Since the introduction of Section 24 restrictions on mortgage interest relief, thousands of UK landlords have moved their buy-to-let portfolios into limited companies. But incorporation is not the right answer for everyone.
This article explains what Section 24 means for your portfolio, when incorporation makes financial sense, and how the decision plays out for South Coast investors.
What Section 24 actually does
Before April 2017, landlords could deduct all mortgage interest from their rental income before calculating their tax liability. A higher rate taxpayer paying GBP 10,000 in mortgage interest would save GBP 4,000 in tax.
Section 24 phased this relief out. From 2020 onwards, no mortgage interest can be deducted from rental income. Instead, landlords receive a 20 per cent tax credit on the interest paid. A higher rate taxpayer paying GBP 10,000 in interest now receives only GBP 2,000 credit — a GBP 2,000 per year tax increase compared to the old system.
The impact is most severe for higher and additional rate taxpayers with highly leveraged portfolios. If you have significant mortgage debt relative to your rental income, Section 24 has substantially increased your tax bill.
How incorporation changes the picture
When you hold BTL properties through a limited company, mortgage interest is treated differently. The company deducts mortgage interest as a business expense before calculating corporation tax. The full interest cost is tax-deductible.
This is the fundamental advantage of incorporation. The company pays corporation tax on net rental profits (after mortgage interest), rather than the landlord paying income tax on gross rents with only a 20 per cent credit.
The numbers: personal name vs limited company
Consider a landlord with a single BTL property:
– Rental income: GBP 15,000 per year
– Mortgage interest: GBP 7,000 per year
– Other costs (insurance, maintenance, letting agent): GBP 2,500
– Net rental profit before tax: GBP 5,500
Personal name (higher rate taxpayer, 40 per cent):
– Tax on GBP 15,000 minus GBP 2,500 costs: GBP 12,500 taxable
– Tax due: GBP 5,000
– Less 20 per cent interest credit (GBP 7,000 x 20 per cent): GBP 1,400
– Total tax: GBP 3,600
– Net income after tax: GBP 1,900
Limited company (25 per cent corporation tax):
– Company profit: GBP 15,000 minus GBP 7,000 minus GBP 2,500 = GBP 5,500
– Corporation tax at 25 per cent: GBP 1,375
– Retained in company: GBP 4,125
– If extracted as dividend (higher rate, 33.75 per cent): further tax of approximately GBP 1,390
– Net after all taxes: approximately GBP 2,735
In this example, the company structure saves approximately GBP 835 per year. On a larger portfolio, the saving scales significantly.
When incorporation does not make sense
Low leverage
If you have little or no mortgage debt, Section 24 does not affect you significantly. The tax advantage of incorporation is limited, and you may be better off retaining properties in your personal name.
Basic rate taxpayers
If you are a basic rate taxpayer (20 per cent), the 20 per cent mortgage interest tax credit covers most of what you lost. The advantage of incorporation is marginal unless you expect to become a higher rate taxpayer in future.
Plans to sell soon
Incorporating and then selling triggers multiple tax events — capital gains tax on the transfer to the company, stamp duty on the company purchase, and potentially ATED charges. If you plan to sell within a few years, the transaction costs of incorporation may exceed the tax savings.
The costs of incorporation
Moving properties into a limited company is not cheap:
– SDLT: The company pays stamp duty on the market value of the property when it is transferred in
– CGT: You may trigger CGT on the transfer if the property has appreciated since purchase
– Legal costs: Solicitor fees for the transfer documents
– Accountancy: Higher ongoing costs for company accounts and tax returns
– Mortgage costs: Commercial BTL mortgages typically have higher rates than personal BTL products
Total upfront costs for incorporating a portfolio of three to five properties can range from GBP 5,000 to GBP 15,000. The annual accountancy cost is typically GBP 500 to GBP 1,500 higher than personal name filing.
How to decide
Run the numbers for your specific portfolio before making a decision. The key inputs are:
1. Your current and expected future tax rate
2. Total mortgage interest across your portfolio
3. The value of your properties and the equity in each
4. How long you plan to hold the properties
5. Whether you plan to grow the portfolio
If you are a higher rate taxpayer with significant leverage and a long-term hold strategy, incorporation will almost certainly save you money. If you are a basic rate taxpayer with low leverage, the case is weaker.
Incorporation and future acquisitions
Most landlords considering incorporation choose a hybrid approach. Existing properties stay in their personal name (the costs of transferring may not justify the benefit), but all new acquisitions are made through a limited company.
This avoids the transaction costs of transferring existing properties while capturing the tax advantage on future purchases. For South Coast investors building a portfolio, this is often the most practical approach.
Getting advice
This article is not financial advice. Every landlord’s circumstances are different. Speak to a property-specialist accountant who can model the numbers for your specific portfolio before making any structural changes.
At Xelox Properties, we work with accountants who understand property tax inside and out. We can introduce you to the right professionals to help you make an informed decision.
Contact Xelox Properties today to arrange a no-obligation conversation about how we can help with your property investment goals.