Incorporating a UK Rental Property Business
Partnership, LLP and company structures explained—a technical guide for landlords considering PropCo structures in the post-Section 24 world.
The drivers
- •Section 24 finance cost restrictions remove higher-rate relief for mortgage interest
- •Corporation tax can compare favourably with higher/additional income tax rates
- •Lenders and partners prefer corporate structures with formal governance
- •Family succession easier through shares than changing Land Registry titles
The risks
- •CGT crystallisation if "business" test not met or debt handled poorly
- •SDLT charges on transfer if Schedule 15 conditions not satisfied
- •HMRC scrutiny where arrangements look artificial or tax-driven
- •Professional costs can outweigh benefits for smaller portfolios
The typical route: Three stages
Recognise and document an existing property partnership where the facts support it—carrying on business in common with a view to profit.
Create a Limited Liability Partnership to provide limited liability, tax transparency, and flexible profit/capital arrangements.
Transfer rental business into company to secure s162 CGT incorporation relief and full finance cost deductibility.
Why incorporations are on the agenda
The Section 24 effect
For unincorporated landlords, Section 24 of the Finance (No. 2) Act 2015 restricts income tax relief for finance costs (including mortgage interest and related fees) on residential property to a basic-rate (currently 20%) tax credit.
No full deduction
Higher and additional-rate taxpayers can no longer shelter rental profits fully with interest costs
Phantom profits
Landlords with significant leverage can be taxed on a "profit" that doesn't exist in cash terms
Corporate advantage
UK companies deduct full finance costs and pay corporation tax on net profit
This differential is a central driver for considering incorporation, but tax is rarely the only motive. Landlords also cite risk ring-fencing, succession planning, professionalisation for lenders and JV partners, and cleaner exit options through share sales.
The legal and tax framework
Defers CGT when an individual transfers a business as a going concern, together with all chargeable assets (except cash), to a company in exchange wholly or partly for shares.
Provides reliefs where property is transferred into or out of partnerships, or where a partnership business is incorporated—particularly where partners and shareholders are the same (or connected) and economic interests preserved.
The threshold question: Is there really a business?
Before even thinking about partnerships, LLPs or PropCos, advisors must ask: on the facts, is there an actual property business capable of being incorporated?
Scale and intensity
Number of properties matters, but regular, organised activity is key—tenant management, repairs, refurbishments, marketing, compliance
Time input
HMRC's 20-hours-per-week 'rule of thumb' is a practical yardstick; documentation of time spent is valuable
Services provided
Active management (furnishing, frequent refurbs, direct tenant interface) supports business status
Systems and organisation
Business bank accounts, accounting records, insurance, documented processes demonstrate commercial reality
Commercial risk
Exposure to voids, arrears, regulatory changes, refurbishment risks distinguishes business from passive investment
Warning: A single, long-let property with minimal landlord involvement is much harder to characterise as a business. If the business test is weak, incorporation relief may be denied and CGT crystallised.
Step one: Formalising a property partnership
Substance first, then form
Many landlord couples or families already operate in a way that looks like a general partnership: co-owning properties, jointly making investment decisions, and both taking part in management. For CGT and SDLT, the key is whether there is substance of a partnership—carrying on a business in common with a view to profit.
A properly established partnership provides an entry point into the Schedule 15 SDLT framework when properties are transferred into an LLP or company. In many structures, jointly owned properties are introduced into a partnership at book value with no SDLT charge where conditions are met.
- Written partnership agreement setting out capital and profit shares, decision-making, admission/retirement
- Dedicated partnership bank account with rents and expenses routed through it
- HMRC registration and partnership tax return filing
- Legal advice on lender consents when properties treated as partnership assets
Advisers stress that partnerships must have commercial reality—they are not simply "paper" constructs to access reliefs.
Step two: Introducing an LLP
Once a general partnership and property business are in place, landlords often consider an LLP as an intermediate step before full incorporation.
Limited liability
Members' liability is limited (subject to personal guarantees to lenders)
Tax transparency
LLP treated like a partnership for income tax—members taxed on their share of profits
Flexible structure
Distinguish capital accounts, current accounts, profit-sharing and special allocations
This flexibility is particularly useful for succession planning—for example, gradually increasing a child's profit share while maintaining parental control over capital and voting.
Step three: Incorporating into PropCo
The final stage is typically the transfer of the rental property business from the LLP (or directly from individuals/partnership) into a company.
- 1
There is a business being transferred (not merely passive assets)
- 2
The business is transferred as a going concern (i.e., a live, functioning rental operation)
- 3
All chargeable assets of the business (typically properties, goodwill, but excluding cash) pass into the company
- 4
Consideration is wholly or partly in shares in the company
Result: The gain inherent in the property business is rolled into the base cost of the shares, rather than triggering an immediate CGT charge.
Handling debt and latent gains
A critical technical layer is how mortgage debt is dealt with. If the company assumes liability for debts in a way that is treated as non-share consideration, part of the gain can crystallise immediately. The interaction between market value of properties, base cost, and debt balances creates a "latent gain" that must be carefully modelled. Advisers often explore structures where economically equivalent outcomes are pursued with careful attention to the technical treatment of assumed debt under s162.
SDLT on transfer from LLP to company
Where the business is operated through a partnership or LLP, Schedule 15 FA 2003 may mitigate or eliminate SDLT on the transfer of properties to a company, typically where company owners are the existing partners/members (or connected with them) and economic shares remain broadly unchanged. However, if new shareholders are introduced or shares are not aligned with prior partnership interests, the "sum of the lower proportions" formula can yield a non-trivial SDLT bill.
Designing ownership, governance and funding
Separate economics from control via different share classes. Introduce family members with growth shares while retaining voting shares at parent level.
LLP agreements and shareholders' agreements covering decision thresholds, distributions, exit mechanisms, and family harmony.
Director's loan accounts reflecting capital introduced, providing tax-efficient extraction route without additional income tax.
Modelling the economics
Before embarking on a restructuring, a robust financial model should compare unincorporated vs incorporated scenarios over 5-10 years.
- ×Rental profits under Section 24 (basic-rate credit only)
- ×Personal tax at higher/additional rates
- ×Limited leverage efficiency
- Corporation tax on net profit (full finance cost deduction)
- Flexible extraction (salary, dividends, loan repayments)
- Corporate borrowing appetite from lenders
A critical insight: tax is only one dimension. Capital structure, risk, lender appetite and long-term family plans can outweigh marginal tax savings. Always model one-off transaction costs including professional fees, SDLT, CGT and refinancing costs.
HMRC scrutiny and common pitfalls
Areas of risk
- Weak business case: Portfolios with limited activity presented as 'businesses' purely for s162 purposes
- Paper partnerships: Partnerships formed shortly before incorporation with limited commercial reality
- Misaligned ownership: Changes in economic interest during partnership/LLP stage that undermine SDLT relief
- Cherry-picking assets: Not transferring all assets of the business (can jeopardise incorporation relief)
- Documentation gaps: Lack of evidence of time spent, services provided, partnership decisions, commercial rationale
For any landlord considering this route, it is prudent to work on the assumption that HMRC may review the restructuring and to design it accordingly.
Decision framework: Five key questions
Do I genuinely run a property business, or do I simply own one or two passive investments?
The business test under s162 is foundational. Without it, incorporation relief is denied.
Would a partnership and LLP reflect reality, or would they be artificial?
Substance must come first; form follows. HMRC increasingly challenges paper structures.
How would incorporation change my after-tax cashflows over five to ten years?
A forecasting model is essential to justify the transaction costs and complexity.
What does this mean for my family succession goals?
Incorporation can fix structural issues—but can also hard-wire new ones without a clear plan.
Am I prepared for HMRC scrutiny?
If the only genuine driver is tax and the commercial story is thin, risk profile increases.
What this means for landlords
For serious UK rental investors, incorporation is no longer an exotic structure—it's a mainstream consideration. But it's not automatically the right answer.
Incorporation can be powerful: it may restore interest deductibility, improve risk management and offer a better platform for professional growth of a rental business. But it must be designed carefully, executed with proper advice, and built on genuine business activity—not reverse-engineered from a tax outcome.
Important: This Insight sets out concepts and typical structuring steps at a principles level only—with no reference to any specific client, numbers or transaction—and is not personal tax advice. Landlords considering incorporation should engage qualified tax advisors, solicitors and accountants before taking any action.