Date posted: 30th Jul 2025
We are contacted very regularly by existing and potential landlords in respect of whether to set up a limited company to acquire buy to let residential properties.
Usually they have read about the “section 24” interest restrictions, which means the tax relief for any mortgage interest is capped at a maximum of 20%.
The immediate thought is then to decide to set up a limited company given the relief for companies is not capped but there are many more factors to consider determining whether a limited company offers a saving, such as:
- If the properties were held personally, what is the rate of tax that could be paid by the individual.
- What is the level of income of the client and whether this will increase in the future.
- If the individual is married and the income their spouse earns.
- If they are planning to acquire more properties in the future.
- The cost of borrowing personally versus via a company.
- The additional professional costs of operating a limited company.
- The level of rental income and profit.
- Whether the rental income is needed or can be reinvested.
- Whether a level of limited liability is required.
- The rate at which the limited company will be subjected to corporate tax – between 19% and 26.5%.
Once these factors are established and some numbers are crunched, we can start to determine whether a limited company may save you money, not just tax.
As an example, Derek has a stable PAYE role earning £30,000 but has recently received an inheritance which he would like to invest in BTL properties. He will need some borrowings but is anticipating buying three BTL properties and not expanding the portfolio from there. Those properties are expected to bring in rental profits (ignoring mortgage interest relief) of c£25,000. Derek’s wife, Janet, has a small part time job earning £5,000.
Derek has read online that he should operate the business via a limited company as there will be full mortgage interest tax relief given so discusses this with us.
We meet with Derek to discuss his situation and he does not believe that his salary will increase in the future, barring any inflationary rises.
Using a limited company, the corporate tax payable by the company on £25,000 (exc mortgage interest relief) would be c£5,000 (assuming the properties are let to third parties and Derek does not own any other companies). Of course, should Derek wish to draw income from the company, then there may be further tax charges payable by Derek personally.
If Derek held the properties personally, he would pay tax of c£6,000 of £25,000 of profits.
Under both scenarios, the tax rate for mortgage interest will be similar, so this has been ignored for these purposes.
So, from a headline perspective, Derek may consider that there is £1,000 to be saved but this is likely to be eroded by:
- Additional accountancy fees of operating a limited company versus a personal tax return fee – good for us, but not good for Derek.
- Potentially paying higher fees and interest to the bank on the borrowings.
- Potentially needing the monies from the limited company, which could mean further tax payable by Derek.
In addition, tax can be saved by making use of Janet’s unused personal allowances and setting up a deed to bring Janet in as a beneficial owner of the property.
After discussions with us, Derek decides he doesn’t need a limited company.
As ever with tax, the answer is “it depends” but this shows the value of taking good tax advice.
We are always here to help should you need advice.
