Residential landlords under pressure: rethinking ownership

Amy Cole, CTA ATT, private client tax director, Menzies. Croner-i

Significant changes to residential property tax make argument for incorporation more compelling but does it really make financial sense for smaller landlords, asks Amy Cole, private client tax director at Menzies LLP.

From April 2027, the tax landscape for residential property becomes markedly tougher due to higher income tax rates on rental income, and a new annual surcharge on high-value homes from April 2028. For buy-to-let (BTL) landlords and high-net-worth individuals (HNWs), the cumulative effect is clear: higher holding costs, increased compliance and renewed pressure on margins.

With the first phase of changes starting in April 2027, now is the time to reassess whether existing ownership structures remain efficient.

Higher taxes on rental income

From April 2027, income tax rates applicable specifically to rental income will increase by two percentage points. The new property-specific income tax rates will be:

• basic rate: 22% (up from 20%)

• higher rate: 42% (up from 40%)

• additional rate: 47% (up from 45%)

  
  

These higher rates apply to landlords who hold property personally. Properties owned within a limited company are not affected and will continue to be subject to corporation tax at 19% or 25%, depending on profit levels.

Mortgage interest relief for individuals remains restricted. Interest is not deductible in calculating taxable rental profit; instead, landlords receive a tax credit equal to 22% of their finance costs (previously 20%).

This restriction means tax is calculated on profits before interest, creating a disconnect between taxable income and real cash flow, and means higher and additional rate taxpayers will not receive full tax relief for mortgage interest paid. Highly leveraged portfolios will feel this most acutely.

When combined with higher tax rates from April 2027, the case for reviewing corporate ownership becomes compelling.

‘Mansion tax’ style council tax surcharge

From April 2028, English homes valued at £2m or more will face an additional annual surcharge:

• £2m–£2.5m: £2,500

• £2.5m–£3.5m: £3,500

• £3.5m–£5m: £5,000

• £5m+: £7,500

Valuations will initially be based on April 2026 values and reviewed every five years. Given the historic upward trend in property prices, more homes could move into higher bands over time. For high net worth individuals (HNWs), this represents an additional holding cost that may influence ownership structures and long-term succession planning.

Incorporation: weighing up corporate ownership

With higher personal tax rates and continued finance cost restrictions, corporate ownership is increasingly attractive. Companies benefit from:

• full deductibility of mortgage interest

• corporation tax rates of 19% or 25%

• flexibility over the timing and method of profit extraction

• the ability to pass wealth through share transfers

However, incorporation is not without complexity or cost.

Illustrative comparison

Consider a £1.5m portfolio generating £60,000 rental income with £30,000 mortgage interest, owned by a higher rate taxpayer:

	Personal ownership	Company ownership
Rental income	£60,000	£60,000
Mortgage interest	22% tax credit	Fully deductible
Taxable profit	£60,000	£30,000
Tax payable	c. £25,200 (42%) less £6,600 credit = £18,600	£5,700 (19%)
Post-tax profit retained	c. £11,400	£24,300

If profits are retained within the company for reinvestment, the tax differential is significant. However, extracting profits to enjoy personally via salary or dividends will create a second layer of tax, reducing the overall benefit. Careful modelling is therefore essential.

Tax traps when moving property into a company

Transferring property into a company is treated as a disposal for capital gains tax (CGT) purposes. This can trigger CGT at 18% or 24%, even though no sale proceeds are received - a so-called ‘dry’ tax charge. For long-held properties with substantial appreciation, liabilities can be considerable.

Stamp duty land tax (SDLT) is also payable by the company on the market value of the properties transferred, generally at higher rates than individuals. For many portfolios, SDLT represents the most significant upfront cost of restructuring.

In certain cases, relief from CGT and SDLT may be available if the activities qualify as a genuine property business, but eligibility must be assessed carefully.

Once incorporated, the market value of the transferred properties can be credited to a director’s loan account, allowing future tax-free withdrawals as the loan is repaid.

Note that transferring a property with an existing mortgage requires lender consent, which can lead to possible early redemption penalties and refinancing costs.

Operating through a company also comes with ongoing compliance obligations - including annual accounts, corporation tax returns and potential annual tax on enveloped dwellings (ATED) considerations which must be factored in when deciding whether to incorporate.

Income tax planning for personal landlords

For landlords retaining personal ownership, income splitting becomes increasingly important.

Transfers of property between spouses take place on a ‘no gain, no loss’ basis, meaning no CGT is payable at the time of transfer. This allows rental income to be shared to maximise use of personal allowances and lower tax bands. SDLT implications must be considered where mortgages exist.

Where property is already jointly owned, the default income split is 50:50. By altering beneficial ownership via a declaration of trust, and filing Form 17 with HMRC, income can be split in unequal proportions to optimise tax band usage.

With the new rates applying from April 2027, there is a window before then to implement such planning.

Capital gains tax planning

CGT on residential property remains at 18% for gains within the basic rate band and 24% thereafter, with a £3,000 annual exemption applying per individual.

Planning strategies include:

• stagger disposals across tax years to maximise use of annual exemptions.

• transfer shares to a spouse before sale to utilise two exemptions and potentially access the lower 18% rate.

• keep detailed records of acquisition, disposal and capital enhancement costs to reduce the chargeable gain.

CGT must be reported and paid within 60 days of completion for residential properties, making cash flow planning essential.

Time to act

With changes beginning in April 2027 and 2028, landlords and HNWs have a narrowing window to assess their position.

Incorporation may offer meaningful advantages for growth-focused or highly leveraged investors intending to retain profits. For those reliant on rental income for personal expenditure or considering a near-term exit, the position is more nuanced.

What is clear is that ownership structure is no longer a passive decision. Ahead of April 2027, reviewing cash flow, modelling restructuring costs and stress-testing long-term plans will be critical to ensuring property portfolios remain sustainable in a more demanding tax environment.

About the author

Amy Cole CTA ATT is private client tax director and property sector specialist at Menzies LLP