If you're a property investor who incorporated in the last few years, you probably remember the conversation with your accountant. It went something like: "You need to move your properties into a company. The tax rules have changed and you're going to get hammered otherwise."
And they were right. The Section 24 changes that started rolling in from 2017 were brutal for higher-rate taxpaying landlords. Mortgage interest relief was gradually restricted until, eventually, you could only claim a basic-rate tax credit instead of deducting the full interest from your rental income.
So you incorporated. And it probably saved you thousands in income tax every year. Good decision.
But here's the thing nobody mentioned at the time: incorporating solved one tax problem and quietly created another. Let's talk about both sides.
Why incorporating made sense for income tax
The logic was straightforward. When you own properties personally and you're a higher-rate taxpayer, the Section 24 restriction means you're taxed on rental income before deducting mortgage interest. For someone with significant borrowing, this could push your effective tax rate well above 40%.
Inside a company, the picture looks very different. The company can deduct the full mortgage interest as a business expense. Then it pays corporation tax on the profit at 25% — not 40% or 45%.
Rachel owns five buy-to-let properties personally, generating £80,000 in rent with £35,000 in mortgage interest. As a higher-rate taxpayer, she's taxed on the full £80,000 (minus a basic-rate credit for the interest). Her income tax bill is roughly £22,000.
If those same properties were in a company, the company would pay tax on £45,000 profit (after deducting the full £35,000 interest) at 25%. That's £11,250 in corporation tax.
The annual saving: around £10,750.
That's a significant saving, and it's why accountants across the country were recommending incorporation. For ongoing income tax, it was — and still is — often the better structure.
What about capital gains?
This is where things start to get more nuanced. When you sell a property personally, you pay Capital Gains Tax (CGT). You get an annual exemption (currently £3,000), and the gains are taxed at 18% or 24% depending on your income level.
When a company sells a property, there's no CGT exemption. The gain is taxed at the corporation tax rate of 25%. And if you then want to extract that money from the company, you'll pay income tax or dividend tax on top.
So for capital gains, personal ownership can sometimes work out better — especially on smaller gains where the annual exemption makes a difference. But for larger portfolios with significant gains, the difference narrows, and the income tax benefits of the company structure often outweigh the CGT disadvantage.
The stamp duty question
If you transferred existing properties into a company, you'll remember the stamp duty bill. SDLT is charged on the market value of properties transferred, even if it's your own company. For a portfolio worth £1m, that could have been £40,000 or more in stamp duty alone.
That's a sunk cost — you've already paid it. But it's worth remembering because it means unwinding the structure would trigger stamp duty again. This is important context for what comes next.
The trade-off nobody mentioned
Here's the part that keeps us busy. When your accountant recommended incorporating, they were focused on the annual tax position — income tax, corporation tax, maybe CGT. That's their world, and they did a good job within it.
But there's a whole other dimension that rarely gets discussed in those conversations: inheritance tax.
When you own properties personally, certain IHT reliefs can apply. Your main home can potentially qualify for the residence nil rate band (up to £175,000 per person). Properties can be gifted directly, and if you survive seven years, they fall out of your estate entirely.
When you own properties through a company, everything changes. You don't own the properties any more — you own shares in a company. And those shares sit in your estate, subject to IHT at 40% on everything above your nil rate band.
The crucial point: Property investment companies do not qualify for Business Property Relief (BPR). HMRC treats them as investment holding companies, not trading businesses. So the full value of your shares is exposed to 40% IHT — with no relief available.
What this actually looks like in practice
David and Susan incorporated their property portfolio in 2018. The company now holds eight properties worth a total of £2,200,000, with mortgages of £900,000. Their shares are worth roughly £1,300,000.
They also have a family home worth £500,000 and savings of £200,000. Their combined estate is approximately £2,000,000.
Their combined nil rate bands (including residence nil rate band) give them £1,000,000 tax-free. The remaining £1,000,000 is taxed at 40%.
Potential IHT bill: £400,000.
They've been saving £10,000 a year in income tax through the company structure. But the IHT exposure dwarfs those savings many times over.
This isn't a reason to panic. But it is a reason to plan.
So should you "undo" the company?
Almost certainly not. Transferring properties back out of the company would trigger stamp duty, potential capital gains, and you'd lose all the income tax advantages that made incorporating worthwhile in the first place.
The good news is that you don't need to undo anything. There are well-established ways to manage the IHT side of things without giving up the income tax benefits of the company structure.
These might involve restructuring how your shares are held, using trusts, making use of the seven-year gifting rules, or putting life insurance in place to cover the potential bill. The right approach depends entirely on your circumstances — your age, your family situation, your plans for the portfolio, and how much control you want to retain.
Why this matters now
There's a timing element to most IHT planning. Many of the most effective strategies rely on the seven-year rule — where gifts fall out of your estate after seven years. That means the earlier you start, the more options you have.
If you're in your 50s or 60s with a property company and you haven't looked at the IHT side, you're not alone. Most property investors haven't. But the numbers are often large enough that it's worth having the conversation sooner rather than later.
The income tax decision was the right one. Now it's time to address what it left behind.
Wondering what your IHT exposure actually looks like?
We work specifically with property company owners to map out the tax trade-offs and find solutions that protect both sides. A short conversation is all it takes to get started.
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