Sole Trader vs Limited Company for Buy-to-Let: Tax, Mortgages and When Incorporation Makes Sense

One of the biggest decisions a UK landlord makes has nothing to do with the property itself: it is whether to hold the rental in your own name (as a sole trader/individual) or inside a limited company. The right answer depends on your income, how many properties you own, whether you have a mortgage, and how long you plan to hold. There is no universally "better" structure, and a choice that suits a higher-rate taxpayer with five mortgaged flats can be the wrong call for a basic-rate taxpayer with one unencumbered house.

Below we set out how each structure is taxed, why limited company mortgage rates tend to be higher, the real administrative difference, and the specific situations where incorporation genuinely pays. We finish with a side-by-side comparison table and a short FAQ.

How personal (sole trader) buy-to-let is taxed

If you hold property in your own name, the rental profit is added to your other income and taxed at your marginal rate of Income Tax: 20% (basic rate), 40% (higher rate) or 45% (additional rate) in England, Wales and Northern Ireland. Scottish taxpayers face their own bands, which include intermediate and advanced rates. Property profit also affects allowances such as the High Income Child Benefit Charge and the tapering of the personal allowance above £100,000.

The single most important rule for personally held property is Section 24 — the finance cost restriction that was fully phased in by the 2020/21 tax year. You can no longer deduct mortgage interest (or other finance costs such as arrangement fees) from your rental profit. Instead, you receive a basic-rate (20%) tax reducer on those finance costs.

This is fine if you are a basic-rate taxpayer, because 20% relief roughly matches your tax rate. It hurts higher- and additional-rate landlords, and it can be brutal: because the interest is no longer a deduction, the full rent counts as income. That can push you into a higher band, restrict your personal allowance, or trip the Child Benefit charge even when your real cash profit is modest.

A worked example of the Section 24 squeeze

Say a property earns £15,000 rent a year, with £6,000 of mortgage interest and £2,000 of other allowable costs (letting agent, repairs, insurance). The genuine cash profit is £7,000.

• Basic-rate landlord: Taxable profit is £15,000 − £2,000 = £13,000, taxed at 20% = £2,600, then a 20% credit on £6,000 interest (£1,200) is deducted, leaving £1,400 tax. That is 20% of the true £7,000 profit — the system works as intended.
• Higher-rate landlord: The same £13,000 is taxed at 40% = £5,200, less the £1,200 credit = £4,000 tax. That is roughly 57% of the £7,000 real profit. The mismatch is entirely down to interest no longer being deductible.

Inside a limited company, Section 24 does not apply: mortgage interest is a normal business expense deducted in full before tax. That single difference is the main reason heavily mortgaged, higher-rate landlords look at incorporating.

How limited company buy-to-let is taxed

A company pays Corporation Tax on its profits, not Income Tax. The rate is 19% on profits up to £50,000, 25% above £250,000, and an effective marginal rate in between (around 26.5% on the slice from £50,000 to £250,000) because of marginal relief. These thresholds are divided between "associated companies", so multiple property companies under common control share the bands.

Crucially, the company can deduct mortgage interest in full. So a higher-rate landlord swaps a 40%+ personal rate (with no interest deduction) for a 19–25% company rate (with full interest deduction). On paper that looks decisive — but the money is not yet in your pocket. To take profit out personally you generally pay a second layer of tax:

• Salary — deductible for the company but subject to Income Tax and National Insurance.
• Dividends — paid from post-Corporation-Tax profit and taxed personally at 8.75% (basic), 33.75% (higher) or 39.35% (additional), after a small annual dividend allowance.
• Director's loan repayment — tax-free if you genuinely lent money into the company.

This is the catch that overlooks: a company is brilliant for retaining and reinvesting profit (buying the next property, paying down debt), and far less impressive if you need to extract every penny each year, because the combined Corporation Tax plus dividend tax can rival or exceed personal rates.

Mortgage rates and availability

Most lenders price limited company (often "SPV" — special purpose vehicle) buy-to-let mortgages at higher rates and fees than personal BTL. Expect a margin of roughly half a percent to a full percent more on the headline rate, plus often higher arrangement fees and frequently a personal guarantee from the directors. Lenders also prefer a clean SPV restricted to property activity, usually identified by SIC codes such as 68100, 68209 or 68320.

The market has matured considerably — many specialist and some high-street-adjacent lenders now offer company products — but the choice is narrower than for individuals and the cost of borrowing is genuinely higher. When you model incorporation, the higher interest bill (and the loss of any portable personal rate) must be weighed against the Corporation Tax saving. For a lightly geared or unmortgaged landlord, the rate premium can wipe out the tax benefit entirely.

Administrative burden

Holding property personally is simple: keep records, complete the property pages of your Self Assessment return, and (from the phased rollout) comply with Making Tax Digital for Income Tax — keeping digital records and sending quarterly updates to HMRC once your qualifying income passes the relevant threshold.

A company is a separate legal person and carries materially more obligation:

• Annual statutory accounts filed at Companies House.
• A Corporation Tax return (CT600) filed with HMRC, plus the tax paid within nine months and one day of year end.
• A confirmation statement each year.
• Director and People with Significant Control filings, a registered office, and statutory registers.
• Personal Self Assessment for any salary/dividends you draw.

Most company landlords use an accountant, so budget a recurring annual fee on top of your own time. The admin is not a reason to avoid incorporation, but it is a real, ongoing cost that small portfolios often underestimate.

The cost of moving existing property into a company

This is where many landlords get caught. Transferring a personally held property into a company is, for tax purposes, a sale at market value. Two charges can bite:

• Capital Gains Tax on the gain since you bought it, at residential property rates, unless an exemption or relief applies.
• Stamp Duty Land Tax (or LBTT in Scotland, LTT in Wales) — the company pays SDLT on the market value, including the additional dwellings surcharge, because companies pay the higher rates.

Incorporation Relief can defer the CGT, but only if you transfer a genuine property business (broadly, a partnership run on a sufficiently commercial, active basis) — it is not automatic and HMRC scrutinises it. There is no general SDLT exemption for a sole owner incorporating, though a relief exists where a property partnership transfers to a connected company. Specialist advice is essential before moving any existing property; doing it wrong can trigger large, avoidable tax bills.

For a brand-new purchase the calculation is cleaner — you simply buy through the company from day one and avoid the transfer charges entirely. That is why incorporation usually makes most sense for future acquisitions rather than retro-fitting an existing portfolio.

Other points worth knowing

• ATED: companies owning a single dwelling worth over £500,000 may face the Annual Tax on Enveloped Dwellings, though most genuine lettings qualify for relief that must still be claimed annually.
• Inheritance tax and succession: a company can make passing shares to children simpler than transferring property, but it is not an automatic IHT shelter — take advice.
• Losses: personal property losses can only be carried forward against future property profits; company losses are dealt with under Corporation Tax rules.
• Mortgage portability: personal BTL deals are typically cheaper and more flexible to remortgage than company products.

Comparison at a glance

Factor	Sole trader / personal	Limited company
Tax on profit	Income Tax: 20% / 40% / 45%	Corporation Tax: 19% to 25% (marginal relief between)
Mortgage interest relief	Restricted — 20% tax credit only (Section 24)	Fully deductible as a business expense
Getting cash out	Already yours after tax	Second tax layer on dividends (8.75% / 33.75% / 39.35%)
Mortgage rates	Lower, wider choice	Typically higher rates and fees; personal guarantees common
Admin	Self Assessment + MTD for Income Tax	Accounts, CT600, confirmation statement, PSC filings + accountant fees
Buying new property	Simple	Simple via an SPV from day one
Moving existing property in	n/a	Potential CGT + SDLT; reliefs are conditional
Best for	Basic-rate, low-gearing, few properties, drawing income	Higher-rate, geared, growing portfolios, reinvesting profit

When incorporation actually makes sense

Incorporation tends to win when several of these are true: you are a higher- or additional-rate taxpayer; the properties are significantly mortgaged, so Section 24 hurts; you plan to keep buying and want to reinvest profit rather than spend it; you are buying new properties (avoiding transfer taxes); and you are building something to pass on. It tends not to make sense when you are a basic-rate taxpayer, own outright or with little debt, only have one or two properties, or need to draw all the income each year.

Because the variables interact, the only reliable approach is to model your own numbers — current and projected — including the mortgage rate premium and accountancy costs, and to get tailored advice before transferring anything you already own.

FAQ

Will moving my existing rental into a company save tax?

Possibly on future profits, but the transfer itself can trigger CGT and SDLT that take years to recover. Incorporation Relief may defer the CGT only if you run a genuine property business. Run the full numbers first.

Are company mortgage rates always higher?

Usually, yes — higher rates and fees, and often a personal guarantee. The gap has narrowed but rarely disappears, so factor it into any comparison.

Do I avoid Section 24 in a company?

Yes. Section 24 applies to individuals, not companies, so a company deducts mortgage interest in full before Corporation Tax.

Does MTD for Income Tax apply to company landlords?

No — Making Tax Digital for Income Tax applies to individuals with property or self-employment income above the relevant threshold. Companies report through Corporation Tax instead.

This article is general information for UK landlords and is not professional, financial, legal or tax advice. Tax rules, rates and thresholds change and depend on your circumstances — please consult a qualified accountant or tax adviser before making a decision.