Setting Up a Property Company: Tax Advantages and Pitfalls in 2026/27

The Section 24 Problem and Why Companies Are Different

Since April 2020, individual landlords have been unable to deduct mortgage interest directly from rental income. Instead, they receive only a 20% basic rate tax credit on finance costs. For a higher-rate taxpayer, this means paying 40% tax on gross rental profit and recovering only 20p per pound of interest paid -- an effective loss of 20p in relief per pound of borrowing cost.

A limited company is not subject to this restriction. Companies pay corporation tax on their profits after full deduction of finance costs. This single difference drives most of the conversation around property company formation.

The Tax Maths: Personal vs Company

Example: Higher-Rate Individual Landlord

A higher-rate taxpayer owns a property generating 24,000 pounds rental income per year. Allowable expenses (excluding mortgage interest) are 4,000 pounds. Mortgage interest is 10,000 pounds.

Personal ownership:

• Taxable rental profit: 24,000 - 4,000 = 20,000 pounds
• Income tax at 40%: 8,000 pounds
• Less: finance cost credit (20% x 10,000): 2,000 pounds
• Net tax: 6,000 pounds
• After-tax profit: 24,000 - 4,000 - 10,000 - 6,000 = 4,000 pounds

Limited company:

• Taxable profit: 24,000 - 4,000 - 10,000 = 10,000 pounds
• Corporation tax at 19%: 1,900 pounds
• After-tax retained profit: 8,100 pounds

At the company level, the landlord is 4,100 pounds better off per year (8,100 vs 4,000). However, extracting that profit from the company (as salary or dividends) creates additional personal tax. Whether the company wins overall depends on whether profits are extracted or left to accumulate.

Extracting Profits from the Company

If profits are extracted as dividends:

• Dividend allowance: 500 pounds tax-free in 2026/27
• Dividend tax rates: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate)

If the higher-rate landlord in our example extracts all 8,100 pounds as a dividend:

• Dividend tax at 33.75%: approximately 2,560 pounds
• Net received: approximately 5,540 pounds

Compare to personal ownership after-tax profit of 4,000 pounds -- still a saving of around 1,540 pounds, but narrower than the company-level saving suggested.

If profits are retained in the company (not extracted) to fund further purchases or reduce the mortgage, the company route is clearly more efficient. The full 8,100 pounds is available to reinvest, compared to only 4,000 pounds in personal hands.

This makes property companies particularly attractive for landlords who are building a portfolio rather than living on rental income.

Corporation Tax Rates in 2026/27

For a property company with modest profits (below 50,000 pounds), the 19% rate is attractive. For larger portfolios generating profits above 250,000 pounds, the 25% rate plus dividend tax on extraction can erode much of the advantage over personal ownership.

Note: The 50,000 pound and 250,000 pound thresholds are divided among associated companies. If you own two companies, each threshold is halved.

The Incorporation Problem: Existing Portfolios

For landlords who already own property personally and are considering moving it into a company, the tax obstacles are significant.

CGT on Transfer

Transferring property to a limited company is treated as a disposal at market value for CGT purposes. The landlord is treated as selling to the company at current market value, regardless of the actual consideration.

• CGT at 24% (higher rate) on the accumulated gain
• Annual exempt amount of only 3,000 pounds

On a portfolio with significant unrealised gains, this can create an immediate and substantial CGT bill.

Incorporation Relief: The Exception

Incorporation relief (under section 162 TCGA 1992) allows the CGT on transfer to be deferred if:

• The property portfolio is transferred to a company in exchange for shares in that company
• The portfolio constitutes a business (not merely a passive investment)

HMRC's position is that a property rental business only qualifies as a "business" for incorporation relief if there is a substantial degree of active management -- property management services, significant administration, portfolio management activities that go beyond merely collecting rent. A simple two-property portfolio with a managing agent is unlikely to qualify.

Where incorporation relief is available, the gain is rolled into the cost of the shares. CGT arises when the shares are eventually sold, not on the transfer.

SDLT on Transfer

Regardless of whether CGT incorporation relief is available, SDLT applies on the transfer of property to a connected company (at market value). There is no equivalent SDLT incorporation relief.

SDLT at residential rates on a 500,000 pound property:

• 0% on first 250,000 = 0 pounds
• 5% on next 250,000 = 12,500 pounds
• 3% surcharge (company acquisition of dwelling): 15,000 pounds
• Total SDLT: 27,500 pounds

The 3% surcharge always applies when a company acquires a residential property, regardless of whether the company already owns properties. (There is a separate 15% flat rate for companies purchasing high-value dwellings above 500,000 pounds that are not let commercially -- the annual tax on enveloped dwellings (ATED) regime -- which is discussed separately.)

Setting Up a New Company for Future Acquisitions

Given the obstacles to incorporating an existing portfolio, most tax advisers recommend that landlords considering company ownership start fresh -- acquiring new properties through a company from the outset, while retaining existing personal holdings.

Practical Steps for Setting Up a Property Company

1. Incorporate the company through Companies House (straightforward, circa 20 pounds online). Use an SIC code appropriate for property letting (SIC 68209 for residential letting, for example).
2. Open a business bank account in the company's name.
3. Approach specialist lenders. Not all high street mortgage providers offer products to limited companies (SPVs), and those that do typically charge a premium of 0.5% to 1% above standard rates.
4. Register for corporation tax with HMRC within three months of starting to trade.
5. File annual accounts and corporation tax returns. A property company will need an accountant, adding to running costs.
6. Consider whether to be VAT-registered. Residential lettings are exempt from VAT, so there is no requirement or benefit to VAT registration for a pure residential letting company.

The SPV Structure

Most buy-to-let companies are set up as special purpose vehicles (SPVs) -- companies with a sole purpose of property investment. This keeps the property portfolio legally separate from any other business activities and is preferred by lenders. The company is typically controlled by the landlord personally (as director and shareholder) or by the landlord and their spouse.

Mortgage Access and Cost: The Hidden Problem

One of the most frequently underestimated drawbacks of the property company structure is the cost and availability of limited company mortgages.

Most high street mortgage lenders do not offer buy-to-let mortgage products to limited companies. The market is served mainly by specialist lenders and some building societies. Rates for limited company buy-to-let mortgages are typically 0.5% to 1.0% higher than equivalent personal buy-to-let products. On a 300,000 pound interest-only mortgage, an extra 0.75% per year costs 2,250 pounds -- a substantial reduction in the annual tax saving.

Before committing to the company structure, model the full cost comparison including mortgage rates, accountancy fees (typically 1,000 to 2,500 pounds per year for a simple property company), and corporation tax versus personal tax.

Estate Planning Benefits

Holding property through a company provides additional estate planning flexibility:

• Gifting shares to family members (children, a spouse) is more straightforward and cheaper than transferring property directly
• Share transfers do not attract SDLT (though stamp duty at 0.5% applies to share transfers)
• Non-voting share classes can be created to pass economic benefit to family members without relinquishing control
• Lifetime gifting of shares is a potentially exempt transfer (PET) for IHT, falling outside the estate if the donor survives seven years

However, the company's own assets (property) remain in the taxable estate of the company's shareholders for IHT purposes via the value of their shares. Business relief (formerly BPR) does not normally apply to property investment companies.

When a Company Is Not the Right Answer

Property company formation is not beneficial for everyone. Consider the personal route if:

• You are a basic-rate taxpayer -- the corporation tax saving is minimal and the cost of company administration may exceed the benefit
• You plan to use rental income to live on -- dividend tax erodes the benefit of lower corporation tax rates
• You have a small portfolio (one or two properties) -- the ongoing accountancy and compliance costs may outweigh the tax saving
• You need residential mortgages -- personal mortgage rates are typically significantly lower than company rates

Summary

A property limited company offers meaningful tax advantages for higher-rate and additional-rate taxpayers who are building a portfolio and reinvesting profits, particularly because it avoids the Section 24 finance cost restriction. Corporation tax at 19% to 25% is lower than personal higher-rate tax, and profits retained in the company compound more efficiently. However, incorporating an existing portfolio is usually costly (CGT, SDLT, and professional fees), and the company must bear additional administration costs and typically higher mortgage rates. For most landlords, the company structure is most attractive for new acquisitions going forward rather than as a restructuring of an existing portfolio.