The Changing Tax Landscape for Property Income
- From 6 April 2027, property income will have its own separate income tax rates: basic rate 22%, higher rate 42%, and additional rate 47%. (gov.uk)
- Savings and dividend income rates have already increased: ordinary dividend rate rose from 8.75% to 10.75%, upper dividend rate from 33.75% to 35.75% from 6 April 2026. (gov.uk)
Entity Choices: Individuals vs Company
| Structure | Pros | Cons |
|---|---|---|
| Individual ownership / sole trader / landlord | Simpler set-up, access to personal allowances, reliefs like the property allowance, Rent-a-Room thresholds | No separation of liability, subject to full property income rate, less scope for corporations tax planning |
| SPV (Special Purpose Vehicle) – Limited Company | Corporation tax rates may be lower on retained profits; more options for reinvestment; dividends are taxed but potentially lower once profits are retained | Dividend tax on distributions; extra admin, accounting costs; double taxation risk if extraction of profits isn’t optimised |
Considerations After New Rates
- Retained profits: If profits are held in a company and reinvested, corporation tax (currently 25%) may be more favourable than paying high personal rates on property income.
- Dividend extraction: Higher dividend rates mean timing of dividends and eligibility for reliefs (e.g. via ISAs or pensions) become more important.
- Mortgage interest and finance cost relief: The government is providing relief at the separate property basic rate (22%) under new rules. Ensure tracking and apportionment of finance costs carefully. (gov.uk)
Example Structure Comparison
Investor A: owns rental property via limited company, retains profits to buy more property. Investor B: owns property personally and takes profits out as personal income.
Under new rates (after April 2027):
- Investor A may pay corporation tax on profits, and only pay dividend tax on what's extracted.
- Investor B’s property income taxed at higher personal rates (e.g. 42-47%), meaning more tax overall if income is high.
Actionable Steps for New or Existing Investors
- Model your expected returns under both structures considering upcoming tax rate changes.
- If using a company, plan for efficient extraction via salaries/dividends and consider timing.
- Review finance cost relief eligibility and ensure properly documented.
- Monitor legislative updates: Budget 2025 approved separate property income rates, but further guidance and legislation may refine details.
Final Thoughts
The shift to separate property income rates and higher dividend/savings rates means entity setup matters more than ever. A well-structured approach, aligned with your investment horizon and income level, can result in significant tax savings and risk reduction.