This week's Financial Matters with Fairhurst Accountants deals with navigating property tax changes
Next April there will be a two per cent rise in income tax rates on property income. Wigan-based Fairhurst Accountants gives its sage counsel
The two per cent rise in income tax rates on property income coming in from April 2027 means it is worth considering whether incorporation might work for you.
Owning buy-to-let property via a limited company is becoming the norm, especially for new landlords who own more than one or two properties.
Tax advantages
The key driver towards corporate ownership has been the restriction on tax relief for finance costs if property is held personally. No restriction applies when it comes to corporate ownership.
For example, a higher-rate taxpaying landlord has buy-to-let rental income of £60,000, allowable deductions of £10,000 and mortgage interest of £40,000. The overall tax cost is £12,000, but within a company structure it would have been just £1,900.
From April 2027, the tax landscape for personally owned residential property will become considerably tougher because the property income tax rates are going up by two percentage points.
Although this will not have too much impact on highly geared landlords – because tax relief for finance costs is also increasing – it does increase the appeal of corporate ownership for those who are less mortgaged.
Corporate ownership avoids having to comply with the Making Tax Digital record keeping and filing requirements introduced for landlords from April 2026.
Tax trap
A common misconception is that any gain arising when a personally owned property is transferred to a company can be held over, but this is normally not the case, unless the activities amount to a “business.”
Where the business threshold is not met, capital gains tax – which will probably be mostly at the higher 24 per cent rate – will be payable despite no sale proceeds being received.
For properties bought many years ago, the tax cost could be so substantial that corporate ownership is not a realistic option.
Stamp duty land tax is also payable when property is transferred from personal to corporate ownership, and this could mean another significant restructuring cost.
We would recommend that you speak to your accountant to see if incorporation would be the best option for you.
If so, they can guide you through the company formation and make sure you are set up and registered with HMRC, along with other company secretarial duties to ensure you remain compliant with Companies House requirements.