From April 2027, changes to the taxation of rental property will increase the tax burden on rental income, presenting new challenges and decisions for buy‑to‑let landlords. For smaller landlords, this may prompt a reassessment of whether holding property personally or through a limited company remains the most tax-efficient approach.
What are the changes?
The government is introducing higher tax rates on income from property, savings, and dividends. These changes will see rental income taxed at separate rates – increasing the overall tax exposure for many landlords.
From April 2027, the new income tax rates on property income will be:
- Basic rate: 22% (up from 20%);
- Higher rate: 42% (up from 40%); and
- Additional rate: 47% (up from 45%).
For landlords holding property through a limited company, corporation tax rates remain unchanged:
- Small companies (profits under £50,000): 19%
- Main rate (profits £250,000+): 25%
- Profits between £50,000 and £250,000: an effective marginal rate of 26.5% on the portion above £50,000
Only landlords taxed as individuals will be impacted by these income tax increases, while properties held within a company will remain subject to the current corporation tax rules.
Tax pressures on personally held rental income
Individual landlords continue not to be able to deduct mortgage interest from their rental income. From April 2027, they will receive a tax credit of 22% on their finance costs (up from 20%). This means rental profits are taxed before interest is considered, so higher-rate taxpayers do not get full relief on interest payments. Landlords with larger or heavily mortgaged portfolios are likely to be impacted most.
Combined with rising income tax rates, these changes could mean renting out property personally is less tax-efficient for some landlords and raises the question: would holding property through a company be a better option?
Buy-to-Let: limited company or personal ownership?
Buy‑to‑let properties can be owned and managed personally, either alone, with others, or through a formal partnership, or held within a limited company. For landlords with one or two properties who need flexibility over when they extract rental income, a limited company is usually not the most practical option.
However, for landlords looking to expand their portfolio over time and reinvest profits, setting up a company from the outset may offer benefits. In 2024, 61,517 new limited companies were established to hold property, representing a 23% increase on the previous year.
Limited company ownership of property is on the rise. While smaller portfolios have traditionally been held personally, increasing income tax rates and restrictions on finance cost relief mean some landlords may wish to revisit incorporation.
Ownership through a limited company
A benefit of owning rental property through a limited company is the ability to fully deduct mortgage interest and other finance costs (such as mortgage arrangement fees) from rental profits. This offers an advantage over the restricted basic rate tax credit available to individual landlords.
However, while there are benefits, a company structure comes with added complexities and potential downsides.
When property is held within a company, the rental profits belong to the company and are taxed under corporation tax. The key question then becomes: how do you access that income personally in a tax‑efficient way?
Extracting profits typically triggers a second layer of tax, whether through salary, dividends, pension contributions, or benefits such as company cars. Each route carries its own tax implications, so the most efficient approach will depend on individual circumstances.
Reporting obligations
Operating through a company offers potential tax benefits, but it carries ongoing reporting responsibilities.
Landlords must prepare annual accounts, file corporation tax returns and for residential properties worth £500,000 or more, consider the Annual Tax on Enveloped Dwellings (ATED). In addition, any salaries or dividends paid to directors must be reported. These requirements should be carefully considered when deciding whether to incorporate.
Incorporating an existing property portfolio
It is possible to transfer an existing buy-to-let portfolio into a limited company, but this is not as simple as setting one up from the outset. The properties must be transferred at market value, which can trigger capital gains tax for the individual and Stamp Duty Land Tax for the company. While these upfront costs and legal steps can be significant, the potential long‑term tax advantages may still make incorporation worthwhile.
Transferring a property with an outstanding mortgage is not straightforward: lender approval is required, and there may be early repayment charges or refinancing costs to consider.
Spouse or civil partner income splitting
There are still opportunities for tax efficiency when holding rental property personally.
Splitting rental income between spouses or civil partners can be an effective way to reduce overall tax liability. Transfers between spouses and civil partners are carried out on a ‘no gain, no loss’ basis, meaning no capital gains tax arises at the time of transfer. Care should be taken if a mortgage is in place, as Stamp Duty Land Tax may apply.
For jointly owned properties, the default income split is 50:50. However, beneficial ownership can be adjusted via a declaration of trust and reported to HMRC using Form 17, enabling a more tax-efficient allocation of rental income.
In its Trusts, Settlements and Estates Manual, HMRC states that:
‘Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where:
- Each spouse or civil partner is in fact entitled to a share other than 50/50 in the property; and
- The share that a spouse or civil partner has in the income is the same as their share in the property.’
Accordingly, where the beneficial interests in a property differ, it may be possible to have the income taxed in proportions that reflects those interests. This can be particularly tax-efficient in circumstances such as when one owner is a higher-rate taxpayer.
The Form 17 declaration must be submitted to HMRC within 60 days of its execution. With higher income tax rates on property income coming into effect from April 2027, now is an opportune time to review and implement such planning.
Anyone considering this approach should seek professional advice to fully understand all the tax and legal implications.
How M+A Partners can help
With tax changes coming into effect from April 2027, landlords have a relatively narrow period to reassess their property strategies.
Choosing the right ownership structure requires careful consideration, as both limited company and personal ownership have advantages and drawbacks.
Ahead of the changes, reviewing cash flow, modelling restructuring costs, and assessing long-term plans will be essential to keep property portfolios sustainable and effective. Professional advice can help navigate the many variables involved, and M+A Partners provides tailored guidance to support informed decisions.
For any queries, please get in touch with me using the details below or email enquiries@mapartners.co.uk.
