Now the 2025 autumn Budget has been delivered and digested, the discussion for clients is moving on to what it means for those with land and property interests, and in particular whether personal or corporate ownership makes sense.
It is not uncommon for estates to have restrictions preventing the sale of land and property assets, so any restructuring has to be carefully considered.
Profits from rental businesses are currently taxed in the hands of individuals at a top rate of 45 per cent as there is no national insurance contributions on rental income. Since 2017, individuals have been restricted to basic rate relief only on the amount of tax relief that they can obtain on mortgage interest against their rental profits.
In comparison, the top rate of corporation tax is currently 25 per cent and companies still generally obtain tax relief on their full mortgage costs, which has made corporate ownership of rental properties attractive for some.
As announced in the recent Budget, the tax rate on property income profits for individuals will increase by 2 per cent on each tax band (22 per cent, 42 per cent and 47 per cent) from April 6 2027. In the future, owning rental properties through companies may make better sense than owning them personally.
Those looking to acquire new properties, should consider establishing a property company. There is a higher upfront stamp duty land tax cost, but depending on the property values this can often pay for itself over a few years in terms of a lower rate of tax on the profits as well as full relief on the interest costs.
A property rental company works well if the landlord does not require the funds personally as there would be additional tax as and when the landlord withdraws funds by way of a dividend (at rates of up to 39.35 per cent). Property rental companies are usually most effective where the landlord wants to reinvest the rental profits in future properties as they can do so at a lower tax cost.
Those with a significant property portfolio held personally may now consider how to move this into a company. The transfer of property into a company will trigger both a capital gains tax disposal and a SDLT event, so it is not for the faint hearted and certainly requires tax advice.
There are reliefs available for both taxes, and when the conditions are met, they can provide the landlords with some good options. Even where SDLT would be triggered by incorporating the property business, it can still sometimes make sense due to the other tax and non-tax benefits — it is often worth modelling the scenarios.
The CGT incorporation relief is a very subjective area of legislation and case law. It does require the landlord to carry on a property business that looks at both the quality and the quantity of business activity by the landlord themselves. It is important that specialist tax advice is sought as there is a significant downside if this goes wrong and it is no longer possible to obtain HMRC pre-transaction clearance on property business incorporations.
From an inheritance tax perspective, corporate ownership does allow property ownership to be split more easily, which can have the added benefit of minority shareholder discounts.
There are non-tax benefits to a property rental company too. Aside from limitation of liability for the landlords (which does have the added cost and complexity of filing information at Companies House), companies can offer additional asset protection through well-drafted articles of association and shareholder agreements for life events such as divorce.
You can create growth shares so that the future growth in the value of the business accrues to the next generation while the current generation retain control, which is often attractive for families.
Family investment companies can be a very flexible way for families to pool their assets across generations. Company shares have three basic rights — dividends, votes and capital — that each have different commercial and tax benefits.
Often ‘alphabet shares’ are created where different share classes have different share rights that suit the particular family member. For example, the A shares could be for the parents who want to retain the voting and dividend rights, but they want to reduce their IHT estate, so they do not have any capital rights.
Whereas the B shares could be for the adult child who does not have voting rights (as the parents want to keep some control) but does have dividend and capital rights. The more complex the share structure, the more costly implementation becomes, as well as ongoing compliance costs such as valuations and company accounts so there is a balance to be struck.
Generally, FICs only make sense with capital of at least £5mn, given there will be Companies House filing requirements as well as corporate tax returns needed every year.
Care is needed where the next generation are not yet adults as there is anti-avoidance legislation to consider. Also, if children did take up residence elsewhere, such as the US, then a FIC may not be tax efficient. While FICs are a simple idea, it is key to get good tax advice upfront as there are lots of points to consider.
With personal tax rates for dividends and property increasing, we are likely to see even more clients asking about the advantages and disadvantages of personal vs corporate ownership.
For a while those differences were narrowing, but these seem to be diverging once again.
Jo Bateson is a partner – private client tax at Mercer & Hole
