Purchasing property

Individual or through a limited company

Polly Dowdell, Manager, Private Clients

When purchasing a residential property for investment purposes, the tax position surrounding owning the property can be complex.

Over the last few years, we have seen an increase in the popularity of using a company formed to hold rental property. This has been driven, not only by the asset protection a company provides, but also because the tax efficiency for a company is typically better than if the property is held personally. This was further enhanced following the introduction of an income tax relief restriction on finance costs for those holding property personally.

When acquiring property, a number of factors should be considered. These factors include:

the holding vehicle
how the associated income and gains may be taxed
the implications of the reinvestment of profits.

There are various ways to structure ownership of a residential property to mitigate your tax liability. Below, we have briefly summarised the tax implications of individual ownership versus limited company ownership for a rental property.

Rental profits

If you purchase a residential property personally, the rental profits you make will be taxed at your marginal rate of income tax (20%, 40% or 45%) as it arises. However, if you purchase the property via a limited company, the profits will be taxed at corporation tax rates. This has been a flat rate of 19% in recent years, but from 1 April 2023, this has increased to 25% for profits over £250,000. Companies with profits between £50,000 and £250,000 will pay tax at 25% reduced by marginal relief to provide a gradual increase in the effective rate. However, if your profits remain under £50,000, the rate remains at 19%.

Mortgage interest relief

In April 2017, rules were introduced to restrict the tax relief that can be claimed by higher rate taxpayers who use mortgages to finance residential buy-to-let properties. Since April 2020, all finance costs incurred are disallowable in calculating the rental profit for a tax year if you purchased the property personally. The relief is instead provided as a basic rate tax reduction in calculating your tax position.

If your rental property did not generate a profit, the mortgage interest costs are not utilised in that tax year and carried forward to be relieved in future years where you have a taxable rental profit.

These rules have proved particularly burdensome for many landlords owning property personally with buy-to-let mortgages, at times turning real-life losses into taxable profits. With a current environment of relatively high interest rates, you may find yourself even further out of pocket.

Making Tax Digital for Income Tax (MTD)

A new tax regime is coming into effect for landlords holding property personally. For those with rental income of more than £50,000 per year, this regime will apply from April 2026. This involves digital record-keeping and quarterly reporting to HMRC. Many will need to adopt bookkeeping software solutions.

Disposal of the property

Personally owned residential property would be taxed at your marginal rate for Capital Gains Tax (CGT) purposes, which are currently 18% for basic rate and 24% for higher rate taxpayers.

Individuals have a Capital Gains Tax annual exemption of £3,000 for the 2025/26 tax year. The annual exemption can be utilised to offset against any residential property gains which may arise.

Capital gains arising from the disposal of a residential property owned via a limited company would be taxable at the corporation tax rates noted above.

Profit extraction

Any rental profits received from a property personally owned are taxed as they arise in a tax year.

When extracting profits from a company, there is likely to be a double tax charge, which could remove any savings from the lower corporation tax rates, compared to income tax, payable on the rental profits and gains.

If profits are extracted by way of a dividend, individual shareholders may have their dividend allowances to utilise (£500 for the 2025/26 tax year). Dividend tax will then be payable on the dividend income received above the allowance at 8.75%, 33.75% or 39.35%.

Company ownership remains advantageous for the most part, where it is not necessary to extract all the profits. If profits and gains are to be retained for investment, or to be protected for future generations, then this can be an extremely tax efficient way of owning property.

Other considerations

There are further considerations to consider when purchasing property personally vs via a limited company. These include Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT) and Annual Tax on Enveloped Dwellings (ATED).

How we can help

How a property investment is structured can be one of the key factors in determining the return. Our team has extensive experience working with investors from the UK and overseas to advise on how best to invest, hold and dispose of UK residential property.

If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with your usual Crowe contact.