Incorporating rental properties: when the maths work, what SDLT and CGT will cost, and planning the long-term exit

If you own rental properties in your personal name and you're a higher rate taxpayer, you're paying tax on money you never see. That's not an exaggeration. Section 24 means you're taxed on gross rental income before mortgage interest, then given a 20% credit that doesn't come close to covering the difference.

You already know this. What you probably don't know is exactly when incorporation makes financial sense, what the transfer will actually cost in SDLT and CGT, and how many years it takes to break even. That's what this article covers, with real numbers for real portfolio sizes.

What Section 24 Actually Does to Your Tax Bill

Before April 2017, you could deduct your full mortgage interest from rental income before calculating tax. If you earned £24,000 in rent and paid £12,000 in mortgage interest, you were taxed on £12,000. Simple.

Section 24 phased that out completely by April 2020. Now, your taxable rental income is £24,000. You get a 20% tax credit on the £12,000 mortgage interest, which gives you £2,400 back. But if you're a 40% taxpayer, you're paying £9,600 in tax and getting £2,400 relief.

Net tax: £7,200.

Your actual cash profit after paying the mortgage is £12,000. You're handing over 60% of it in tax.

Under the old rules, the same numbers gave you a tax bill of £4,800. Section 24 cost this landlord £2,400 per year—and that's per property. With two rental properties, you're looking at £4,800 in extra annual tax because of Section 24.

Scale this to ten properties and you start to see why incorporation isn't just "nice to have". It becomes the only way the numbers work.

How a Company Changes the Maths

A limited company deducts mortgage interest as a business expense. Full stop. No Section 24 restrictions.

Same example through a company:

- Rental income: £24,000
- Mortgage interest deducted: £12,000
- Taxable profit: £12,000
- Corporation tax at 19% (small profits rate): £2,280

That's £4,920 less tax per year than the personal ownership route. Every year.

At 25% corporation tax (profits over £250,000), the bill rises to £3,000. Still £4,200 cheaper than personal ownership.

The catch? Getting the properties into the company isn't free.

The Transfer Costs: SDLT and CGT

This is where most landlords get stuck. The savings are obvious but the upfront bill feels brutal. Let's break it down.

Stamp Duty Land Tax (SDLT)

When you transfer properties to a company, even your own company, SDLT is calculated on the market value. And because the company is buying additional dwellings, the 5% surcharge applies to the entire purchase (this increased from 3% in October 2024).

For a single property worth £250,000:

For two properties at £250,000 each, that's £30,000 in SDLT.

For a ten-property portfolio worth £2.5 million (average £250,000 per property), SDLT alone runs to £150,000.

These numbers make people close the spreadsheet. Don't. Keep reading.

Capital Gains Tax (CGT)

You're selling your properties to the company at market value, which triggers CGT on any gain since you bought them.

Example: property bought for £150,000, now worth £250,000.

- Gain: £100,000
- Annual exempt amount: £3,000
- Taxable gain: £97,000
- CGT at 24% (higher rate, residential property): £23,280

When two properties with similar gains are transferred in the same tax year, the annual exempt amount applies once to the combined gain. Total gain of £200,000 less £3,000 AEA = £197,000 taxable gain, resulting in CGT of £47,280.

But here's where relief might apply (though rarely).

Incorporation Relief (Section 162 TCGA 1992) - High Bar to Clear

If your rental portfolio qualifies as a business (not just passive investment), you may be able to claim incorporation relief. This defers the entire CGT bill instead of paying it on transfer. The gain rolls into the base cost of your shares in the new company and only crystallises when you eventually sell those shares.

Here's the critical part: incorporation relief is very rarely granted on rental portfolios.

HMRC applies a stringent test. To qualify, you need to demonstrate that you're running a genuine property rental business, not simply holding investment properties. The key factor HMRC examines is the time and effort you spend actively managing the portfolio.

Professional tax guidance typically points to evidence of 20+ hours per week spent on active management, though HMRC's assessment focuses on all facts and circumstances rather than applying a specific hours threshold. You would need to demonstrate:

- Active management of multiple tenants (not delegated to a letting agent)
- Hands-on maintenance coordination and decision-making
- Financial record-keeping, analysis, and strategic planning
- Active decisions about tenant selection, rent levels, and property investment
- Contemporaneous records (time logs, emails, meeting notes) proving your involvement

A portfolio of two BTL properties where a letting agent handles everything will not qualify. A portfolio of ten properties where you genuinely work 20+ hours per week actively managing them might qualify, but you'll need professional advice and solid evidence. HMRC challenges incorporation relief claims on rental portfolios frequently, and they're right to be sceptical.

Most landlords do not meet this test. If you're considering incorporation primarily for the tax savings, you should plan on NOT getting incorporation relief and assume you'll pay the CGT upfront. This is specialist territory—don't proceed without a property tax accountant who understands HMRC's current position on business relief for portfolios.

Other Transfer Costs

Don't forget:

- Legal fees: £1,500 to £3,000 for the transfer documentation
- Re-mortgaging costs: Your personal mortgages can't transfer to a company. You need new commercial mortgages, which typically come with arrangement fees of 1-2% of the loan value and slightly higher interest rates
- Valuation fees: £300 to £500 per property for formal RICS valuations

For a two-property portfolio, expect £5,000 to £10,000 in additional professional fees. For ten properties, £15,000 to £30,000.

Break-Even Analysis: When Incorporation Pays for Itself

Here's where you stop looking at the upfront cost in isolation and start seeing the full picture. But first, a reality check: most landlords should assume they will NOT get incorporation relief.

Scenario 1: Two Properties, Higher Rate Taxpayer (Without Relief)

This is the realistic scenario for most landlords.

Approximately 8.7 years (8.67 years to two decimal places). For two properties, incorporation starts to make sense if you're planning a long hold, especially if you're genuinely running them as a business. The economics change completely once you've recovered the transfer costs. From year nine onwards, you're banking £9,840 every year in tax savings that personal ownership would have cost you.