NEW PODCAST: I tried to sell a property at auction – this is what happened
NEW PODCAST: I tried to sell a property at auction – this is what happened
Weekly data-led tips, local hotspots, and what actually moves the market.
Nobody gets into property investment because they’re excited about tax. But if you don’t understand the tax implications, you could end up paying HMRC far more than necessary or find yourself breaking rules you didn’t even know existed.
But first, a crucial disclaimer: We aren’t tax advisors, and tax rules change more often than most people change their bedsheets. This guide gives you the fundamentals, but for specific advice about your situation, you absolutely must speak to a qualified accountant.
Before we dive into the specific taxes, there’s one fundamental decision that affects everything else: should you buy property in your own name or through a limited company?
This isn’t just a minor technical detail – it completely changes how you’re taxed on everything from rental income to capital gains. Get this wrong, and you could be paying significantly more tax than you need to.
Here’s the key difference in simple terms:
Buy as an individual: You’ll pay Income Tax on rental profits and Capital Gains Tax when you sell. The rates depend on your total income, but you get some useful allowances and reliefs.
Buy through a company: The company pays Corporation Tax on rental profits and gains. You then pay additional tax when you extract money from the company (usually through dividends or salary). It sounds like double taxation – and in some ways it is – but it can still work out cheaper overall, especially if you’re a higher-rate taxpayer, for two main reasons.
First, a company’s taxable profit is lower. Companies can still deduct mortgage interest from their rental income before paying tax, whilst individuals lost this ability in 2020.
Second, Corporation Tax rates (19-25%) are generally lower than the income tax rates most property investors pay (40-45%), so even though you’ll face dividend tax when you take money out, the combined tax bill can still be less than what you’d pay as an individual, particularly if you’re reinvesting profits rather than extracting them immediately.
Which is better? It depends entirely on your specific circumstances, other sources of income, and your long-term goals. This is exactly the sort of thing you need professional advice on, but here’s a simple question to ask yourself that can help guide your thinking: Do you need the rental income now or not?
If you need the rental income to live off, buying personally keeps things simple and gives you instant access to the cash. Yes, you’ll pay more tax on your rental income, but at least you’re not getting hit with corporation tax and then again with dividend tax when you take the money out.
However, if you’re investing for the long term and don’t need the rental income immediately, a company will often work out better. Instead of taking money out and paying dividend tax, you can keep reinvesting those profits and basically build a property business that grows itself.
The costs of running a company stay pretty much the same whether you have one property or four, so as your portfolio grows, those extra accounting costs become less significant. You could even structure things so that when you eventually retire, you start taking money out of the company when you might be in a lower tax bracket.
This is just a starting point, and there are loads of variables that could change what’s right for your specific situation, but with that out of the way, let’s look at the taxes you’ll encounter at each stage of your property journey.
This is usually the first tax hit you’ll encounter, and it can be a big one. SDLT is paid when you buy property in England or Northern Ireland (Scotland and Wales have their own versions, but the principles are similar).
The tax is calculated on a “slice” basis – a bit like income tax bands. You pay nothing on the first slice, then increasing percentages on each slice above that.
For individuals buying their main home: The rates are relatively gentle, starting at 0% on purchases up to £250,000.
For individuals buying additional properties: This is where it gets expensive. There’s a 5% surcharge on top of the standard rates for second homes and buy-to-let properties. So if you’re buying a £300,000 buy-to-let, you’ll pay significantly more than someone buying the same property as their main residence.
For companies: Companies always pay the higher rates that apply to additional properties.
Non-UK residents get stung too: There’s an additional 3% surcharge if you’re not a UK resident, whether you’re buying as an individual or through a company.
The payment deadline is tight – just 14 days from completion. Your solicitor will usually handle this, but make sure you’ve budgeted for it properly. We’ve seen people scramble to find extra cash because they underestimated their SDLT bill.
This is where the individual vs company distinction really matters.
Your rental income gets added to your other income and taxed accordingly. Sounds simple enough, but there are some important nuances.
The basics: You pay tax on your rental profit – that’s your rental income minus allowable expenses like letting agent fees, repairs, insurance, and accountancy costs.
The mortgage interest headache: This is where it gets complicated. Until a few years ago, you could deduct all your mortgage interest from your rental income before calculating tax. Not anymore. Now you get a 20% tax credit instead, which is often much less generous, especially if you’re a higher-rate taxpayer.
This change has made buy-to-let much less attractive for higher earners owning property in their own names, which is exactly what the government intended.
Companies get a much simpler deal on rental income. They pay Corporation Tax on their rental profits at rates from 19% (for profits up to £50,000) up to 25% (for profits over £250,000).
The big advantage: Companies can still deduct mortgage interest in full. This is why many landlords have switched to company ownership in recent years.
The catch: While the company pays less tax on the profits, you’ll face additional tax when you want to get the money out. Take it as a dividend and you’ll pay dividend tax, or take it as salary and you’ll pay Income Tax and National Insurance.
This is where the tax system can really bite, depending on how you’ve structured your investments.
If you sell a property that isn’t your main home, you’ll potentially face Capital Gains Tax on any profit you make. The calculation is straightforward in principle: selling price minus buying price minus allowable costs equals your gain.
What counts as allowable costs? Pretty much anything you had to pay to buy or sell the property – solicitor fees, estate agent fees, stamp duty, and so on. You can also add the cost of improvements (but not repairs) that you’ve made over the years.
The rates: For residential property, you’ll pay either 18% or 24% CGT, depending on whether you’re a basic-rate or higher-rate taxpayer overall.
The good news: You get an annual exempt amount (£3,000 for 2024/25 and 2025/26) that you can use to shelter some gains from tax.
The bad news: You need to report and pay CGT on UK residential property within 60 days of completion (or face penalties).
Private Residence Relief: If you’ve lived in the property as your main home at any point, you might be able to claim relief for some or all of the gain. The rules are complex, but it’s worth investigating if you’ve ever actually lived in a property you’re now selling.
Companies don’t pay Capital Gains Tax as such. Instead, any gains they make are just added to their overall profits and taxed as Corporation Tax at the usual rates (19% up to 25%).
This can actually work out better than individual CGT rates, especially for higher-rate taxpayers. However, you’ll still face additional tax when you extract the money from the company.
UK property taxation is like a game where the rules keep changing and the penalties for getting it wrong are severe, but once you understand the basics, it’s perfectly manageable.
The key is to:
That last point is crucial. We’ve given you the framework, but tax rules are complex, they change regularly, and everyone’s situation is different. A good accountant will save you far more than they cost, both in terms of tax efficiency and peace of mind.
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