Investing privately or through a limited company

Over recent years there has been a significant move towards buying investment properties through limited companies rather than in personal names. This has been primarily driven by the harsh changes to mortgage interest relief rules introduced in 2016 and took full effect in 2020.

As of April 2020, private landlords could no longer deduct mortgage interest expenses from their rental income to reduce taxable profits. Instead, they can only take a 20 per cent tax credit against their overall liability for that tax year. Many reputable sources state that after tax profits for landlords have seen a major reduction, with some being as much as 50 per cent. This predominantly impacts higher rate and additional rate taxpayers as they no longer receive mortgage interest relief at their rate of Income Tax.

Limited companies, on the other hand, can treat mortgage interest as a cost and take Corporation Tax relief, and dividend tax rates are lower than the Income Tax rate for higher rate taxpayers. It makes good business sense for the majority of property investments to be carried out through limited companies rather than paying tax as an individual property investor.

For private landlords, profits from rental income are taxed via Income Tax alongside other earnings. This means adding the money made from rental properties to the amount received via salary, and any other money received from bank interest or dividends. Income above your personal allowance is taxed at the rates listed below. Currently, the standard personal tax-free allowance is £12,570, although this reduces if your income is above £100,000.

Tax Band            Income                                       Tax Rate

Basic Rate           £12,571 to £50,270                     20%

Higher Rate         £50,271 to £150,000                   40%

Additional Rate    Above £150,000                         45%

Advantages of buying through a limited company

If you invest in property via a company with limited status, you will be liable for Corporation Tax on your profits. The Corporation Tax rate remains at 19 per cent for those companies with profits below £50,000 but has risen to 25 per cent for profits above £250,000. Companies with profits between these thresholds will pay tax at the main rate reduced by a marginal relief that gradually increases.

Higher rate taxpayers will stand to make a large tax saving, even after considering the extra administration involved with operating a limited company. You will still be taxed if you want access to your rental income for personal reasons, either via Income Tax on the salary you pay yourself or tax on dividend payments. However, there are ways to minimise the tax you pay.

Tax treatment of mortgage interest

Private landlords now receive a tax credit based on 20% of the mortgage interest payments made.

If you have a salary in the basic rate and small rental profits, you may find yourself falling into the next tax bracket, because your rental income, excluding any mortgage interest, is added to overall income to calculate gross earnings. This has been a common problem for many property investors and is the main driver towards limited company incorporation.

Difficulty arranging mortgages

The number of buy-to-let mortgage products on offer for limited companies, especially smaller ones, is fewer than for individuals. As a result, you may find interest rates are slightly higher – especially in current market conditions – and they can prove more difficult and costly to arrange.

Tax when drawing income from the company

To access your rental income, you can pay yourself a salary. This is liable for Income Tax but will count as a cost when calculating your pre-tax profit for Corporation Tax purposes.

Rental profits taken as dividends are not considered a business expense. The tax-free dividend allowance was recently reduced to £1,000 and falls again to £500 from April 2024. How much tax you pay on dividends above this amount depends on your tax band, such as:

Tax Band         Tax Rate on Dividends

Basic Rate        8.75%

Higher Rate      33.75%

Additional Rate 39.35%

If you require your rental income as earnings, which many smaller landlords do, then you must calculate whether a limited company will in fact, reduce your tax bill. As property experts, we can support this decision and advise on further tax-efficient methods, such as splitting dividends with a spouse who is a basic rate taxpayer.

If you wish to discuss this further, contact our property expert, David Herd, on or call 0161 703 2500.