Since the phased removal of mortgage interest relief for individual landlords (fully effective from April 2020), the question of using a limited company for buy-to-let investment has become central for anyone buying additional properties. This guide explains the tax comparison, costs, and decision criteria.
Why the Landscape Changed — Section 24
Before 2017, individual landlords could deduct all mortgage interest from rental income before calculating their tax bill. Section 24 of the Finance Act 2015 removed this:
| Period | Mortgage interest deductibility |
|---|---|
| Before 2017/18 | 100% deductible |
| 2017/18 | 75% deductible, 25% as basic rate credit |
| 2018/19 | 50% deductible, 50% as basic rate credit |
| 2019/20 | 25% deductible, 75% as basic rate credit |
| 2020/21 onwards | 0% deductible — replaced by 20% basic rate tax credit only |
The impact: A higher-rate taxpayer (40%) with a £200,000 mortgage at 5% (£10,000 interest/year) now receives only a £2,000 tax credit rather than a £4,000 tax deduction — costing them an extra £2,000/year in tax.
Limited companies are exempt from Section 24. They can still deduct mortgage interest in full as a business expense.
Tax Comparison: Personal vs Limited Company
Example: One property, £1,500/month rent, £600/month mortgage interest
As an individual (higher-rate taxpayer):
| Item | Amount |
|---|---|
| Annual rental income | £18,000 |
| Less allowable expenses (ex. mortgage) | (£3,000) |
| Taxable profit | £15,000 |
| Income tax at 40% | £6,000 |
| Less 20% basic rate mortgage interest credit (£7,200 × 20%) | (£1,440) |
| Net tax bill | £4,560 |
Through a limited company:
| Item | Amount |
|---|---|
| Annual rental income | £18,000 |
| Less mortgage interest | (£7,200) |
| Less other expenses | (£3,000) |
| Company profit | £7,800 |
| Corporation tax (25% over £50k, 19% small profits) | £1,482 (19%) |
| Net tax in company | £1,482 |
Annual tax saving by using a company: £3,078
Note: This doesn’t account for extraction costs — you’ll pay further tax when taking profit out of the company.
The Extraction Problem
Tax is deferred, not eliminated. Money left in the company is not accessible without further tax:
| Extraction method | Tax rate |
|---|---|
| Salary | Income tax + NI at marginal rates |
| Dividends (2026/27) | 8.75% (basic) / 33.75% (higher) / 39.35% (additional) |
| Director’s loan repayment | No tax on original capital lent; interest on overdrawn accounts |
Key insight: If you reinvest rental profits (buy more properties, build the portfolio), the tax deferral is highly valuable. If you’re extracting all profit to live on, the savings are smaller and the additional admin costs eat into the benefit.
Costs of Using a Limited Company
| Cost | Amount |
|---|---|
| Company formation | £12–£50 (one-time) |
| Annual Companies House filing | £13/year (if filed online) |
| Annual accountancy (limited company accounts) | £800–£2,000/year |
| Limited company mortgage vs personal: rate premium | +0.2–0.5% typically |
| Stamp Duty on buy (same rates apply) | Same rates, but company pays 3% surcharge |
| Capital gains tax on sale (company) | 25% corporation tax (not 24% personal CGT) |
The accountancy cost alone is significant for small portfolios. A single property generating £2,000 in tax savings per year may only leave £500–£1,000 net benefit after accountancy fees — not always compelling for smaller landlords.
When a Limited Company Makes Sense
| Situation | Company likely beneficial |
|---|---|
| Higher-rate (40%) or additional rate (45%) taxpayer | ✅ Yes — Section 24 hits hardest |
| Building a portfolio of 3+ properties | ✅ Yes — reinvested income compounds efficiently |
| Long-term hold with compounding strategy | ✅ Yes — deferred extraction is valuable |
| Passing properties to children or family trust | ✅ Potentially — IHT and CGT planning options |
| Situation | Company likely NOT beneficial |
|---|---|
| Basic-rate (20%) taxpayer | ❌ Personal ownership often simpler and similar tax |
| Single property, profit needed immediately | ❌ Extraction costs eat savings |
| Thinking of transferring existing properties to company | ❌ CGT + SDLT on transfer usually kills the economics |
| Short-term investment plan | ❌ Admin and setup costs not recouped |
Setting Up a Buy-to-Let Limited Company
- Incorporate at Companies House (gov.uk/limited-company-formation) — £12 online, ~24 hours
- Choose SIC code 68209 — “Other letting and operating of own or leased real estate” (most BTL lenders require this)
- Open a business bank account — needed for mortgage applications and rent collection
- Appoint a director — usually you; can also appoint a spouse for income-splitting benefits
- Register for Corporation Tax — within 3 months of starting to trade
- Speak to a specialist BTL mortgage broker — company mortgages require specific products
Can a Spouse or Family Member Own Shares?
Yes — and this is one of the key tax planning advantages. By allocating shares to a spouse or adult children who are basic-rate taxpayers:
- Dividends can be extracted at the lower 8.75% rate
- Is particularly useful if one partner doesn’t work
However: HMRC’s settlement legislation (S625 ITTOIA) can apply if shares are gifted between spouses without real economic substance. Take advice before splitting shareholdings for tax purposes.
What Happens on Sale?
When you sell a property held in a company:
- The company pays corporation tax (25%) on any gain
- You then pay income tax or CGT when extracting those proceeds
- No annual Capital Gains Tax exemption — individuals get a £3,000 CGT exemption in 2026/27; companies do not
- Rollover relief may be available if reinvesting in further commercial or residential property
This means the company structure can be less efficient on exit than personal ownership, depending on your plans.