Should You Incorporate Your Property Business? A Closer Look at the Pros and Cons

The Rise of Property Incorporation

More landlords are now considering running their property ventures through limited companies. This trend has accelerated due to the increasing gap between corporate and personal tax rates, as well as the full deductibility of finance costs available to companies. Additionally, with the tax perks for furnished holiday lettings coming to an end, holiday let landlords may also be reassessing their structures. But is incorporation the right move?

Key Benefits of Using a Company Structure

1. Lower Corporation Tax Rates

The top rate of corporation tax is 25%, which is significantly lower than the 45% additional rate of income tax for individuals. For many landlords, this means a smaller tax bill on their rental profits when operating through a company.

2. Full Deduction of Finance Costs

Unlike unincorporated landlords, who face restrictions on mortgage interest relief, property companies can deduct all interest and finance costs in full, whether the property is residential or a former furnished holiday let.

3. More Favourable Capital Gains Treatment

Capital gains within a company are taxed under corporation tax rules, which typically results in a lower tax liability compared to individual landlords paying 24% on residential capital gains. Moreover, companies benefit from longer deadlines to settle their tax bills.

4. Limited Liability Protection

A company structure offers legal protection, meaning your assets are generally safeguarded if the business runs into trouble.

The Downsides to Consider

1. Costs of Transferring Properties

Transferring existing properties into a limited company can be expensive. Stamp Duty Land Tax (SDLT) applies again, and the transfer is treated as a sale at market value, potentially triggering a capital gain.

2. Limited Tax-Free Allowances

Companies do not benefit from personal allowances or the capital gains annual exemption amount. Every pound of profit or gain is taxable.

3. Personal Use of Profits

If shareholders want to use company profits personally, they must extract them through salary, dividends, or other routes—each of which may incur additional income tax and National Insurance contributions.

4. Increased Administrative Burden

Operating a company brings added responsibilities, such as filing annual accounts and company tax returns, which can increase compliance costs and complexity.

The Bottom Line: Do the Math

Incorporating your property business is not a one-size-fits-all decision. The advantages can be compelling, especially for those with larger portfolios or significant financing costs, but the drawbacks, particularly on cost and complexity, must also be weighed carefully.

Before making the switch, it’s vital to calculate both the company tax position and the implications of withdrawing profits for personal use. Getting professional advice and running the numbers is essential.

Partner Note: ITTOIA 2005, Part 3; CTA 2010, Parts 2 and 3A.

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