Navigate Section 24 Tax Changes and Choose the Right Structure for Your Property Portfolio
With recent tax changes, many landlords are asking: “Am I paying too much tax by owning my properties in my own name?” This question has become increasingly important since the introduction of Section 24 tax reforms, which fundamentally changed how buy-to-let taxation works in the UK. Whether you’re a seasoned landlord in Manchester with a growing portfolio or a first-time investor eyeing a rental property in Birmingham, understanding the differences between owning through a limited company versus personal ownership could save you thousands of pounds annually.
Understanding the Tax Shift: What Section 24 Means for Landlords
The Section 24 tax changes, fully implemented by April 2020, marked the biggest shift in buy-to-let taxation for decades. Previously, landlords could deduct their full mortgage interest payments from their rental income before calculating tax. This meant if you earned £12,000 in rent and paid £8,000 in mortgage interest, you’d only pay tax on the £4,000 profit.
However, Section 24 phased out this relief for individual landlords. Instead of deducting mortgage interest as an expense, landlords now receive a basic rate tax credit (currently 20%) on their mortgage interest payments. This change has significantly increased tax bills for higher-rate taxpayers, particularly those with substantial mortgage debt on their rental properties.
For example, consider Sarah, a higher-rate taxpayer who owns a rental property in Leeds generating £15,000 annual rent with £10,000 in mortgage interest. Under the old system, she’d pay 40% tax on £5,000 profit (£2,000). Under Section 24, she pays 40% tax on the full £15,000 rental income (£6,000) but receives a 20% tax credit on the £10,000 interest (£2,000), resulting in a total tax bill of £4,000 – double her previous liability.
Limited Company vs. Personal Name: The Key Differences
Limited Company Structure
Advantages
- Corporation Tax rates: Currently 19% for profits up to £50,000 (increasing to 25% for profits over £250,000 from April 2023), often lower than personal income tax rates for higher earners
- Interest Cover Ratio: Typically 125% Rent to payment cover for corporate borrowers.
- Full mortgage interest deduction: Unlike personal ownership, companies can still deduct mortgage interest as a business expense
- Inheritance planning: Easier to pass shares to family members and potentially more tax-efficient for estate planning
- Retained profits: Can keep profits within the company and pay them out as dividends when tax-efficient to do so
- Professional image: May appear more professional when dealing with tenants and suppliers
Disadvantages
- Administrative burden: Requires annual accounts, corporation tax returns, and potentially professional accountancy fees
- Limited mortgage products: Fewer lenders offer buy-to-let mortgages to limited companies, often with higher rates
- Dividend tax: When extracting profits, you’ll pay dividend tax on top of corporation tax
- Setup and ongoing costs: Company formation, registered office, and annual filing fees
Personal Name Ownership
Advantages
- Simplicity: Straightforward to manage with standard self-assessment tax returns
- Mortgage choice: Access to the full range of buy-to-let mortgage products and rates
- Capital gains tax relief: Potential for principal private residence relief if you’ve lived in the property
- No dividend tax: Rental profits are subject to income tax only
Disadvantages
- Section 24 impact: No deduction for mortgage interest, only 20% tax credit
- Higher tax rates: Rental income taxed at marginal rates (20%, 40%, or 45%)
- Interest Cover Ratio: Can be up to 145% Rent to payment cover for higher rate taxpayers.
- Inheritance tax: Properties form part of your estate for IHT purposes
- Less flexibility: Cannot retain profits to smooth tax liabilities across years
What Does It Mean for You? Real-World Scenarios
Scenario 1: The Basic Rate Taxpayer
James from Bristol owns one buy-to-let property generating £12,000 annual rent with £6,000 mortgage interest. As a basic rate taxpayer (20% tax band), the Section 24 changes have minimal impact since his tax credit matches his marginal rate. The additional complexity and costs of a limited company structure likely outweigh any tax savings.
Recommendation: Personal ownership remains most suitable.
Scenario 2: The Higher Rate Taxpayer with Multiple Properties
Emma from Edinburgh owns three rental properties generating £45,000 combined annual rent with £30,000 total mortgage interest. As a 40% taxpayer, she faces significant additional tax under Section 24.
Personal ownership tax: £18,000 income tax minus £6,000 tax credit = £12,000 Company ownership tax: £15,000 profit × 19% corporation tax = £2,850
Even after considering dividend tax when extracting profits, the company structure offers substantial savings.
Recommendation: Limited company structure likely beneficial.
Scenario 3: The Portfolio Landlord
David from Glasgow owns eight properties with combined rental income of £96,000 and mortgage interest of £65,000. The rental income pushes him into the 40% tax bracket, and the portfolio size justifies the additional administrative costs.
Under personal ownership, he’d face a significant tax burden, while a company structure allows full interest deduction and corporation tax rates. The scale of his operation also makes the fixed costs of running a company proportionally smaller.
Recommendation: Limited company structure strongly recommended.
The Expert's View: It's Not One-Size-Fits-All
The choice between limited company and personal ownership isn’t simply about tax rates. Your decision should consider your overall financial position, investment strategy, and long-term goals. Factors such as your other income sources, existing pension provisions, inheritance planning objectives, and risk tolerance all play crucial roles.
For landlords with smaller portfolios or those operating as basic rate taxpayers, personal ownership often remains the most practical choice. The simplicity, mortgage accessibility, and lower setup costs typically outweigh the tax disadvantages.
However, for higher rate taxpayers, particularly those with significant mortgage debt or expansion plans, the company route increasingly makes financial sense. The ability to deduct mortgage interest fully, combined with lower corporation tax rates, can result in substantial annual savings that easily justify the additional complexity.
It’s also worth noting that mortgage lenders are increasingly comfortable with limited company applications, with more products becoming available, though rates may still be slightly higher than personal mortgages.
The timing of any switch is also crucial. Moving existing properties from personal to company ownership triggers capital gains tax and stamp duty, which can be prohibitively expensive. Many landlords therefore adopt a hybrid approach, keeping existing properties in personal names while purchasing new acquisitions through a company structure.
Making the Right Choice for Your Portfolio
The landscape of buy-to-let investment has fundamentally changed, and the strategies that worked five years ago may no longer be optimal. Whether you’re contemplating your first rental property purchase in Newcastle or reviewing an established portfolio across the Midlands, the structure you choose can significantly impact your long-term wealth creation.
The key is to look beyond just the immediate tax implications. Consider your investment timeline, growth ambitions, and how your property investments fit within your broader financial planning. What works for a dentist in Surrey with a £100,000+ salary may not suit a teacher in Yorkshire with more modest earnings but similar property investment goals.
Still unsure which route is right for your portfolio? Speak with a buy-to-let mortgage expert today to understand how these changes affect your specific circumstances.
Ready to explore the benefits? Get a free consultation to review your property strategy and discover whether a limited company structure could save you thousands in tax while positioning your portfolio for future growth.
Remember, tax legislation can change, and individual circumstances vary significantly. Professional advice tailored to your specific situation isn’t just recommended – it’s essential for making an informed decision that protects and enhances your property investment returns.
