income. Instead, you'll receive a £1,200 tax credit. However, a limited company can still fully deduct mortgage interest and other finance costs before calculating its profits, which are then subject to Corporation Tax.
* **Income Tax vs. Corporation Tax:** As an individual, your rental profits are subject to your personal income tax rate, which can be 40% or 45% for higher and additional rate earners. Basic rate taxpayers pay 20%. Limited companies, however, pay Corporation Tax on their profits. For companies with profits under £50k, the small profits rate of 19% applies. Profits over £250k are taxed at 25%. This difference can lead to substantial tax savings for higher-rate taxpayers, as the corporate tax rate is often lower than their personal income tax rate.
* **Dividend Tax on Withdrawals:** While a limited company saves on corporation tax, you'll pay tax on the money you extract from the company, typically as dividends. Dividend tax rates are lower than income tax rates, but this is an additional layer of tax. For basic rate taxpayers, a limited company might only make sense if you plan to reinvest profits or are a higher-rate taxpayer.
* **Capital Gains Tax (CGT):** When selling an investment property held personally, basic rate taxpayers pay 18% CGT, while higher/additional rate taxpayers pay 24%. The annual exempt amount is £3,000. For a limited company, CGT doesn't apply in the same way; instead, the company pays Corporation Tax on the profit from the sale, potentially at 19% or 25% depending on overall profits. This can be a significant saving for individuals who would otherwise pay 24% CGT.
* **Stamp Duty Land Tax (SDLT):** This is a key upfront cost. Whether you buy personally or through a company, the additional dwelling surcharge of 5% applies. So, on a £200,000 second property, you’d pay the residential rates plus the 5% surcharge. If purchased personally, for instance, a £200,000 property falls into the 2% and 5% bands, plus the 5% surcharge on the entire amount. This means a significant SDLT liability, for example, on a £250,000 property, you'd pay the standard residential rates plus the 5% additional dwelling surcharge, resulting in a substantial upfront cost regardless of ownership structure.
## Potential Pitfalls with Property Companies
While a limited company offers tax advantages, it's not without its downsides. Be aware of these potential traps.
* **Increased Administration and Costs:** Running a limited company involves more administrative burden, including filing company accounts with Companies House, preparing annual confirmation statements, and more complex tax returns. This often means higher accountancy fees, potentially £1,000+ per year, compared to self-assessment for personal ownership.
* **Lending Restrictions and Rates:** Securing buy-to-let mortgages for limited companies can be more restrictive. Lenders assess company finances, and typically offer slightly higher interest rates and fees compared to personal buy-to-let mortgages. For instance, while typical BTL mortgage rates are 5.0-6.5% for two-year fixed, company products sometimes sit at the higher end of this range or slightly above.
* **Higher Stress Tests:** Limited company lending often involves stricter rental coverage ratios (ICR) and higher notional interest rates for stress tests. The standard BTL stress test is 125% rental coverage at a 5.5% notional rate, but some lenders for limited companies might demand 145% or more, making it harder for properties to qualify.
* **Less Flexibility:** Withdrawing funds from a company can be less flexible than simply taking rent directly. Funds are typically extracted as salary or dividends, each with its own tax implications and administrative steps.
* **Perception of Risk:** Some lenders or even tenants might perceive a limited company as a more complex or potentially riskier entity, though this is becoming less common as company ownership grows.
## Investor Rule of Thumb
For higher-rate taxpayers, a limited company structure is almost always the more tax-efficient choice for new buy-to-let investments due to Section 24, provided you factor in the additional costs and administrative burden.
## What This Means For You
Most landlords don't lose money because they misunderstand Section 24, they lose money because they make a decision without a full financial model tailored to their personal tax position and investment goals. If you want to know which ownership structure is truly best for your first buy-to-let deal, this is exactly what we analyse inside Property Legacy Education, helping you forecast tax liabilities and profit extraction strategies with precision.
Steven's Take
Section 24 fundamentally altered the landscape for individual landlords. If you're a basic rate taxpayer, personal ownership might still work, but you need to crunch the numbers carefully. For higher and additional rate taxpayers, a limited company isn't just an option, it's virtually a necessity to maximise profitability and mitigate tax leakage. Don't just follow the crowd, understand why this change happened and how it impacts your bottom line. The upfront costs and slightly higher mortgage rates for a company often pale in comparison to the long-term income and capital gains tax savings.
What You Can Do Next
Calculate your personal income tax rate to determine if you are a basic, higher, or additional rate taxpayer.
Project your rental income and mortgage interest expenses for your potential investment property.
Compare the tax implications of personal ownership (using the 20% tax credit for Section 24) versus limited company ownership (19% or 25% Corporation Tax and dividend tax on extraction).
Research limited company buy-to-let mortgage rates and lending criteria, including stress tests, to ensure the property is viable under this structure.
Consult with a specialist property accountant to model scenarios for both ownership structures before making a final decision.
Get Expert Coaching
Ready to take action on tax & accounting? Join Steven Potter's Property Freedom Framework for comprehensive, hands-on property investment coaching.