The Section 24 advantage, mortgage interest deduction in a company
Section 24 (Finance (No.2) Act 2015) restricts individual landlords to a 20% basic-rate tax credit on mortgage interest, higher-rate and additional-rate landlords pay tax on gross rental income before interest. A limited company has no such restriction: mortgage interest is deducted as a business expense and corporation tax is paid only on net profit (19% for profits below £50,000; 25% above £250,000 from April 2023). For a higher-rate taxpayer with significant mortgage debt, this produces a materially lower tax charge on the rental income before any extraction.
SDLT, CGT, and the cost of transferring an existing portfolio
Transferring an existing property into a company triggers SDLT on market value (FA 2003 s.53 connected-party rule) at full residential rates plus the 5% additional dwellings surcharge; on a £400,000 property this can exceed £22,000. CGT on any unrealised gain is also due unless TCGA 1992 s.162 incorporation relief applies (which HMRC challenges for passive letting portfolios). Existing mortgages cannot be transferred to the company; they must be refinanced to company buy-to-let products, typically at a rate premium. For most landlords with large unrealised gains, the company structure works best for new purchases.
- SDLT on market value at full rates plus the 5% surcharge, no exemption for connected-party transfers from individual to company
- CGT on the gain unless TCGA 1992 s.162 incorporation relief applies, HMRC resists the relief for passive property portfolios
- Existing mortgages must be refinanced to company buy-to-let products, typically at 0.5-1.0% rate premium
- Best for new purchases, avoid the transfer SDLT and CGT by purchasing through the company from the outset
When a property company is beneficial, and when it is not
The company structure is most beneficial for higher-rate or additional-rate taxpayers with significant mortgage debt who intend to accumulate profit in the company and purchase new properties. It is typically not beneficial for basic-rate taxpayers (whose Section 24 credit largely cancels the restriction), unencumbered portfolios (no interest to deduct), or landlords planning to sell within a short horizon (corporate extraction costs, corporation tax plus dividend tax, can exceed the saving on rental income during the holding period). ATED applies to single residential properties worth over £500,000 held by a company; the letting relief (ATED-RRF) must be claimed annually. Business Asset Disposal Relief (BADR) does not apply to shares in a pure property investment company.