Rental Income Tax Rises 2027: Should Landlords Incorporate?

Two tax changes are about to make holding residential property in personal ownership materially more expensive. From April 2027, income tax rates on rental profits rise by two percentage points across all bands. From April 2028, residential properties in England valued at £2 million or more face a new annual surcharge.

For landlords reviewing their ownership structure, the key question is now whether incorporation is financially worthwhile.

What Are the New Rental Income Tax Rates from April 2027?

From 6 April 2027, income tax on rental profits rises across every band. The increase is two percentage points, applied specifically to property income:

Properties held within a limited company are unaffected. Corporation tax rates of 19% or 25% continue to apply, depending on profit levels.

Mortgage interest relief remains restricted for individual landlords. Finance costs cannot be deducted from rental profit. Instead, landlords receive a tax credit equal to 22% of these costs, up from the current 20%, but higher and additional rate taxpayers still do not receive full relief.

The difference between taxable income and actual cash flow represents the cost of personal ownership. For leveraged portfolios, this gap will widen from April 2027.

What Is the Annual Surcharge on High-Value Properties from April 2028?

Residential properties in England valued at £2 million or more will face an additional annual council tax surcharge known as Mansion Tax from April 2028. Valuations use April 2026 property prices, with reassessment every five years.

This surcharge is a recurring annual cost rather than a one-off charge. As property values increase over each five-year cycle, more homes will enter higher surcharge bands at each revaluation.

For landlords and high-net-worth individuals with higher-value rental properties, this surcharge adds an additional holding cost on top of the income tax changes.

How Does the Tax Position Compare Between Personal & Company Ownership?

Section 24 of the Finance (No. 2) Act 2015 removed the ability for individual landlords to deduct mortgage interest directly from rental income. Tax is charged on gross rental income before deducting finance costs. The credit then partially offsets the liability. Where finance costs are high relative to rent, this structure inflates taxable income and can push landlords into higher adjusted net income bands affecting the personal allowance and child benefit entitlement.

A limited company does not face these restrictions. Mortgage interest is fully deductible, taxable profit is based on net income, and corporation tax applies at 19% or 25%.

The table below illustrates the income tax position from April 2027 for a single property valued at £2.5 million generating £90,000 in annual rental income, with £50,000 of annual mortgage interest, owned by a higher rate taxpayer:

Personal tax is calculated across the income tax bands: 0% on the first £12,570, 22% on income up to £50,270, and 42% on the remainder before the mortgage interest credit is applied.

The company retains £6,380 more from the same property income. If profits remain within the company for reinvestment, the savings accumulate annually.

This comparison considers retained profit only. Once profits are withdrawn as salary or dividends, a second layer of tax applies, reducing the overall benefit. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) above the £500 dividend allowance. Salary is subject to income tax and National Insurance. Landlords who rely on rental income should carefully model these effects before assuming incorporation will result in net savings. For those building a portfolio or nearing retirement without immediate income needs, deferring profit extraction maximises the benefits of a corporate structure.

From April 2028, this property will also be subject to the annual surcharge. A property valued at £2.5 million incurs a £3,500 annual charge, regardless of whether it is held personally or through a company. This does not affect the £6,380 income tax difference between ownership structures but increases the total annual holding cost.

What Does Buy-to-Let Incorporation Actually Cost?

The tax savings from buy-to-let incorporation do not come free. Transferring property into a company is treated as a disposal for Capital Gains Tax (CGT) purposes. No cash changes hands, but the gain is taxable. CGT on residential property applies at 18% within the basic rate band and 24% above it. The annual exemption is £3,000 per individual. For properties held for years with substantial appreciation, the CGT charge alone can run into tens of thousands.

Stamp Duty Land Tax (SDLT) in England is also payable by the company on the market value of the properties transferred. Higher rates apply for additional dwellings. On most portfolios, SDLT represents the single largest upfront cost of restructuring.

Relief from both CGT and SDLT may be available in certain cases where the landlord's activities qualify as a genuine property business. Eligibility relies on the specific facts of each case and cannot be assumed.

Compliance costs are recurring and often underestimated. A company must file annual accounts, a corporation tax return, and a confirmation statement every year whether profitable or not. Where the company holds residential property valued at £500,000 or more, ATED applies, with a return required annually and a potential charge depending on property value and available reliefs. For a small portfolio, they can lessen a meaningful portion of the tax saving.

What Planning Options Are Available to Landlords Who Remain in Personal Ownership?

Where the incorporation costs outweigh the tax savings, the same April 2027 deadline creates an opportunity to restructure personal ownership instead. Spousal transfers and income splitting do not require lender consent, carry no SDLT exposure in most cases, and can be implemented before the higher rates take effect.

Transferring a share of a property to a spouse or civil partner is treated as a no-gain, no-loss for CGT. No tax is payable on the transfer. Rental income then splits between two taxpayers, using lower bands and personal allowances. SDLT must be reviewed where a mortgage exists.

Conclusion

The April 2027 changes are close enough that the window for acting before they take effect is narrowing. Lender consent, legal restructuring, and tax advice cannot be compressed into a few weeks. A landlord who waits until the new rates are in force has already absorbed a year of the higher liability unnecessarily.

Whether incorporation makes sense depends on one question: do you need the income now, or later? For landlords drawing on rental profits to fund living costs, the extraction tax erodes much of the corporate advantage. For those building a portfolio or approaching retirement, the corporation tax differential compounds every year it is in place. The 2028 Mansion Tax adds a further annual cost on top, regardless of structure  but it does not change which ownership structure handles that cost more efficiently.