Limited company or personal name: choosing where your property sits
The question is not which structure pays less tax. It is which structure pays less tax after the cost of getting there.
The headline comparison is straightforward: a company can deduct mortgage interest, pays corporation tax on profit, and can retain earnings to buy the next property. An individual cannot deduct the interest, pays income tax at their marginal rate, and can only reinvest what is left after tax.
The headline is also where most of the analysis stops, which is a problem, because the decisive numbers are usually elsewhere — in the cost of moving property into a company, and in the cost of getting money out.
The cost of incorporating existing property
Transferring a personally-owned property into a company is a disposal at market value for capital gains tax purposes, even if no money changes hands. If the property has grown in value, that is a real tax charge. It is also a chargeable transaction for stamp duty land tax, at the additional-property rates, again on market value.
There are incorporation reliefs — business asset disposal relief in limited circumstances, and relief on the transfer of a property business as a going concern — but they are narrow, they require the properties to be let as a business rather than as investments, and they need to be planned before the transfer rather than applied for afterwards. For a portfolio that has already grown, the cost of moving is frequently prohibitive.
Getting money out again
Profit retained in a company is taxed at corporation tax rates, but profit taken out as a dividend is taxed again at dividend rates. The combined burden can approach or exceed the personal income tax rate, so the company structure only wins if the money stays in and is reinvested.
That is the key question to answer honestly: will you reinvest the profit, or spend it? If you intend to live on the rental income, the advantage of a company largely disappears and may reverse once accountancy fees and the loss of the personal allowance are counted.
The other differences that matter
Companies face higher mortgage rates and a narrower lender panel. They must file accounts publicly, which means your portfolio is visible to anyone who looks. They cannot use the capital gains annual exemption or a personal allowance, and they face different treatment on sale — the shares can be sold rather than the property, which is a genuine advantage for a larger portfolio but of little use for a single flat.
- Buy-to-let mortgage rates for companies are typically higher than for individuals
- Public filing of accounts discloses your holdings
- Losses are trapped in the company and cannot be offset against personal income
- Selling shares rather than property can be far more tax-efficient, but only for a genuine business
- Accountancy and compliance costs are higher, and a dormant company still has filing obligations
Common questions
- Should I set up a limited company for my first buy-to-let?
- It depends on your tax position, whether you will reinvest or spend the income, and whether you expect to borrow significantly. For a higher-rate taxpayer planning to build a portfolio with mortgages and reinvest the profit, a company often wins. For a basic-rate taxpayer buying one property with cash to supplement their income, it often does not. This is a decision to make with an accountant who can see your whole position.
- Can I move my existing properties into a company later?
- You can, but it is usually expensive because it triggers capital gains tax and stamp duty at market value. The decision is therefore much cheaper to make before you buy than after. If you think you may want a company eventually, it is worth taking advice before your first purchase rather than after your third.