Significant changes to the taxation of residential property are due to take effect from April 2027 and April 2028. On the surface, these reforms make incorporation look increasingly attractive. However, for smaller landlords in particular, the real question is whether moving into a company structure genuinely delivers a financial advantage once all costs and long-term plans are considered.
With implementation dates approaching, now is the time for landlords to review whether their current ownership structure remains fit for purpose.
Higher Income Tax Rates on Rental Income
From 6 April 2027, income tax rates applying specifically to rental income will increase by two percentage points:
- Basic rate: 22 percent
- Higher rate: 42 percent
- Additional rate: 47 percent
These increased rates apply to landlords holding property personally. Properties owned through a limited company will continue to be taxed under corporation tax rules at 19 percent or 25 percent, depending on profit levels.
Mortgage Interest Relief
Until 5 April 2027, individual landlords receive a tax credit equal to 20 percent of their mortgage interest under the existing finance cost restriction rules.
From 6 April 2027, the finance cost tax credit will be provided at the new property basic rate of 22 percent.
Importantly, mortgage interest remains non-deductible in calculating taxable rental profit for individuals. Tax is therefore calculated on profits before finance costs, creating a disconnect between taxable income and real cash flow. Higher and additional rate taxpayers will still not receive full tax relief for their interest costs.
For highly leveraged portfolios, this effect can be significant. When combined with the higher tax rates from April 2027, the case for reviewing corporate ownership becomes more pressing.
High-Value Property Surcharge from April 2028
From April 2028, English residential properties valued at £2 million or more in 2026 will be subject to an additional annual council tax style surcharge:
- £2m to £2.5m: £2,500
- £2.5m to £3.5m: £3,500
- £3.5m to £5m: £5,000
- Over £5m: £7,500
Valuations will be reviewed every five years. With long-term property price growth, more homes may fall within these bands over time.
Further detail is expected following consultation on reliefs, exemptions and complex ownership structures, including properties held through companies, trusts and partnerships.
For high net worth individuals, this introduces an additional holding cost which may influence ownership structuring and succession planning.
Incorporation: The Potential Advantages
In a company structure:
- Mortgage interest is fully deductible.
- Corporation tax rates currently stand at 19 percent for small profits and 25 percent for main rate profits, with marginal relief applying between thresholds.
- Profits can be retained for reinvestment.
- Wealth can be transferred via shares, offering estate planning flexibility.
For landlords intending to grow a portfolio and reinvest profits, the difference in retained post-tax profit can be significant.
However, extracting profits personally through salary or dividends creates a second layer of tax. The overall benefit therefore depends heavily on whether profits are retained or withdrawn. Detailed modelling is essential before making structural changes.
The Cost of Transferring Property to a Company
Moving property into a company is treated as a disposal for capital gains tax purposes at market value, even if no sale proceeds are received. This can create a substantial tax liability without any corresponding cash inflow.
Stamp duty land tax is also payable by the company on the market value of the properties transferred. For many landlords, SDLT represents the most significant upfront cost of restructuring.
In certain circumstances, reliefs may be available where the activity qualifies as a genuine property business, but eligibility must be carefully assessed.
Additional practical considerations include:
- Lender consent and possible refinancing
- Early repayment penalties
- Ongoing company compliance obligations
- Potential annual tax on enveloped dwellings considerations
While incorporation can offer long-term structural advantages, the initial tax cost may outweigh the benefits for smaller portfolios.
Planning for Landlords Remaining in Personal Ownership
For landlords retaining personal ownership, income planning becomes increasingly important.
Transfers between spouses generally take place on a no gain, no loss basis for capital gains tax purposes. This allows rental income to be shared to maximise personal allowances and lower tax bands. SDLT implications must be considered where mortgages exist.
Where property is jointly owned, income is normally split 50:50. By adjusting beneficial ownership and submitting the appropriate declaration to HMRC, income can be allocated in proportions that better reflect each spouse’s tax position.
With the new property income tax rates taking effect from April 2027, there remains a limited window to implement such planning.
Capital Gains Tax Considerations
Capital gains tax on residential property currently stands at:
- 18 percent for gains falling within the basic rate band
- 24 percent for gains above it
Each individual has a £3,000 annual exemption.
Planning strategies may include:
- Staggering disposals across tax years
- Transferring interests to a spouse before sale
- Maintaining detailed records of acquisition costs and enhancement expenditure
CGT on UK residential property must be reported and paid within 60 days of completion where tax is due, making forward planning essential.
Is Incorporation Right for You?
For growth-focused landlords intending to retain profits and expand, incorporation may offer meaningful advantages.
For those reliant on rental income for personal expenditure, or considering selling in the short to medium term, the position is often more nuanced. Upfront restructuring costs can be significant, and the long-term tax savings may not justify the move.
What is clear is that ownership structure is no longer a passive decision.
Ahead of April 2027 and April 2028, landlords should:
- Review projected cash flow under the new tax rates
- Model the cost of incorporation
- Assess capital gains and SDLT exposure
- Consider long-term succession objectives
- Stress test portfolio sustainability
If you would like us to model your portfolio and provide a clear, evidence-based comparison tailored to your circumstances, we would be pleased to assist.
