Should I use a limited company for HMO investments to save tax?

Deciding whether to hold Houses in Multiple Occupation (HMOs) within a limited company structure is one of the most significant decisions a UK property investor faces today. While moving to a corporate structure can unlock substantial tax efficiencies—most notably the full deduction of finance costs—it introduces new layers of complexity, administrative burden, and potentially higher costs for extracting profits.

Should I Use a Limited Company for HMO Investments to Save Tax?

The decision to hold HMO investments via a limited company hinges entirely on your personal circumstances, future financial goals, and existing tax rate. For many high-earning landlords, the tax benefits of incorporation outweigh the increased administrative costs, particularly since the introduction of tax restrictions for individual landlords (commonly known as Section 24).

Understanding the Tax Landscape for Landlords

Until 2017, individual landlords could deduct all eligible finance costs (such as mortgage interest) before calculating their taxable rental profit. This rule changed, and now individuals receive only a basic rate (20%) tax credit on finance costs. Limited companies, however, are unaffected by these restrictions and can still deduct 100% of their finance costs.

An HMO investment typically involves significant borrowing due to the nature of the asset and the costs associated with achieving regulatory standards. Therefore, the ability to deduct all interest payments is often the primary driver for choosing the limited company structure.

Key Tax Advantages of Using a Limited Company

When investing in HMOs through a Special Purpose Vehicle (SPV) limited company, the following tax benefits generally apply:

• Full Finance Cost Deduction: The company can offset 100% of its mortgage interest and associated finance costs against rental income before Corporation Tax is calculated. This is the biggest tax saving mechanism for highly leveraged portfolios.
• Corporation Tax Rates: Profits are subject to Corporation Tax (CT), which is generally lower than the higher and additional rates of Income Tax for individuals. Currently, UK Corporation Tax rates are 19% for small profits, rising to 25% for companies with high profits (as of 2023/24).
• Reinvestment Efficiency: If you plan to retain profits within the company to fund further property acquisitions or refurbishments, you only pay Corporation Tax. You avoid paying personal income tax until you extract the funds.
• Inheritance Tax (IHT) Planning: While complex, holding properties within a limited company can sometimes offer more flexibility for IHT planning and passing assets to the next generation, often involving shares rather than direct property transfers.

The Drawbacks and Costs of Corporate Investment

While the tax savings on mortgage interest are compelling, the limited company structure introduces several new costs and complexities that must be carefully evaluated.

1. Double Taxation on Extracted Profits

This is often the most misunderstood drawback. When you invest personally, you pay Income Tax once on your net profit. When investing through a limited company, you face potential ‘double taxation’ if you need to access the cash personally:

• First, the company pays Corporation Tax on profits.
• Second, when you extract the remaining money (usually as a dividend or salary), you pay personal income tax or dividend tax on those distributions.

For shareholders who rely on the rental income to fund their lifestyle, the combined tax burden (CT + Dividend Tax) might negate the savings made on finance cost relief, especially if they need to draw large sums.

2. Higher Administrative Burden and Running Costs

Operating a company requires stricter adherence to compliance requirements compared to personal investing:

• Statutory Accounts: Full statutory accounts must be prepared and filed with Companies House annually.
• Company Tax Returns: Corporation Tax returns must be filed with HM Revenue & Customs (HMRC).
• Audit & Accounting Fees: Professional accountancy costs for corporate structuring and filing are significantly higher than those for completing a personal self-assessment tax return.

You must also ensure timely filings with Companies House and keep precise records detailing shareholder minutes and company transactions.

3. Mortgage Finance is More Expensive

Lenders perceive loans to limited companies as higher risk compared to standard residential mortgages. As a result:

• Higher Interest Rates: Interest rates on buy-to-let mortgages for limited companies (often called SPV mortgages) are typically 0.5% to 1.5% higher than equivalent personal buy-to-let rates.
• Higher Fees: Arrangement fees and valuation costs can also be higher.

You must calculate whether the tax savings from deducting 100% of the interest outweigh the cost of paying a higher interest rate and increased fees.

4. Capital Gains Tax Considerations

When an individual sells a property, Capital Gains Tax (CGT) applies, typically at 18% or 24% (for residential property) depending on the individual’s income bracket. If a limited company sells a property, the gain is taxed as part of the company’s profit, subject to Corporation Tax. When the proceeds are distributed to the owner, dividend tax may also apply.

Additionally, if you decide later to dissolve or exit the company, there may be complex tax implications relating to the transfer of the assets or shares.

Specific Considerations for HMO Investments

HMOs often require significant ongoing maintenance, refurbishment, and regulatory compliance checks (such as licensing requirements and safety standards). Operating as a limited company does not change these operational demands, but it does add complexity to how expenses are managed.

Due to the higher yielding nature of HMOs compared to standard single-let buy-to-lets, they generate substantial cash flow. If your primary goal is to scale up your property portfolio quickly, retaining this high cash flow within the company (paying only Corporation Tax) to fund deposits for the next HMO often makes the corporate structure highly attractive.

It is crucial to structure the company correctly from the outset. Most lenders require a specific type of company—an SPV (Special Purpose Vehicle)—which exists solely for property investment. Failure to use an SPV can severely limit your mortgage options.

For more information on tax obligations for UK businesses, you may wish to review the official HMRC guidance on business tax.

When Should You Consult a Professional?

The tax landscape for property investors is constantly shifting. The complexity associated with combining mortgage products, company law, and varying tax rates means that seeking professional, regulated advice is mandatory before making the decision to incorporate.

A specialist property tax adviser can perform a detailed financial analysis to determine your tax liability under both personal and corporate ownership structures, factoring in your projected borrowing levels, rental income, and personal income requirements.

If you are planning significant property expansion that requires finance, checking your credit profile is also essential before approaching lenders. Your personal credit rating often influences the rates offered to your limited company, particularly when you act as a guarantor.

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People also asked

What is Section 24 and why is it important for HMO investors?

Section 24 refers to the restriction on finance cost relief for individual landlords. It means that individuals can no longer deduct all mortgage interest from their rental income before calculating tax; instead, they receive a tax credit equivalent to the basic rate of Income Tax (20%). This significantly increases the tax burden for higher-rate taxpayers, driving many to consider limited company structures.

Are buy-to-let mortgage rates higher for limited companies?

Yes, generally, mortgage rates and arrangement fees are higher for limited companies than for individuals. Lenders view corporate lending as slightly riskier and therefore charge a premium, typically adding between 0.5% and 1.5% to the interest rate compared to an equivalent personal buy-to-let mortgage.

What is “double taxation” in the context of limited company property ownership?

Double taxation occurs when profits are taxed twice. First, the limited company pays Corporation Tax on its rental profits. Second, when the shareholder (the landlord) extracts those remaining profits as dividends or salary, those funds are then subject to personal Income Tax or Dividend Tax, leading to two separate tax liabilities on the same underlying profit.

Can I transfer my existing HMOs into a limited company?

It is possible to transfer existing personally owned properties into a newly formed limited company, but this process is treated as a sale by HMRC. This transaction will trigger liability for Capital Gains Tax (CGT) on any increase in the property’s value since purchase, and the company will typically have to pay Stamp Duty Land Tax (SDLT) on the market value of the transferred property.

What type of limited company should I use for property investment?

Most specialist lenders require property investors to use a Special Purpose Vehicle (SPV), which is a non-trading limited company designed specifically for acquiring and managing property investments. This structure simplifies due diligence for lenders and aligns with standard regulated property finance products.