The difference in one paragraph
In your own name, rental profit is added to your other income and taxed at your income tax rates, and mortgage interest only earns a 20% tax credit. In a company, mortgage interest is a normal business cost, profit is taxed at corporation tax rates, and then any money you take out is taxed again, usually as dividends. Which works out better depends on your tax rate, how much you borrow, and whether you need the income now or can leave it in the company.
How each is taxed
- Personal ownership: income tax at 20%, 40% or 45% on rental profit with no deduction for mortgage interest, then a 20% credit on the interest. Higher rate taxpayers with large mortgages are hit hardest.
- Company ownership: corporation tax at 19% on profits up to £50,000, rising to 25% from £250,000, with interest fully deductible. Profit taken out as dividends is then taxed at 10.75%, 35.75% or 39.35% after a £500 dividend allowance.
- On sale: an individual pays capital gains tax, with an annual exempt amount. A company pays corporation tax on the gain and has no annual exempt amount, and getting the proceeds out is taxed again.
The Section 24 calculator compares the two for one property at your income level.
When a company tends to suit
- You are a higher or additional rate taxpayer and borrow significantly.
- You plan to build a portfolio and reinvest profits rather than live on them, since profit kept in the company is only taxed once.
- You are buying new properties, rather than moving ones you already own.
When personal ownership tends to suit
- You are a basic rate taxpayer and expect to stay one, so Section 24 costs you little or nothing.
- You own outright or borrow little, so there is not much interest to deduct.
- You need the rental income to live on, so it would be taxed twice in a company.
- You want to keep things simple: a company brings accounts, filings and extra costs every year.
Running costs and paperwork
A property company needs annual accounts and a corporation tax return, a yearly confirmation statement at Companies House, and its own bank account. Most landlords use an accountant, which typically costs more than a personal tax return. Lenders usually expect a special purpose vehicle: a company whose only activity is property, registered with property SIC codes such as 68209 for letting your own property.
Residential properties worth more than £500,000 held in a company fall within the Annual Tax on Enveloped Dwellings. Properties let commercially to unconnected tenants can usually claim relief, but the return must still be filed.
Mortgages
Most buy to let lenders now offer limited company mortgages. Rates and fees are often a little higher than personal ones, and lenders almost always want personal guarantees from the directors, so the company does not ring-fence you from the debt. Rental cover is often tested at 125% rather than the 145% many lenders use for higher rate taxpayers, which can mean a larger loan on the same rent.
Moving property you already own
Transferring a property from your own name into your company is treated as a sale at market value. That can mean capital gains tax on any increase in value, and the company pays stamp duty on the purchase, including the higher rates for additional properties. You would also need a new mortgage in the company's name.
Some reliefs can apply in particular circumstances, for example where the letting activity amounts to a business, but the conditions are demanding and widely misunderstood. Take advice from a tax adviser who specialises in property before transferring anything.