Family Investment Company vs Discretionary Trust – Which Is Better?

FIC vs discretionary trust, Family Investment Company or trust, FIC or trust, Family Investment Company trust comparison, discretionary trust vs company

FICs and Trusts Compared for Inheritance Tax, Control, Property Investment and Passing Wealth to Future Generations

By Steve Bicknell FCMA, CGMA

Family Investment Company vs Discretionary Trust is becoming an increasingly important comparison for families looking to pass wealth to children and grandchildren while retaining control.

Both structures can be used for long-term family wealth planning.

Both can separate control from the people who ultimately benefit from the wealth.

Both can potentially help move value or future growth away from an individual’s estate.

But they work in fundamentally different ways and have very different tax consequences.

And sometimes the answer isn’t:

FIC OR TRUST.

It is:

FIC + TRUST.

Quick Answer – FIC or Discretionary Trust?

A Family Investment Company is generally stronger for investing and compounding substantial family wealth while retaining control. A discretionary trust is generally stronger where flexibility, asset protection and future or unknown beneficiaries are the priority. For some families, a discretionary trust owning growth shares in a FIC can combine advantages of both.

The important distinction is that a:

FAMILY INVESTMENT COMPANY IS PRIMARILY AN INVESTMENT VEHICLE

whereas a:

DISCRETIONARY TRUST IS PRIMARILY AN OWNERSHIP AND SUCCESSION STRUCTURE.

That distinction drives much of the tax treatment.

	Family Investment Company	Discretionary Trust
Legal structure	Company	Trust
Who controls it?	Directors/shareholders	Trustees
Beneficiaries/shareholders have fixed rights?	Depends on share rights	Beneficiaries usually do not
Future generations	Good	Very flexible
Large sums can be invested	Yes	Yes, but IHT entry charges need considering
Immediate IHT charge on creation	Not necessarily	Can arise
10-year IHT charges	No company-level 10-year charge	Potentially yes
Tax on retained income	Corporation Tax	Trust Income Tax
Property investment	Often attractive	Possible
Founder can retain control	Potentially strong	Trustees control
Original capital accessible	Potentially via loan account	Generally much less flexible
Asset protection	Depends on shareholder	Potentially stronger
Future/unknown beneficiaries	More difficult	Excellent
Administration	Company compliance	Trust compliance
Best suited to	Investment and future growth	Flexibility and succession

Let’s look at why.

What Is a Family Investment Company?

A Family Investment Company, usually abbreviated to FIC, is normally a private limited company whose shareholders are members of the same family.

It might hold:

residential property;
commercial property;
shares;
investment funds;
cash;
loans;
or a combination of investments.

Different classes of shares can have different rights to:

votes;
dividends;
capital;
and future growth.

That can allow parents or grandparents to retain:

CONTROL

while children, grandchildren or trusts participate in:

FUTURE GROWTH.

HMRC itself investigated FICs through a specialist unit established in April 2019.

HMRC found that FICs were commonly used for intergenerational wealth planning, often using different share classes so older generations retained voting rights while younger generations had rights to income or capital. HMRC also found no evidence that people establishing FICs were more inclined towards avoidance or non-compliant behaviour. The specialist project was subsequently ended and FICs became part of HMRC’s normal compliance activity.

So a FIC isn’t a special HMRC tax scheme.

It is a company whose share rights, funding and transactions are designed around a family’s long-term objectives.

What Is a Discretionary Trust?

A discretionary trust works very differently.

Assets are legally held by:

TRUSTEES

for a class of:

BENEFICIARIES.

Those beneficiaries might include:

children;
grandchildren;
future grandchildren;
spouses;
other descendants;
or other people identified in the trust deed.

The critical feature is that an individual discretionary beneficiary does not normally have an absolute entitlement to a particular trust asset.

Instead, the trustees decide, subject to the trust deed and their legal duties:

which beneficiaries receive income;
which receive capital;
when distributions are made;
and how much they receive.

This creates considerable flexibility.

The Biggest Difference – Who Owns the Value?

This is perhaps the easiest way to understand the difference.

With a FIC

Value is represented by:

and potentially:

SHAREHOLDER LOANS.

The rights attached to each share class determine who has:

votes;
dividend rights;
capital rights;
and future growth.

If your adult daughter owns growth shares, she genuinely owns those shares.

With a discretionary trust

The:

TRUSTEES OWN THE ASSETS

and manage them for the beneficiaries.

A discretionary beneficiary does not ordinarily own a particular percentage of the trust fund.

That means:

FIC = DEFINED SHAREHOLDER RIGHTS

whereas:

TRUST = TRUSTEE DISCRETION.

£1 Million – FIC vs Discretionary Trust

Let’s use a completely fictional family.

David and Emma Taylor have accumulated:

£1,000,000

which they want to invest for the long-term benefit of their family.

They have two adult children:

Alex and Sophie

and expect grandchildren in future.

They are considering two options.

Option 1 – £1 Million Family Investment Company

David lends:

£1,000,000

to:

Taylor Family Investments Ltd.

Initially, the balance sheet might broadly look like this:

	£
Cash/investments	1,000,000
Loan owed to David	(1,000,000)
Initial net company value	approximately nil

The company then invests the money.

The family might establish:

Control shares

held by David and Emma

and:

Growth shares

held by Alex and Sophie.

If the investments eventually become worth:

£3,000,000

the original £1 million loan still belongs to David to the extent it hasn’t been:

repaid;
spent;
gifted;
or otherwise transferred.

But much of the:

£2 MILLION FUTURE GROWTH

could potentially accrue to the growth shares.

The important point is:

THE FIC HASN’T MAGICALLY REMOVED £1 MILLION FROM DAVID’S ESTATE.

Instead, it can potentially:

REDIRECT FUTURE GROWTH.

Option 2 – £1 Million Discretionary Trust

Suppose instead David transfers:

£1,000,000

directly into a discretionary trust.

This is fundamentally different.

David has transferred the assets to trustees.

But that immediately raises:

INHERITANCE TAX.

A transfer of assets into a relevant-property trust is normally an immediately chargeable transfer for IHT purposes.

That means a substantial lifetime transfer into a discretionary trust can create an immediate IHT charge.

And once the assets are within the relevant-property regime, there can potentially be further charges:

EVERY 10 YEARS

and:

WHEN ASSETS LEAVE THE TRUST.

This is one of the most important differences between a FIC and a discretionary trust.

The £325,000 Trust Issue

The standard IHT nil-rate band is currently:

£325,000.

There is no rule saying that a discretionary trust cannot hold more than £325,000.

It absolutely can.

The issue is the potential:

INHERITANCE TAX ENTRY CHARGE.

If an individual transfers assets into a discretionary relevant-property trust, the transfer is generally immediately chargeable.

Subject to available exemptions, reliefs, the settlor’s previous chargeable transfers and the available nil-rate band, amounts above the available threshold can create lifetime IHT.

The lifetime rate is generally 20% where the tax is borne by the person making the transfer.

So:

£325,000 IS NOT A MAXIMUM TRUST SIZE.

It is relevant because of the IHT calculation.

This is one reason a FIC can be more practical where a family has £1 million, £2 million or considerably more to invest.

But remember:

LENDING £1 MILLION TO A FIC DOES NOT REMOVE THE £1 MILLION FROM YOUR ESTATE.

The loan is still an asset.

FIC vs Trust – What Happens to £1 Million?

A useful way of thinking about it is:

FIC

£1m loan

↓

FIC invests £1m

↓

Founder still owns the £1m loan

↓

Growth shares can potentially capture future growth

MAIN OBJECTIVE:

MOVE FUTURE GROWTH

DISCRETIONARY TRUST

£1m transferred to trustees

↓

Potential immediate IHT considerations

↓

Trustees control the assets

↓

10-year and exit-charge regime can apply

MAIN OBJECTIVE:

MOVE ASSET OWNERSHIP INTO A FLEXIBLE SUCCESSION STRUCTURE

That is why comparing the two simply by looking at tax rates misses the point.

What About the Seven-Year Rule?

This is another area where confusion often arises.

Suppose David gives shares outright to his adult daughter Sophie.

An outright lifetime gift to an individual will generally be a:

POTENTIALLY EXEMPT TRANSFER.

If David survives seven years, it can generally fall outside his estate for IHT purposes.

A transfer into a discretionary relevant-property trust is different.

It is normally an:

IMMEDIATELY CHARGEABLE TRANSFER.

HMRC confirms that a transfer into a relevant-property trust is immediately chargeable, with further consequences possible if the settlor dies within seven years.

So:

“Put it into trust and survive seven years”

is an oversimplification.

The 10-Year Discretionary Trust Charge

Most assets held in a discretionary trust are within the:

RELEVANT PROPERTY REGIME.

HMRC confirms that relevant-property trusts can face an IHT charge at each:

10-YEAR ANNIVERSARY.

The rate can be:

UP TO 6%.

The calculation is more complicated than simply applying 6% to everything. It depends on factors including the value of the relevant property, available nil-rate band and relevant historic transfers.

A FIC itself does not have an equivalent ten-year company IHT charge.

However, if a discretionary trust owns shares in the FIC:

THE VALUE OF THOSE SHARES MAY FORM PART OF THE TRUST’S RELEVANT PROPERTY.

So using a trust to own FIC shares doesn’t make the trust’s IHT regime disappear.

What Are Trust Exit Charges?

IHT can also potentially arise when relevant property leaves a discretionary trust.

These are commonly called:

EXIT CHARGES

or:

PROPORTIONATE CHARGES.

They can arise where, for example:

capital is appointed to a beneficiary;
a beneficiary becomes absolutely entitled to an asset;
or property otherwise ceases to be relevant property.

HMRC confirms that relevant-property trusts have both ten-year charges and proportionate/exit charges.

The calculation depends on the circumstances and how long the property has been within the relevant-property regime.

Income Tax – A Major Difference

The tax on investment income can make a significant difference between the two structures.

For 2026/27, trustees of accumulation and discretionary trusts generally pay:

Dividend-type income

39.35%

Other income

45%.

There is normally a £500 tax-free amount, although this can be divided where the same settlor has established multiple accumulation or discretionary trusts. Trustees do not receive the individual dividend allowance.

This can make accumulating substantial investment income within a discretionary trust expensive.

How Does That Compare With a FIC?

A company pays:

CORPORATION TAX

rather than trust Income Tax.

A FIC holding a portfolio of shares, cash and similar investments may be a:

CLOSE INVESTMENT-HOLDING COMPANY.

A close investment-holding company is subject to the Corporation Tax main rate and cannot use the small-profits rate or marginal relief.

That currently means:

25% CORPORATION TAX

on taxable profits.

This can make a FIC considerably more attractive than a discretionary trust where investment returns will be:

RETAINED

and:

REINVESTED.

But Don’t Forget Tax When Money Leaves the FIC

This is crucial.

Suppose a FIC makes:

£100,000

of taxable profit.

The company may pay Corporation Tax first.

If the remaining profits are then paid to an individual shareholder as a dividend:

DIVIDEND TAX

may also arise.

So you cannot simply compare:

25% COMPANY TAX

with:

45% TRUST TAX

and conclude that the FIC always wins.

The FIC is often particularly effective where profits can remain inside the company and compound over a long period.

If all the profits need to be extracted personally every year, the comparison can look very different.

Trust Distributions and the Tax Pool

Trust taxation has another layer of complexity.

When trustees make discretionary income payments to beneficiaries, the payments carry a tax credit and the trustees have to maintain a:

TAX POOL.

HMRC describes the tax pool as the record used to track Income Tax paid by trustees and the tax credits attached to discretionary income payments. If the pool does not contain enough tax to support distributions, the trustees can have additional tax to pay.

A beneficiary may potentially recover some tax depending on their own circumstances.

That can make trusts useful where distributions eventually go to low-income adult beneficiaries.

But it adds another layer of administration.

Which Gives the Family More Control?

Both can provide control.

But it is a different kind of control.

Family Investment Company

Parents or grandparents might retain:

voting shares;
directorships;
investment decision-making;
and influence over dividend policy.

Meanwhile younger generations can own growth shares.

This allows a useful separation between:

CONTROL

and:

FUTURE ECONOMIC VALUE.

Discretionary Trust

The trustees control:

investments;
distributions;
administration;
and when beneficiaries receive capital.

The settlor can potentially also be a trustee, depending on the structure.

But trustees don’t own the assets beneficially.

They have legal duties and must act according to:

THE TRUST DEED

and:

THEIR DUTIES TO THE BENEFICIARIES.

Which Is Better for Minor Children?

A discretionary trust can be particularly useful where the intended beneficiaries are:

young children;
grandchildren;
future grandchildren;
or people whose circumstances may change considerably.

Instead of giving assets directly to a child, trustees can decide:

WHEN

and:

HOW

the beneficiary should receive them.

Direct ownership of FIC shares by minor children can also create additional legal and tax complications, including the parental settlements rules where income has been provided by a parent.

So where the beneficiaries are very young:

THE FLEXIBILITY OF A TRUST CAN BE VERY VALUABLE.

Which Is Better for Adult Children?

The FIC can become more attractive where children are adults.

An adult child can genuinely own:

growth shares;
dividend shares;
voting shares;
or a combination.

This can simplify future distributions because dividends can potentially be paid directly to the shareholder.

But there is an important consequence:

THEY REALLY OWN THE SHARES.

The shares form part of their personal wealth.

That brings us to asset protection.

Divorce, Bankruptcy and Asset Protection

Suppose Alex personally owns valuable FIC growth shares.

Those shares are his assets.

They could potentially become relevant in circumstances involving:

divorce;
bankruptcy;
creditors;
or death.

A discretionary beneficiary, by contrast, doesn’t ordinarily own a specified percentage of the trust fund.

The trustees decide whether and when to make distributions.

That can make a discretionary trust attractive where:

ASSET PROTECTION AND CONTROL OVER FUTURE DISTRIBUTIONS

are important family objectives.

This should not be viewed as guaranteed protection from every possible claim — family and insolvency law can be complex — but it is an important structural distinction.

What About Future Grandchildren?

This is one of the areas where a discretionary trust can be particularly powerful.

Suppose David and Emma currently have:

NO GRANDCHILDREN.

It is difficult to give shares today to people who don’t yet exist.

A discretionary trust can potentially define a class of beneficiaries that includes:

existing children;
existing grandchildren;
future grandchildren;
and potentially further descendants.

That means the family doesn’t necessarily need to decide today:

EXACTLY WHO SHOULD RECEIVE THE WEALTH IN 20 YEARS.

The trustees can respond to future circumstances.

Sometimes the Answer Is FIC + Trust

This is where the comparison gets particularly interesting.

You don’t necessarily have to choose between:

FAMILY INVESTMENT COMPANY

and:

DISCRETIONARY TRUST.

You can potentially combine them.

For example:

David and Emma

hold:

A CONTROL SHARES

in Taylor Family Investments Ltd.

Alex and Sophie

hold:

B GROWTH SHARES.

And:

TAYLOR FAMILY DISCRETIONARY TRUST

holds:

C GROWTH SHARES

for the potential benefit of:

children;
grandchildren;
future grandchildren;
and other permitted family beneficiaries.

The:

FIC

acts as the:

INVESTMENT VEHICLE.

The:

TRUST

provides:

FLEXIBILITY OVER FUTURE BENEFICIARIES.

This can be a very powerful combination.

Why Put Growth Shares Into the Trust?

Suppose the company initially has a relatively low value because it is largely funded by a shareholder loan.

A trust might acquire an appropriately structured class of growth shares while their value is low.

If the company then grows substantially over the next 20 years, some of that future growth may accrue to the trust-owned shares.

That can potentially allow future value to be held for a much wider family group.

But:

VALUATION IS CRITICAL.

The trust acquiring shares with genuine existing value for less than market value can create tax consequences.

The structure should therefore be designed before substantial value has accumulated rather than attempting to move valuable shares later.

FIC + Trust Does Mean More Administration

Combining the two structures means complying with:

TWO SETS OF RULES.

The company may require:

bookkeeping;
annual accounts;
Corporation Tax returns;
confirmation statements;
shareholder records;
board minutes;
dividend documentation.

The trust may require:

Trust Registration Service registration;
trustee records;
Trust and Estate Tax Returns;
tax-pool records;
IHT calculations;
ten-year anniversary reviews;
exit-charge calculations.

So:

DON’T ADD A TRUST JUST BECAUSE IT SOUNDS SOPHISTICATED.

There should be a clear reason for it.

Which Is Better for Property Investment?

For building a substantial long-term property portfolio, a FIC can have significant practical advantages.

A company can:

own multiple properties;
borrow;
reinvest profits;
deduct qualifying finance costs under the corporate rules;
and retain profits for future purchases.

An individual residential landlord is subject to the Section 24 finance-cost restriction.

A company is not subject to Section 24 in the same way.

There is also an important Corporation Tax point.

A close company can fall outside close investment-holding company status where it exists wholly or mainly for commercial investment in land that is let, or intended to be let, to unconnected persons.

But connected lettings can prevent that exception applying.

So:

PROPERTY FICs CAN HAVE A DIFFERENT CORPORATION TAX POSITION FROM SECURITIES-BASED FICs.

What About Existing Property?

This needs particular care.

Suppose David already personally owns a rental property worth:

£750,000.

Transferring that property into a FIC can potentially trigger:

CAPITAL GAINS TAX

and:

STAMP DUTY LAND TAX.

Putting the property into a discretionary trust can raise:

CGT

IHT

and potentially:

SDLT

depending on the facts, including any debt.

So the decision:

“FIC or trust?”

shouldn’t be made before calculating:

THE COST OF GETTING THE ASSET INTO THE STRUCTURE.

Sometimes the tax cost of transferring existing assets outweighs the future benefits.

Which Is Better for Shares and Investment Portfolios?

Where a substantial portfolio is intended to generate income that will be:

RETAINED AND REINVESTED,

a FIC can be attractive.

A securities-based FIC may pay Corporation Tax at the main rate where it is a close investment-holding company.

A discretionary trust can pay 45% on most income and 39.35% on dividend-type income.

Many dividends received by companies can also fall within the corporate dividend exemption regime, subject to the detailed rules.

This can make the corporate structure particularly useful for:

LONG-TERM COMPOUNDING.

But if the shareholders need all the profits personally every year, the eventual extraction tax must also be included.

Which Is Better for Inheritance Tax?

Neither answer is universally better.

They achieve different things.

Family Investment Company

A FIC can be particularly effective at:

REDIRECTING FUTURE GROWTH.

For example, the parent might retain a £1 million loan while future growth accrues to children’s or trust-owned growth shares.

But the £1 million loan remains within the parent’s estate unless something else is done with it.

Discretionary Trust

A discretionary trust can transfer ownership of assets away from the settlor and provide substantial flexibility over future beneficiaries.

But transfers into a relevant-property trust can be immediately chargeable and the trust can then face:

10-year charges;
exit charges;
and high Income Tax rates.

So:

A TRUST IS NOT SIMPLY A WAY OF AVOIDING 40% INHERITANCE TAX.

Can the Founder Continue to Benefit?

This needs careful thought in either structure.

FIC

If the founder has lent £1 million to the company, the company can potentially repay that loan.

The founder may also retain genuine rights attached to their own shares.

But value genuinely transferred to other shareholders cannot simply be treated as though it still belongs entirely to the founder.

Trust

If someone gives assets away but continues to benefit from them, the:

GIFT WITH RESERVATION OF BENEFIT

rules may become relevant.

There are also separate Income Tax rules for settlor-interested trusts.

So if the objective is to move assets outside an estate:

THE DONOR CANNOT SIMPLY GIVE THEM AWAY ON PAPER AND CONTINUE USING THEM AS BEFORE.

Advantages of a Family Investment Company

A FIC can potentially offer:

1. Lower tax on retained investment profits

Particularly compared with discretionary trust Income Tax rates.

2. Long-term compounding

Profits can remain within the corporate structure.

3. Loan-account flexibility

The original funder may retain access to loan repayments.

4. Control

Voting shares and directorships can allow the older generation to retain substantial control.

Future value can potentially accrue to younger generations.

6. Property investment

Companies can be particularly useful for leveraged property portfolios.

7. No company-level 10-year IHT charge

Unlike the relevant-property trust regime.

8. Direct adult family ownership

Adult children can hold genuine shares and receive dividends directly.

Disadvantages of a Family Investment Company

Potential disadvantages include:

1. Double taxation on extraction

Corporation Tax can be followed by dividend tax.

2. Shareholders genuinely own their shares

That can have consequences on divorce, bankruptcy and death.

3. Less beneficiary flexibility

It is harder to provide for unknown future beneficiaries than with a discretionary trust.

4. Valuation

Growth shares and freezer shares can require specialist valuation.

5. Legal drafting

Different share rights require carefully drafted Articles of Association and shareholder arrangements.

6. Annual company compliance

Accounts, Corporation Tax and Companies House filings are required.

7. Existing asset transfers

CGT and SDLT can make moving an established property portfolio expensive.

Advantages of a Discretionary Trust

A discretionary trust can potentially provide:

1. Maximum beneficiary flexibility

Trustees can choose between members of a broad beneficiary class.

2. Future generations

The class can potentially include grandchildren who have not yet been born.

3. Control over distributions

Beneficiaries don’t automatically receive assets simply because they reach 18.

4. Asset protection

Beneficiaries generally do not own specific trust assets outright.

5. Succession

The structure can continue for future generations subject to the trust terms and legal rules.

6. Protection for younger or vulnerable beneficiaries

Trustees can decide when distributions are appropriate.

Disadvantages of a Discretionary Trust

The principal disadvantages include:

1. High Income Tax rates

For 2026/27, 45% on most discretionary trust income and 39.35% on dividend-type income.

2. IHT on entry

Transfers into relevant-property trusts are generally immediately chargeable transfers.

3. Ten-year charges

The rate can be up to 6%.

4. Exit charges

IHT can potentially arise when relevant property leaves the trust.

5. Tax-pool administration

Income distributions can require additional trust tax calculations.

6. Specialist administration

Trustees need to comply with trust, tax and reporting requirements.

FIC vs Discretionary Trust – Which Is Better?

A Family Investment Company may be particularly suitable where:

substantial capital needs investing;
investment income will largely be reinvested;
the founders want access to the original capital;
adult children can own shares;
property investment is important;
retaining corporate control matters;
and the principal IHT objective is moving future growth.

A discretionary trust may be particularly suitable where:

flexibility over beneficiaries is crucial;
children or grandchildren are young;
future grandchildren need to be included;
asset protection is important;
the family doesn’t want beneficiaries owning assets outright;
and the proposed transfer fits within the family’s wider IHT strategy.

A FIC + discretionary trust may be particularly suitable where:

a FIC is wanted as the investment vehicle;
parents want to retain voting control;
adult children will own some growth directly;
but part of the future growth should be held flexibly for grandchildren and later generations.

10 Questions Before Choosing a FIC or Trust

1. How much wealth is involved?

A £100,000 decision can be very different from a £5 million decision.

2. Does the founder need the capital back?

If yes, loan funding into a FIC can be very useful.

3. Will investment income be retained or distributed?

This is critical when comparing Corporation Tax with trust Income Tax.

4. Are the beneficiaries adults or minors?

That can significantly change the appropriate structure.

5. Do we know who should ultimately inherit?

If not, discretionary flexibility can be valuable.

6. Do future grandchildren need to be included?

A trust can accommodate a wider future beneficiary class.

7. Is asset protection important?

Direct share ownership and discretionary beneficiary status are very different.

8. What are we investing in?

Property, securities and cash can produce different tax results.

9. Are we transferring existing assets?

Calculate CGT, SDLT and IHT before making the transfer.

10. Would FIC + trust work better than either structure alone?

Sometimes the best answer is not choosing one.

Frequently Asked Questions

Is a Family Investment Company better than a discretionary trust?

Not automatically. A FIC can be particularly effective for investing substantial sums and compounding future growth, whereas a discretionary trust can offer much greater flexibility over who eventually benefits.

Is a trust better for Inheritance Tax than a FIC?

Not necessarily. Transfers into discretionary relevant-property trusts can be immediately chargeable to IHT and the trust can face 10-year and exit charges. A FIC may instead be designed to move future growth, although assets such as shareholder loans retained by the founder remain within their estate.

Can a FIC avoid the 10-year trust charge?

The company itself is not subject to the discretionary trust 10-year IHT regime. But if a discretionary trust owns shares in the FIC, those shares may form part of the trust’s relevant property.

Can I put more than £325,000 into a discretionary trust?

Yes. £325,000 is not a maximum trust size. The issue is that a lifetime transfer above the available IHT nil-rate band can potentially produce an immediate IHT liability.

What tax does a discretionary trust pay in 2026/27?

Accumulation and discretionary trusts generally pay 45% on most income and 39.35% on dividend-type income.

What is the 10-year trust charge?

Relevant-property trusts can face an IHT charge at each ten-year anniversary. The rate can be up to 6%, although the actual calculation depends on the trust’s circumstances.

Can a discretionary trust own shares in a Family Investment Company?

Yes. This can combine the investment function of a FIC with the beneficiary flexibility of a discretionary trust.

Can parents retain control of a FIC?

Potentially. Voting/control shares can be retained by parents while other share classes participate in future growth.

Is a FIC good for property investment?

It can be. Companies are not subject to the residential Section 24 finance-cost restriction in the same way as individual landlords. Commercial property investment companies letting to unconnected persons can also fall outside the close investment-holding company regime.

Is a FIC good for grandchildren?

Potentially, but where grandchildren are young or not yet born, a discretionary trust owning a class of FIC growth shares can sometimes provide greater flexibility than direct ownership.

The Key Question Isn’t “Which Pays Less Tax?”

A Family Investment Company and a discretionary trust do fundamentally different jobs.

So I wouldn’t start with:

“Which structure has the lowest tax rate?”

Instead, I would start with:

WHO NEEDS CONTROL?

WHO NEEDS THE INCOME?

WHO SHOULD BENEFIT FROM FUTURE GROWTH?

DOES THE FOUNDER NEED THEIR ORIGINAL CAPITAL BACK?

ARE THE BENEFICIARIES ADULTS, CHILDREN OR FUTURE GRANDCHILDREN?

DO WE NEED ASSET PROTECTION?

IS THE FAMILY INVESTING IN PROPERTY, SHARES OR BOTH?

WHAT SHOULD HAPPEN TO THE WEALTH IN 10, 20 OR 30 YEARS?

Once those questions have been answered, the tax comparison becomes much more meaningful.

How Bicknell Business Advisers Can Help

At Bicknell Business Advisers, we can help families compare Family Investment Companies, discretionary trusts and combined structures, including:

FIC feasibility and tax modelling;
FIC vs trust comparisons;
loan versus equity funding;
growth and freezer shares;
property investment structures;
Corporation Tax;
trust taxation;
Inheritance Tax;
CGT;
SDLT;
associated-company implications;
share valuation requirements;
extraction planning;
and coordination with specialist solicitors for trusts, Articles of Association, wills and other legal documentation.

The objective shouldn’t be to create the most complicated structure.

It should be to create a structure that matches:

WHAT THE FAMILY WANTS ITS WEALTH TO DO OVER THE NEXT 10, 20 OR 30 YEARS.

For some families that will be a:

FAMILY INVESTMENT COMPANY.

For others it will be a:

DISCRETIONARY TRUST.

And for some:

FIC + TRUST

may provide the combination of investment, control and succession flexibility they are looking for.

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, landlord tax planning, SDLT, Capital Gains Tax and property company structures throughout the UK.

Landlord Repairs, Improvements or Replacements? What Can You Claim for Tax?

Is property work a repair, improvement or replacement? Learn what landlords can deduct, how RDI works and what changed for holiday lets after April 2025.

Repairs, Capital Improvements, Replacement of Domestic Items and the New Rules for Holiday Lets After April 2025

By Steve Bicknell FCMA, CGMA

You spend £15,000 on a new kitchen in a rental property.

Is it:

an allowable repair that reduces your rental profit now;
a capital improvement that may only become relevant when you sell;
a replacement domestic item;
or a mixture of different things?

What about replacing single-glazed windows with double glazing? A new boiler? Rewiring? New carpets? Replacing a fridge? Refurbishing a property immediately after buying it?

These questions matter because repairs and capital improvements are treated very differently for tax.

And there has been another important change.

FROM APRIL 2025, THE SPECIAL FURNISHED HOLIDAY LETTINGS TAX REGIME ENDED

Former Furnished Holiday Lets (FHLs) are now generally part of the same UK or overseas property business as other residential lettings. The special FHL capital allowance treatment for new expenditure has gone, while Replacement of Domestic Items Relief can now apply to former FHLs. Existing pre-repeal capital allowance pools can continue to receive writing-down allowances.

So whether you own a buy-to-let, HMO or holiday let, understanding the difference between:

REPAIR • IMPROVEMENT • REPLACEMENT • CAPITAL

has become more important than ever.

Quick Answer – Repair, Improvement or Replacement?

Here are some common examples.

Landlord expenditure	Possible tax treatment
Painting and decorating	Repair – normally revenue
Replacing broken roof tiles	Repair – normally revenue
Replacing an old roof with a modern equivalent	Can still be a repair
Replacing single glazing with modern double glazing	Can be a repair – modern equivalent
Refurbishing an old kitchen to a similar modern standard	Can be a repair
Building an extension	Capital improvement
Adding an extra bathroom where none existed	Normally capital improvement
Replacing an old fridge with an equivalent fridge	RDI may apply
Buying the first fridge for a previously unfurnished property	Not RDI – there is nothing being replaced
Replacing old carpets with equivalent carpets	RDI may apply
Replacing a boiler	Usually considered under repair rules rather than RDI
Major structural alteration changing the property	Likely capital
Furniture for a former FHL after April 2025	RDI may apply if it replaces an existing item

These are general examples. The precise facts matter.

The size of the bill alone doesn’t decide the tax treatment.

A £30,000 roof replacement can potentially be a repair, while a much smaller expenditure creating something that did not previously exist could be capital.

HMRC’s guidance confirms that common deductible repairs include decorating, damp and rot treatment, repairing windows and doors, repointing and replacing roof slates, flashing and gutters.

Why Does Repair vs Improvement Matter?

For a property business, a qualifying revenue repair can generally be deducted when calculating taxable rental profits.

For example:

Rental income: £30,000
Allowable repairs: £10,000

Subject to the other expenses and tax rules, that £10,000 can reduce the property’s taxable rental profit.

A capital improvement isn’t deducted from rental income in the same way.

It may instead form part of the property’s capital cost and potentially become relevant when calculating a future Capital Gains Tax liability.

So getting the classification wrong can significantly change when — or even whether — tax relief is available.

What Is a Repair?

HMRC describes a repair as broadly restoring an asset by replacing subsidiary parts of the whole.

For example, replacing storm-damaged roof tiles can be a repair.

By contrast, expenditure that significantly improves an asset beyond its original condition is generally capital.

A useful starting question is therefore:

ARE YOU RESTORING WHAT WAS ALREADY THERE OR CREATING SOMETHING NEW OR BETTER?

But even that isn’t the whole story.

The “Entirety” Test – What Are You Actually Replacing?

One of the most important concepts is the entirety.

HMRC’s basic position is:

repairing a worn or dilapidated asset is normally revenue expenditure;
replacing the asset as a whole is normally capital.

But identifying the asset is crucial.

Consider a roof.

If the roof is regarded as a subsidiary part of the house, replacing a worn-out roof does not necessarily mean you’ve replaced the entire asset.

The asset may be:

THE HOUSE

not:

THE ROOF

HMRC similarly gives an example of a fitted kitchen being stripped out and replaced with an equivalent modern kitchen. The kitchen is treated as part of the house rather than a separate entirety, and on those facts HMRC treats the work as a repair.

Contrast that with demolishing an entire separate garage and building a new one. HMRC’s example treats that as replacing the entirety and therefore capital expenditure.

This principle is reflected in the longstanding case-law concept of repair being the renewal or replacement of subsidiary parts of a larger whole.

Does Replacing Something With a Better Modern Version Make It an Improvement?

Not necessarily.

This is particularly important with older properties.

Suppose you replace:

single-glazed windows

with:

modern double-glazed windows.

The new windows are clearly technically superior.

But double glazing is now a normal modern replacement.

HMRC accepts that using modern materials does not automatically turn a repair into an improvement.

The important question is whether, broadly, the asset continues to perform the same function or has been substantially enhanced or changed.

The same principle can apply to replacing:

lead pipes with modern pipework;
outdated electrical equipment;
old heating systems;
obsolete building materials;
or equipment that is no longer legally or practically available.

Your existing repair guidance also highlights modern-equivalent replacements, including replacing single-glazed windows with double glazing and old lead pipes with modern materials.

So:

NEWER DOES NOT AUTOMATICALLY MEAN CAPITAL

HMRC even acknowledges that changing technology can mean a replacement lasts longer or performs more efficiently without necessarily changing a repair into an improvement.

Kitchens – Repair or Improvement?

Kitchen refurbishments are a classic problem.

Suppose a landlord removes:

old kitchen units;
worktops;
sink;
fitted hob;
tiles;
and worn flooring,

and replaces them with modern equivalents of broadly similar quality.

That can potentially be a repair to the property, despite the fact that virtually the entire fitted kitchen has been replaced.

HMRC has an example where the fitted kitchen is completely renewed with equivalent-quality units in a different layout. HMRC treats the house as the entirety and the kitchen refurbishment as a repair.

But now suppose the landlord:

substantially enlarges the kitchen;
knocks down walls;
creates a large kitchen/diner;
adds an island and facilities that did not previously exist;
installs materially superior fittings as part of a major upgrade.

Now there may be a significant capital improvement element.

The facts matter.

One Refurbishment Can Contain Both Repairs and Improvements

This is particularly important.

Imagine a landlord spends £60,000 refurbishing a rental property.

The project includes:

Work	Possible treatment
Redecoration	Revenue repair
Roof repairs	Revenue repair
Equivalent replacement kitchen	Potentially revenue repair
Repairing existing wiring	Potentially revenue
New extension	Capital
Creating second bathroom	Capital
New fridge replacing old fridge	Potential RDI
First dishwasher where none existed	Not RDI; consider capital treatment

It would be wrong simply to say:

“The refurbishment cost £60,000, therefore it must all be capital.”

Equally, it would be wrong to assume that because builders describe everything as “refurbishment”, the whole £60,000 is deductible.

HMRC acknowledges that a programme of works can contain some repairs and some alterations or improvements.

That makes detailed invoices and cost breakdowns extremely important.

Ask your builder to itemise the work rather than issuing an invoice simply saying:

“Property refurbishment – £60,000.”

That description isn’t very helpful when somebody has to determine the tax treatment two years later.

Beware: Repairs Can Sometimes Become Part of a Capital Project

There is an important qualification.

If apparently repair-type expenditure is incidental to a wider capital renovation or conversion, its treatment may be affected.

HMRC notes that certain repair expenditure incidental to the renovation or conversion of part of a building can be treated as part of the capital cost of that project.

So you cannot necessarily split a fundamental capital transformation into artificial pieces and claim the decorating, plastering and similar consequential work as standalone repairs.

Again, the purpose and character of the overall work matter.

Bought a Run-Down Property? Repairs Aren’t Automatically Capital

This is another area where landlords frequently get confused.

Suppose you buy a property and immediately spend £40,000 repairing it.

Is the £40,000 automatically capital because the work happened immediately after acquisition?

NO – NOT AUTOMATICALLY

Timing alone does not decide the issue.

However, HMRC will consider the condition of the property when acquired.

If you buy a derelict or seriously run-down property that cannot sensibly be used or let without major works, expenditure putting it into usable condition may be capital. HMRC specifically lists refurbishment or repair of a property bought in a derelict or run-down state among circumstances that can represent capital expenditure.

But the position can be different where:

the property was already capable of being let;
you paid a normal market price;
defects subsequently became apparent;
and the work restores rather than fundamentally improves the property.

The source material similarly identifies whether the property was lettable when purchased, whether the purchase price reflected the defects, and whether the works formed part of an improvement project as relevant factors.

Worked Example – £50,000 Refurbishment After Purchase

Consider an illustrative example based on the type of case we see in practice.

A landlord purchases a residential investment property.

It is not bought at a substantial discount because of serious disrepair and is capable of being occupied.

After purchase, problems emerge and approximately £50,000 is spent on:

electrical repairs;
damp treatment;
flooring;
structural repairs;
decorating;
and replacing worn components.

The important questions aren’t simply:

“Was the work expensive?”

or:

“Was it done shortly after purchase?”

Instead we need to ask:

Was the property capable of use when acquired?
Did the purchase price reflect serious defects?
Was the expenditure restoring what already existed?
Was an entire separate asset replaced?
Was the character of the property changed?
Was this actually a scheme to substantially improve or transform the property?

Depending on the answers, substantial expenditure shortly after acquisition can still contain deductible repairs.

Replacement of Domestic Items Relief – RDI

Repairs are only part of the story.

Residential landlords can also have Replacement of Domestic Items Relief.

This is particularly important for furnished and partly furnished properties.

RDI can apply to the replacement of domestic items such as:

beds;
sofas;
tables and chairs;
carpets;
curtains;
crockery and cutlery;
televisions;
fridges;
freezers;
washing machines;
and similar household items.

The key word is:

REPLACEMENT

First Purchase vs Replacement

Suppose you start letting an unfurnished property and buy a sofa for £1,000.

There was no previous sofa.

That isn’t a replacement, so RDI doesn’t apply merely because the sofa is used by the tenant.

Now suppose several years later that sofa is worn out and replaced.

That is potentially within RDI.

The underlying material makes exactly this distinction: the relief is concerned with replacing an existing domestic item rather than purchasing something for the first time.

What If the New Item Is Better Than the Old One?

This needs careful consideration.

Suppose the tenant’s old fridge needs replacing.

An equivalent modern replacement costs:

£600

Instead, the landlord buys a premium American-style fridge-freezer costing:

£1,800

RDI does not necessarily give relief for the entire £1,800.

Broadly, where the new item represents an improvement beyond a reasonable modern equivalent, the additional improvement cost can be excluded from the relief.

The key distinction is again between:

modern equivalent

and:

genuine upgrade.

So replacing an old basic appliance with today’s ordinary equivalent is different from deliberately moving into a substantially higher specification.

Fixtures Aren’t Necessarily Replacement Domestic Items

It is also important to distinguish movable domestic items from parts of the building.

A freestanding fridge, for example, can be an asset in its own right. HMRC contrasts this with fixtures forming part of the building.

Items such as:

boilers;
fitted sanitary ware;
radiators;
plumbing systems;
and other fixtures

will generally need to be considered under the repairs versus capital rules rather than simply being put through RDI.

This distinction is also made in the source material between movable domestic items and fixtures forming part of the dwelling.

Holiday Lets – The Rules Changed From April 2025

This is a major change for holiday-let owners.

Before abolition, qualifying Furnished Holiday Lettings benefited from special tax treatment.

For capital allowances, qualifying FHL businesses could claim allowances on plant and machinery such as:

furniture;
white goods;
and other qualifying equipment within the property.

Ordinary residential property businesses generally could not claim capital allowances on those dwelling-house items.

That changed when the FHL regime was abolished.

The special rules ceased from:

6 April 2025 for Income Tax, and
1 April 2025 for Corporation Tax accounting periods, subject to the detailed commencement provisions.

What Does That Mean for a Holiday Let in 2026?

A former FHL is now generally brought into the same UK or overseas property business rules as other property lettings.

For new expenditure, the old FHL capital allowance advantage no longer applies.

Instead, former FHL businesses can potentially use:

REPLACEMENT OF DOMESTIC ITEMS RELIEF

in line with other property businesses.

This is a major practical change.

For example, before abolition a qualifying FHL might have claimed capital allowances on qualifying furniture and white goods.

After abolition, a replacement sofa or fridge in a former FHL needs to be considered under the ordinary property rules, including RDI where its conditions are met.

What Happens to Old FHL Capital Allowance Pools?

They don’t simply disappear.

HMRC confirms that where an existing FHL business had an ongoing capital allowance pool before abolition, the business can continue to claim writing-down allowances on that historic pool.

But new expenditure incurred after the relevant abolition date must be considered under the ordinary property-business rules.

So there are effectively two questions:

OLD EXPENDITURE

Was it already in a qualifying pre-abolition FHL capital allowance pool?

NEW EXPENDITURE

What relief, if any, is available under the normal property-business rules?

This distinction is particularly important for established holiday-let businesses with historic capital allowance claims.

What About Capital Allowances on Dwellings?

The abolition of FHL treatment means former holiday lets no longer have the special FHL exemption that allowed qualifying plant and machinery allowances on items within the dwelling.

HMRC is explicit that FHLs previously obtained capital allowances on furniture and white goods whereas non-FHL property businesses did not — and still do not — qualify for capital allowances on those items.

Therefore, don’t assume:

“It’s a holiday let, so we can claim capital allowances.”

For new expenditure, that old FHL treatment has gone.

What About HMOs?

HMOs can require particular care.

Simply describing an area as a “communal area” doesn’t necessarily take it outside the dwelling-house capital allowance restrictions.

The precise property layout, nature of occupation and expenditure need to be considered.

So I would be wary of broad claims that furniture or equipment in HMO common areas automatically qualifies for capital allowances.

Repairs and Improvements Can Affect Capital Gains Tax Later

If expenditure is capital rather than revenue, that doesn’t necessarily mean it is lost forever.

Qualifying capital enhancement expenditure may potentially be deductible when calculating the gain on a later disposal of the property, subject to the CGT rules.

That makes good record keeping important.

If you spend £25,000 on a genuine capital improvement in 2026 and sell the property ten years later, you don’t want to discover that the invoices and evidence disappeared nine years ago.

Keep records of:

invoices;
contracts;
planning documents;
photographs before and after;
specifications;
bank payments;
and explanations of the work undertaken.

Don’t Forget VAT – Could a Development Company Help?

There is another tax that can make a huge difference to major property projects:

VAT

Ordinary residential letting is generally an exempt activity for VAT purposes.

That can mean VAT incurred on refurbishment or development costs isn’t recoverable in the way a VAT-registered taxable business might expect.

But property development and conversion can have very different VAT consequences.

For example, HMRC’s current construction guidance provides for:

zero-rating of qualifying new dwellings;
5% VAT for certain conversions to a different residential use;
5% VAT for qualifying renovation or alteration of residential premises that have been empty for at least two years;
and potentially zero-rating of the first sale or long lease following certain qualifying non-residential-to-residential conversions.

This is why, in the right circumstances, undertaking a genuine development project through a development company can potentially create VAT advantages.

We have previously looked at this in:

The VAT Advantages of a Development Company

Read our Development Company VAT article

However:

DO NOT INSERT A DEVELOPMENT COMPANY AFTER THE EVENT JUST TO TRY TO RECOVER VAT

The structure, contractual arrangements, ownership, intended onward supply and VAT position need considering before significant expenditure is incurred.

This is an area where planning before the project begins can be considerably more valuable than tax advice after the invoices have already been paid.

10 Common Landlord Mistakes

1. Assuming anything expensive must be capital

The amount spent does not determine the treatment.

2. Assuming anything described as “maintenance” on an invoice is deductible

Tax treatment depends on what was actually done, not the invoice heading.

3. Assuming new materials automatically mean improvement

Modern equivalent replacements can still be repairs.

4. Assuming a new kitchen is always capital

An equivalent fitted-kitchen replacement can potentially be a repair.

5. Assuming work immediately after buying a property is always capital

The property’s condition, price and purpose of the works matter.

6. Claiming RDI on the first furniture bought for a property

There needs to be a replacement.

7. Claiming the full cost of a substantial upgrade under RDI

A genuine improvement element may need restricting.

8. Treating every item in one refurbishment project the same way

A project can contain repairs, capital improvements and RDI items.

9. Continuing to claim FHL capital allowances on new expenditure after abolition

The special FHL treatment ended from April 2025.

10. Thinking about VAT after the development has started

VAT planning can depend on the structure and intended transaction, so it should be considered before contracts and expenditure are committed.

Landlord Repair or Improvement – Decision Table

Question	If YES	If NO
Is the work restoring something already there?	May be a repair	Consider capital
Is the whole separate asset being replaced?	More likely capital	Repair may be possible
Is it merely the nearest modern equivalent?	Can still be repair	Consider improvement
Does the property do something substantially new afterwards?	Likely improvement	Repair more likely
Is a movable domestic item being replaced?	RDI may apply	Consider other rules
Was there an old item to replace?	Continue RDI test	No RDI
Is the replacement substantially better?	Improvement restriction may apply	Full RDI may be possible
Is it a former FHL after April 2025?	Ordinary property rules now generally apply	—
Is there an old FHL capital allowance pool?	WDA may continue	No new FHL pool
Is this a major development/conversion?	Consider VAT before starting	Normal landlord VAT position may apply

Frequently Asked Questions

Is replacing a kitchen tax deductible for a landlord?

Potentially. Replacing an existing fitted kitchen with a modern equivalent can be a repair. HMRC gives an example where an equivalent replacement fitted kitchen is treated as a repair to the house.

Is replacing a roof a repair or improvement?

Replacing or repairing a worn roof can potentially be a revenue repair because the roof is a subsidiary part of the building. Adding another storey or fundamentally changing the building would be capital.

Is double glazing a repair or improvement?

Replacing old windows with the modern equivalent can potentially remain a repair. The fact that modern materials are technically superior does not automatically create a capital improvement.

Can a landlord claim for a new boiler?

Replacing an existing boiler with a modern equivalent can potentially be a repair. The precise circumstances and whether the heating system is being substantially improved should be considered.

Can landlords claim for furniture?

Where an existing domestic item supplied to tenants is replaced, Replacement of Domestic Items Relief may be available subject to its conditions. The initial purchase of an item where there was nothing to replace generally doesn’t qualify for RDI.

Can I claim a new fridge in a holiday let?

Since abolition of the FHL regime, new expenditure no longer gets the former FHL capital allowance treatment. If an existing fridge is being replaced, RDI may potentially apply instead.

Can holiday lets still claim capital allowances?

The special FHL capital allowance treatment for new expenditure has ended. Existing qualifying pre-abolition pools can continue to receive writing-down allowances.

Can refurbishment costs immediately after buying a property be deducted?

Sometimes. Timing alone isn’t decisive. The condition of the property when purchased, whether it was usable, whether the price reflected its defects and the nature and purpose of the works all need consideration.

What happens to capital improvements?

They aren’t normally deducted from rental profits. Qualifying enhancement expenditure may potentially become relevant to the CGT calculation when the property is eventually disposed of.

Can I recover VAT on refurbishment costs?

It depends on the activity and structure. Ordinary residential letting is generally VAT exempt, but new construction, qualifying conversions and certain renovations can have special VAT treatment.

Before Starting a Major Refurbishment – Get the Tax Treatment Right

If you are about to spend £20,000, £50,000 or £100,000 on a property, don’t wait until the year-end accounts are prepared before thinking about tax.

Before starting, consider:

INCOME TAX / CORPORATION TAX

Which costs are repairs and which are capital?

REPLACEMENT OF DOMESTIC ITEMS

Which furniture, appliances and furnishings genuinely replace existing items?

CAPITAL ALLOWANCES

Are there historic pools or qualifying assets outside the normal dwelling restrictions?

CAPITAL GAINS TAX

Which improvement costs should be retained for a future disposal?

VAT

Is this actually a development or conversion where the VAT treatment could be different?

STRUCTURE

Should the development activity be undertaken personally, through the existing property company or potentially through a separate development company?

That last question needs answering before the project begins, not after completion.

How Bicknell Business Advisers Can Help

Property refurbishment frequently involves several different taxes at the same time.

We can help review:

repairs versus capital improvements;
major refurbishment programmes;
Replacement of Domestic Items Relief;
former FHL expenditure after April 2025;
historic FHL capital allowance pools;
property acquisition and pre-letting expenditure;
VAT on developments and conversions;
development-company structures;
and the records required for future Capital Gains Tax calculations.

For larger projects, it is often worth reviewing the proposed works and builders’ estimates before work starts so that the accounting, tax and VAT treatment can be considered while there is still an opportunity to plan.

The Key Question: What Has Actually Changed?

When deciding whether property expenditure is a repair or an improvement, don’t focus only on:

how much it cost

or:

how new it looks.

Instead ask:

WHAT WAS THERE BEFORE?

WHAT WORK WAS ACTUALLY DONE?

WHAT IS THERE AFTERWARDS?

HAS THE PROPERTY OR ASSET SIMPLY BEEN RESTORED — OR HAS IT BEEN FUNDAMENTALLY IMPROVED?

Then separately consider whether any movable domestic items qualify for Replacement of Domestic Items Relief.

And for holiday-let owners, remember the major change:

THE SPECIAL FHL TAX REGIME ENDED IN APRIL 2025

Former FHLs are now generally within the same property-business regime as other residential lettings. New expenditure no longer receives the old FHL capital allowance treatment, although historic qualifying pools can continue, and RDI may now be available.

Getting the answer right can determine whether tax relief is obtained now, later, or not at all.

Forgot to Declare Rental Income? What to Do Before HMRC Contacts You

The VAT advantages of a development company

Is it a Repair, Replacement (RDI) or Improvement?

About the Author

Forgot to Declare Rental Income? What to Do Before HMRC Contacts You

Forgot to Declare Rental Income? HMRC Let Property Campaign 2026

HMRC’s Let Property Campaign Explained – Undeclared Rent, Penalties, Interest and How Far Back HMRC Can Go

By Steve Bicknell FCMA, CGMA

Have you received rental income that you haven’t declared to HMRC?

Perhaps you:

inherited a property and started letting it;
became an accidental landlord;
own a rental property jointly with somebody else;
assumed your letting agent dealt with the tax;
thought there was no profit because the rent only covered the mortgage;
spent substantial amounts repairing or improving the property;
live abroad but rent out a UK property;
or simply didn’t realise the income needed to be reported.

If so, ignoring the problem is unlikely to make it disappear.

HMRC operates the Let Property Campaign, which gives many individual residential landlords an opportunity to disclose previously undeclared rental income and bring their tax affairs up to date. HMRC’s current guidance was updated on 6 April 2026.

And there is an important reason to deal with the problem sooner rather than later:

IT CAN BE BETTER TO APPROACH HMRC BEFORE HMRC APPROACHES YOU

HMRC specifically distinguishes between unprompted and prompted disclosures. A disclosure is unprompted where, at the time it is made, you have no reason to believe HMRC has discovered or is about to discover the failure. Otherwise it is prompted.

Let Property Campaign – Quick Answer

If you have undeclared rental income, don’t simply put several years of old rent on your next Self Assessment return and assume the problem is fixed.

The correct route depends on the circumstances, but for many individual residential landlords the process is broadly:

1. Establish what has not been declared

Identify the property, ownership, rental periods and affected tax years.

2. Notify HMRC

Tell HMRC that you intend to make a disclosure.

3. Receive HMRC’s disclosure reference

HMRC provides a Disclosure Reference Number and payment reference.

4. Calculate what is owed

This can include:

TAX + INTEREST + PENALTIES

5. Submit the disclosure

HMRC currently gives you 90 days from its acknowledgement of the notification to submit the disclosure.

6. Pay HMRC

Payment is normally due by the same deadline. If you cannot pay in full, HMRC says you should discuss the position with it before submitting the disclosure.

What Is HMRC’s Let Property Campaign?

The Let Property Campaign has been operating since 2013.

It is aimed at individual landlords who owe tax from letting residential property, including property in the UK and overseas.

It can potentially cover people who:

rent one residential property;
own several rental properties;
rent a room above the Rent a Room threshold;
have relevant holiday letting income;
live abroad and rent UK residential property;
or have inherited a property and subsequently rented it out.

This means the campaign is not just for professional landlords with large portfolios.

Some of the people most likely to get into difficulty are those who never really regarded themselves as landlords in the first place.

The underlying property-sector material also reflects this: examples include inherited property, joint ownership and landlords who misunderstood the effect of mortgage payments or improvements on taxable profit.

Who Cannot Use the Let Property Campaign?

The campaign is primarily for individual residential landlords.

It is not the disclosure route for:

COMPANIES

or:

TRUSTS

and other disclosure routes may be needed for different types of taxpayer or income.

That does not mean undeclared income can simply be ignored. It means the correct HMRC disclosure mechanism needs to be identified.

Common Ways Landlords End Up With Undeclared Rental Income

Not every case begins with somebody deliberately deciding not to pay tax.

The Accidental Landlord

Sarah moves in with her partner but keeps her previous home and rents it out.

She has always been taxed through PAYE and has never normally completed a Self Assessment return.

Three years later she discovers that the rental income should have been considered for tax.

The Inherited Property

John inherits his mother’s house.

Rather than sell it immediately, he rents it out.

He assumes that because the property was inherited and much of the rent is being spent maintaining it, there is nothing to report.

That assumption may be wrong.

Inherited residential property can still generate taxable rental income.

Joint Owners

Two siblings jointly own a rental property.

The rent goes into one bank account and neither has correctly declared their share.

Each individual’s tax position needs to be considered separately.

“The Mortgage Used All the Rent”

David receives £18,000 a year in rent.

His mortgage payments, repairs and other costs come to almost £18,000.

He concludes:

“I haven’t made any money, so there can’t be any tax.”

Unfortunately:

CASH FLOW AND TAXABLE RENTAL PROFIT ARE NOT THE SAME THING

Can HMRC Find Out That I Own a Rental Property?

You should not assume that because HMRC has not contacted you yet, it does not know about the property.

HMRC can compare information it holds with information from other sources.

The more important point is:

DON’T BASE YOUR DECISION TO DISCLOSE ON WHETHER YOU THINK HMRC WILL FIND OUT

If you know there is undeclared rental income, investigate the position.

Waiting for HMRC to contact you may also affect whether the disclosure is treated as prompted or unprompted.

How Far Back Can HMRC Go for Undeclared Rental Income?

This is one of the first questions landlords usually ask.

And the answer is not simply:

“HMRC can always go back 20 years.”

The period depends heavily on what happened and why the tax was underpaid.

Broadly, different time limits can apply depending on whether the taxpayer took reasonable care, was careless, acted deliberately, or failed to notify HMRC of the tax liability.

The practical message is:

THE REASON FOR THE ERROR MATTERS

not just the number of years the property has been rented.

That is why preparing a clear chronology of what happened is so important.

Reasonable Care, Careless or Deliberate?

You should not simply choose whichever description produces the lowest penalty.

The facts need to support the position.

There can be a significant difference between someone who:

tried to get their affairs right but still made an error;
failed to take reasonable care;
or knew tax was due and deliberately failed to report the income.

Those circumstances can affect:

HOW FAR BACK HMRC CAN GO

and:

THE PENALTY POSITION

The underlying disclosure guidance also distinguishes careless, deliberate and deliberate-and-concealed behaviour, with increasingly serious penalty consequences.

Prompted vs Unprompted Disclosure – Why It Matters

This distinction can be very important.

Unprompted Disclosure

HMRC says a disclosure is unprompted where the taxpayer has no reason to believe HMRC has discovered or is about to discover the failure.

Prompted Disclosure

Otherwise the disclosure is prompted.

HMRC expressly says it wants to encourage taxpayers to come forward voluntarily.

So if you already know there is a problem:

DON’T WAIT FOR THE HMRC LETTER SIMPLY BECAUSE IT HASN’T ARRIVED YET

Does an Unprompted Disclosure Mean No Penalty?

Not necessarily.

But the timing and quality of the disclosure can influence the penalty outcome.

HMRC considers matters including:

TELLING

HELPING

GIVING ACCESS

The source material describes these as providing a full explanation, helping HMRC establish the correct liability and providing access to supporting records.

A carefully prepared disclosure is therefore very different from simply sending HMRC a rough estimate.

Worked Example – Five Years of Undeclared Rental Income

Consider a deliberately simplified example.

A landlord discovers that rental income has not been correctly declared for five years.

After reconstructing the records:

	Illustrative amount
Gross rental income	£38,000
Allowable property expenses	(£12,000)
Taxable rental profits	£26,000
Estimated additional Income Tax	£7,000
Estimated late-payment interest	£1,400
Illustrative penalties	£1,200
Illustrative total payable	£9,600

This is only an illustration.

An actual disclosure should be calculated tax year by tax year, taking account of:

the landlord’s other income;
allowances;
applicable tax rates;
finance-cost rules;
losses;
interest;
behaviour;
and the appropriate penalty rules.

The source working example illustrates the same underlying principle: unpaid tax, penalties and late-payment interest are separate components of the eventual liability.

“But My Mortgage Cost More Than the Rent – Surely There Is No Tax?”

This is a very common misunderstanding.

Imagine:

Rent received: £18,000
Mortgage payments: £14,000
Other costs: £3,000

Cash remaining:

£1,000

That does not automatically mean taxable property profit is £1,000.

Mortgage payments may include:

CAPITAL REPAYMENT

and:

INTEREST

Repaying borrowed capital is not an ordinary deductible property expense.

And for individual residential landlords, qualifying finance costs are subject to specific rules rather than being treated like an ordinary expense deduction. HMRC confirms that the full mortgage payment is not deductible and that residential mortgage interest is subject to the finance-cost restriction rules.

Therefore:

CASH PROFIT ≠ TAXABLE RENTAL PROFIT

“I Spent Thousands Renovating the Property – Can’t I Deduct It?”

Again, it depends on the nature of the expenditure.

There is a major distinction between:

REPAIRS

and:

CAPITAL IMPROVEMENTS

HMRC allows qualifying repairs and maintenance as property-business expenses, but improvements and other capital expenditure are not ordinary deductions against rental income.

So do not simply total every builder’s invoice and deduct it from the rent.

What Expenses Can Potentially Be Claimed?

Depending on the year and the circumstances, qualifying expenses can include items such as:

letting agent fees;
accountants’ fees;
buildings and contents insurance;
repairs and maintenance;
utilities paid by the landlord;
service charges;
ground rent;
cleaning and gardening;
and other direct costs of letting the property.

The source checklist similarly identifies agent statements, repairs, insurance, service charges, mortgage-interest information and replacement domestic items as useful disclosure records.

What If I Don’t Have All the Old Records?

This is extremely common, particularly where the problem goes back many years.

But:

MISSING RECORDS DON’T MEAN YOU SHOULD SIMPLY ACCEPT A GUESS

Historic property accounts can often be reconstructed from:

bank statements;
letting-agent statements;
tenancy agreements;
mortgage statements;
credit-card statements;
insurance records;
invoices;
service-charge statements;
council tax records;
emails;
deposit information;
and other evidence.

The source material specifically anticipates reconstructing missing rental history from estimates, emails and tenancy-deposit information where necessary.

And this can make a very substantial difference.

Real Case Study – HMRC Assessment Reduced by £32,085

In one previous case, HMRC contacted a landlord about undeclared property income going back to 2010/11.

HMRC’s original assessment was:

£54,798

We reconstructed the historic records using:

bank statements;
letting records;
expenses;
credit-card statements;
and other supporting information.

The work became effectively a forensic reconstruction exercise, with information and questions going backwards and forwards with HMRC over many months.

HMRC ultimately issued a revised assessment of:

£22,713

The reduction was:

£32,085

The case demonstrates an important principle:

DON’T ASSUME HMRC’S FIRST FIGURE IS NECESSARILY THE FINAL ANSWER

The objective is not to invent expenses or artificially reduce the liability.

It is to establish the correct position supported by the best available evidence.

Read the full £32,085 Undeclared Property Income case study

Free Download – Let Property Campaign Checklist

We have prepared a practical checklist to help landlords identify the records and information likely to be needed.

It covers:

property ownership;
letting history;
rent received;
allowable expenditure;
mortgage information;
missing records;
other taxable income;
circumstances surrounding the omission;
and the HMRC disclosure process.

Use this CTA button on the blog:

FREE DOWNLOAD

Free Checklist Download

Let Property Campaign – Landlord Disclosure Checklist

Download the Let Property Campaign Landlord Disclosure Checklist

What Information Should You Gather?

Before calculating a disclosure, I would normally want to establish:

Property

full address;
date acquired;
ownership percentages;
changes in ownership;
whether the property has now been sold.

Letting History

date letting commenced;
tenancy periods;
void periods;
gross rents for each tax year;
letting-agent statements.

Expenses

repairs;
insurance;
agent fees;
service charges;
professional fees;
replacement items;
mortgage interest/finance costs;
other property expenditure.

Wider Tax Position

employment income;
self-employment income;
pensions;
other property income;
previous Self Assessment returns;
losses brought forward.

Explanation

Prepare a chronology explaining:

when the property was first let;
what you understood the tax position to be;
whether advice was obtained;
why the rent was not declared;
when the issue was discovered;
and what happened afterwards.

What If the Property Is Jointly Owned?

Do not automatically report all the rental income on one person’s disclosure.

The ownership and tax treatment need to be established.

This is particularly important for:

spouses and civil partners;
siblings;
unmarried couples;
unequal ownership;
and situations where all rent happened to be paid into one person’s bank account.

What If the Property Has Already Been Sold?

Selling the property does not make historic rental income disappear.

There may also be a separate:

CAPITAL GAINS TAX

position to review.

The disposal and the historic rental income should therefore both be considered.

What About Overseas Rental Property?

The Let Property Campaign can potentially cover undisclosed residential rental income from overseas property as well as UK property.

Offshore cases can be more complex because of:

residence;
foreign tax;
double-taxation relief;
and potentially different penalty rules.

Professional advice is especially sensible where overseas property is involved.

How Is Interest Calculated?

Interest is separate from the penalty.

HMRC charges late-payment interest because the tax was paid later than it should have been.

A multi-year disclosure therefore often requires a separate interest calculation for each affected tax year.

The source working illustrates just how much the interest can build across several historic years.

The 90-Day Let Property Campaign Process

STEP 1 – NOTIFY HMRC

Tell HMRC that you intend to disclose.

↓

STEP 2 – RECEIVE THE DISCLOSURE REFERENCE

HMRC provides the relevant reference numbers.

↓

STEP 3 – RECONSTRUCT THE PROPERTY ACCOUNTS

Calculate the correct result for every relevant year.

↓

STEP 4 – CALCULATE TAX

Take account of other income, allowances, losses and year-specific tax rules.

↓

STEP 5 – CALCULATE INTEREST

Calculate late-payment interest.

↓

STEP 6 – CALCULATE PENALTIES

Consider:

behaviour

prompted vs unprompted

quality of disclosure

↓

STEP 7 – SUBMIT THE DISCLOSURE

Normally within:

90 DAYS

↓

STEP 8 – PAY HMRC

or agree an appropriate payment arrangement.

The source material sets out the same broad sequence: notification, calculation and submission within the 90-day window, followed by payment.

What If I Can’t Afford to Pay HMRC?

Do not let inability to pay immediately stop you from addressing the tax problem.

HMRC has a dedicated Let Property Campaign contact route and advises taxpayers who need help with the campaign to contact it.

The sensible approach is to establish the correct liability and discuss affordability rather than ignoring the disclosure altogether.

Will HMRC Automatically Accept My Disclosure?

No.

HMRC can review the disclosure and request further information.

That is another reason why accurate calculations and supporting evidence matter.

A properly prepared disclosure should be capable of explaining:

how the figures were calculated;
what assumptions were made;
why the omission occurred;
and what records support the position.

Should I Just Wait and See Whether HMRC Contacts Me?

In my view:

NO

If you have identified undeclared rental income, investigate it now.

Waiting can:

increase interest;
leave you dealing with the problem on HMRC’s timetable;
and potentially turn an unprompted disclosure into a prompted one.

HMRC’s own guidance says it wants to encourage unprompted disclosures.

Let Property Campaign – Decision Tree

Have you received rental income?

→ The Let Property Campaign probably is not relevant.

YES

↓

Was all taxable rental income correctly reported?

YES

→ A historic disclosure may not be needed.

NO / NOT SURE

↓

Has HMRC already contacted you about the rent or property?

INVESTIGATE AN UNPROMPTED DISCLOSURE NOW

YES

TAKE ADVICE BEFORE RESPONDING

↓

Establish:

YEARS + RENT + EXPENSES + FINANCE COSTS + OTHER INCOME

↓

Calculate:

TAX + INTEREST + PENALTIES

↓

Submit the appropriate disclosure and make sure current reporting is brought fully up to date.

Frequently Asked Questions

I forgot to declare rental income. What should I do?

Establish the tax years and amounts involved and consider whether HMRC’s Let Property Campaign is the correct disclosure route.

Can HMRC go back 20 years?

Potentially, depending on the circumstances. The reason for the underpayment and whether you failed to notify HMRC are important.

What if the rent only covered my mortgage?

That does not necessarily mean there is no taxable profit. The full mortgage payment is not an allowable rental expense.

What if I spent thousands renovating the property?

Repairs may potentially be deductible. Improvements and other capital expenditure generally are not ordinary deductions against rental income.

What if I have no records?

Historic accounts can often be reconstructed using bank statements, letting-agent statements, mortgage records and other available evidence.

What if HMRC’s estimate looks too high?

Check it carefully. Our previous property case resulted in a £54,798 HMRC assessment being reduced to £22,713 after the historic records were reconstructed.

Can my accountant make the disclosure?

Yes, an agent can assist with the disclosure process.

Can a limited company use the Let Property Campaign?

The campaign is aimed at individual landlords; other disclosure routes are used for companies.

What if HMRC has already written to me?

Do not ignore the letter. The prompted/unprompted position and the correct response need to be considered carefully.

How long do I get to complete the disclosure?

HMRC currently gives 90 days from acknowledgement of notification.

How Bicknell Business Advisers Can Help

A Let Property Campaign disclosure involves much more than adding up rent received.

We can help:

1. Establish the history

Identify the properties, ownership, letting dates and years affected.

2. Reconstruct the rental accounts

Using bank statements, letting records, mortgage statements, credit cards and other available evidence.

3. Identify allowable expenses

Including repairs versus improvements and the correct treatment of finance costs.

4. Calculate each tax year

Taking account of other income, allowances, tax rates and losses.

5. Calculate interest and penalties

Including consideration of behaviour and whether the disclosure is prompted or unprompted.

6. Prepare the explanation

Set out what happened and why.

7. Deal with HMRC

Assist with notification, submission and queries.

8. Get the current position right

Make sure ongoing rental income is correctly reported going forward.

Don’t Wait for HMRC to Find the Problem

Discovering that several years of rental income have not been declared can be worrying.

But the sensible response is to establish:

WHAT SHOULD HAVE BEEN DECLARED

then:

HOW MANY YEARS NEED CORRECTING

then:

WHAT TAX, INTEREST AND PENALTIES ARE ACTUALLY DUE

And as our £32,085 case study demonstrates, properly reconstructing the records can make a very significant difference.

The objective is not to produce the lowest possible figure.

It is to produce the:

CORRECT, EVIDENCED FIGURE

and make a complete disclosure.

If you have undeclared rental income, inherited a property that has been let, received an HMRC letter or are simply unsure whether historic rental income was correctly reported, Bicknell Business Advisers can review the position and help you decide the appropriate next step.

Useful Blogs

Making Tax Digital for Income Tax – Understanding Quarterly Updates

How Landlords Can Legally Reduce Tax by Changing the Split of Rental Income

ATED Revaluation 2027 – Could Your Property Company Be Caught by the £500,000 Tax Trap?

Landlords Face Higher Tax Rates from April 2027 – How Much More Will You Pay?

About the Author

Should Your Limited Company Pay You Rent for a Home Office?

Tax, VAT, Planning, Capital Allowances and FRS 102 Explained

By Steve Bicknell FCMA, CGMA

If you run your limited company from home, you may already know about the familiar:

£6 per week / £312 per year

Homeworking reimbursement.

It is simple, potentially tax-free and involves very little administration.

But what if your company makes much greater use of your home?

Could you charge your company a commercial rent for using part of the property as an office?

Potentially, yes.

And the opportunity can go considerably further than simply replacing £312 with a larger payment.

Your company might also:

buy computers and office equipment;
claim capital allowances;
recover VAT where appropriate; and
obtain Corporation Tax relief on qualifying expenditure.

But creating a more formal home-office arrangement also introduces other questions:

Is the rent taxable personally?
What household costs can you claim?
Could it affect Private Residence Relief when you sell your home?
Does your mortgage lender need to agree?
Could business rates apply?
Do you need planning permission?
Would a Certificate of Lawfulness be useful?
What about insurance?
And, under the revised FRS 102 rules, does the home-office agreement need to appear on your company’s balance sheet as a lease?

That last point is particularly interesting because relatively few discussions of directors charging their companies home-office rent consider the new FRS 102 lease accounting rules.

The right question therefore isn’t simply:

“How much rent can I get out of my company?”

It is:

“What is the most tax-efficient and commercially sensible way for my company to use my home?”

Home Office Rent – Quick Answer

Yes. A director can potentially charge their limited company commercial rent for genuine business use of part of their home.

The company may obtain a Corporation Tax deduction.

The director normally reports the rent as property income and deducts allowable expenses when calculating the taxable profit.

But the arrangement can also affect:

VAT + CAPITAL ALLOWANCES + CGT + PLANNING + BUSINESS RATES + FRS 102

So it needs to be considered as a complete arrangement rather than simply another method of extracting cash.

£312 or Home-Office Rent?

Here’s the basic comparison:

	£312 Homeworking Reimbursement	Home-Office Rent
Potential amount	£312 p.a.	Potentially much higher
Tax on director	Potentially tax-free	Taxable property income
Corporation Tax deduction	Yes	Potentially yes
Household costs against rent	N/A	Potentially yes
Rental agreement	No	Advisable
Property income reporting	No	Potentially yes
CGT/PRR considerations	Minimal	Needs consideration
Planning/property issues	Usually limited	Potentially greater
FRS 102 lease issue	No	Potentially yes
Administration	Very low	Higher

For many directors, £312 wins on simplicity.

But where the company genuinely occupies valuable workspace within the home, a commercial rental arrangement may produce a significantly better overall result.

Who Should Consider Charging Their Company Rent?

This is most worth considering where:

you work predominantly from home;
your company genuinely uses a dedicated room or substantial workspace;
meaningful household costs relate to that use;
business equipment or records are stored there;
the company buys substantial office equipment; or
£312 bears little relationship to the actual commercial value of the facilities being provided.

If you occasionally answer emails from the kitchen table, a formal rental arrangement may be unnecessary.

Option 1 – Keep It Simple: £312 a Year

Where the relevant conditions are satisfied, the company can reimburse qualifying additional homeworking expenses.

HMRC’s guideline rate is:

£6 per week

or:

£26 per month

giving:

£312 per year

For many owner-managed companies this remains attractive:

Company: potential Corporation Tax deduction

Director: potentially £312 tax-free

Administration: minimal

And importantly:

No rent + no property income + no rental agreement

We’ve previously looked at this in:

HMRC Update: New Evidence Rules for £312 Working From Home Allowance

That article has been one of our most popular recent working-from-home tax guides.

But £312 is still only £312.

What if your company genuinely uses substantially more of your home?

Option 2 – Charge Your Company Commercial Rent

Suppose your company regularly uses one room within your house as its office.

You could potentially put an agreement in place allowing the company to use that space and pay you rent.

The rent should reflect:

GENUINE BUSINESS USE + A REASONABLE COMMERCIAL AMOUNT

The basic mechanics become:

YOUR COMPANY

Pays rent

↓

Potential Corporation Tax deduction

YOU

Receive property income

↓

Deduct qualifying expenses

↓

Pay Income Tax on the resulting property profit

This is fundamentally different from the £312 reimbursement.

Worked Example – £312 or £4,800 Rent?

Let’s use our fictional example:

Consultancy 4 Business Ltd

The director works predominantly from home and one room is regularly used for the company’s business.

After considering comparable local office space and the facilities being provided, a reasonable commercial rent is established at:

£400 per month

Annual rent:

£4,800

Suppose allowable household expenditure reasonably attributable to the arrangement amounts to:

£1,800

The personal property-income calculation is:

	Amount
Rent received	£4,800
Allowable expenses	(£1,800)
Property profit	£3,000

Now assume, purely for illustration, that Consultancy 4 Business Ltd obtains Corporation Tax relief at 25%.

Company tax saving:

£4,800 × 25% = £1,200

If the £3,000 property profit is taxed at the new 22% property basic rate from April 2027:

£3,000 × 22% = £660

Simplified tax difference:

£1,200 company tax saving

less

£660 personal tax

£540

before taking account of the wider circumstances.

This is deliberately simplified.

The actual result could be affected by:

the company’s Corporation Tax rate;
your other income;
property tax bands;
mortgage finance costs;
jointly owned property;
allowances;
dividends; and
your wider profit-extraction strategy.

But it demonstrates why this can be worth calculating.

Property Income Tax Changes From April 2027

There is another reason the numbers need modelling carefully.

From 6 April 2027, property income will have separate Income Tax rates of:

22%
42%
47%

in England, Wales and Northern Ireland.

So the relevant comparison isn’t simply:

£312 versus £4,800

It is:

COMPANY TAX SAVING versus PERSONAL PROPERTY TAX

How Much Rent Can You Charge?

Not:

“Whatever amount saves the most tax.”

The rent needs to be commercially supportable.

Relevant factors can include:

size of the workspace;
floor area;
facilities;
storage;
parking;
hours and days of use;
utilities provided;
broadband;
local office rents;
serviced-office alternatives; and
restrictions placed on you as homeowner.

Keep evidence.

That might include:

floor plan + local rental comparables + bills + calculation + written agreement

The target is:

REASONABLE + COMMERCIAL + EVIDENCED

How Do You Determine a Market Rent for a Home Office?

There is no HMRC table telling directors that a bedroom used as an office is worth £200, £300 or £500 per month.

The rent should instead be a reasonable commercial figure based on the space and facilities actually being provided to the company.

A sensible approach is to start by looking at comparable workspace in your area, such as:

small serviced offices;
individual office rooms;
coworking/private-office space;
small commercial units; and
similar workspace advertised locally.

Then adjust for the fact that a room within your home is not necessarily equivalent to a fully serviced commercial office.

Consider factors such as:

floor area;
location;
dedicated storage;
parking;
broadband and utilities;
access arrangements;
days and hours available to the company;
whether clients or staff can attend;
kitchen/toilet facilities; and
whether the room retains genuine domestic use.

For example, suppose comparable local office space costs £500 per month, but your company is only obtaining use of a room within your home, without independent access, reception facilities or exclusive 24-hour occupation.

A reasonable home-office rent might therefore be materially less than £500.

The important thing is to retain evidence showing how you arrived at the figure.

I would keep:

1. Local comparable rents

Screenshots or copies of local office and serviced-office advertisements.

2. Floor-area calculation

For example, the office represents 12% of the usable floor area of the house.

3. Facilities provided

Broadband, heating, electricity, furniture, parking and storage.

4. Restrictions on use

For example, no independent entrance, no client meetings or continuing domestic use.

5. A written calculation

Keep a short note with the rental agreement explaining why the agreed rent is commercially reasonable.

The aim is not to produce a formal RICS valuation for every spare bedroom.

It is to be able to demonstrate that the rent was arrived at commercially rather than simply being chosen to maximise a tax deduction.

Bicknell Business Advisers’ Tip: Review the rent periodically. A figure that was commercially reasonable when an agreement began may not remain appropriate indefinitely.

What Household Costs Can Be Considered?

Depending upon the circumstances, potentially relevant expenditure could include an appropriate share of:

electricity;
heating;
water;
council tax;
insurance;
broadband;
repairs;
cleaning; and
other appropriate household costs.

The method of apportionment needs to be reasonable.

You might consider:

ROOMS × FLOOR AREA × TIME USED

depending upon the circumstances.

Where a room has mixed use, both the business and private use need to be reflected.

Rent-a-Room Relief Doesn’t Normally Solve It

This is a common misconception.

The £7,500 Rent-a-Room Scheme relates to residential accommodation.

It doesn’t simply make business office rent paid by your company tax-free.

So:

“I’ll charge the company £7,500 and claim Rent-a-Room Relief.”

is generally not the answer for home-office accommodation.

Let the Company Equip the Office

This is an important additional opportunity.

Your company might require:

computers;
monitors;
printers;
desks;
chairs;
filing cabinets;
telephone equipment;
networking equipment; and
other business equipment.

Rather than buying everything personally from after-tax income, it may make more sense for the:

COMPANY TO BUY AND OWN THE EQUIPMENT

Capital Allowances on Home-Office Equipment

Qualifying expenditure on plant and machinery can potentially attract capital allowances.

Normal office equipment might include:

Computers

Monitors

Desks

Office chairs

Printers

Networking equipment

Depending upon the circumstances, the Annual Investment Allowance may provide 100% relief for qualifying expenditure.

But distinguish between:

EQUIPPING AN OFFICE

and:

BUILDING AN OFFICE

Buying a £2,000 computer is very different from spending £30,000 constructing a building in your garden.

That’s an important enough subject for a separate article:

Can Your Limited Company Pay for a Garden Office?

We’ll look at the tax, VAT, capital allowance, benefit-in-kind, CGT and planning issues separately.

VAT Can Make Company Purchases More Attractive

Suppose Consultancy 4 Business Ltd is VAT registered.

The company buys:

Item	Net	VAT
Computer	£2,000	£400
Monitors	£1,000	£200
Desk/equipment	£1,500	£300
Total	£4,500	£900

If the purchases relate properly to the company’s taxable business activities and the usual VAT recovery conditions are satisfied:

Potential VAT recovery = £900

There may then also be tax relief through capital allowances on qualifying expenditure.

The cleanest evidence trail is usually:

COMPANY PURCHASE → COMPANY INVOICE → COMPANY ASSET → BUSINESS USE

Where there is significant private use, VAT and benefit-in-kind implications require separate consideration.

Planning – Can You Actually Run the Business From Home?

This is one of the most easily overlooked issues.

Tax relief does not give you planning permission.

A home-office arrangement could make complete sense for:

Corporation Tax;
VAT;
property income; and
accounting

but still create a separate planning issue.

The broad question is:

Does the property remain primarily a home, or has the business activity materially changed its character?

When Could Planning Permission Become Relevant?

There isn’t a simple:

one room = fine

two rooms = planning application

rule.

It depends on the facts and degree of use.

Warning signs can include:

employees attending regularly;
customers visiting;
frequent commercial deliveries;
increased traffic;
parking problems;
signage;
noise;
substantial storage;
alterations;
unusual business hours; or
a significant part of the house ceasing to function domestically.

Compare these examples.

Example 1 – Professional Working From Home

One director.

Computer-based work.

No employees.

No clients visiting.

No signage.

No significant deliveries.

The property remains overwhelmingly a home.

Example 2 – Home Becoming Business Premises

Five employees attend every weekday.

Clients visit throughout the day.

Vans regularly make deliveries.

Several rooms are permanently offices.

There is signage and increased parking.

That is much more likely to require planning consideration.

What If You’re Unsure? Certificate of Lawfulness

Where you believe the proposed home-business use does not require express planning permission, but you want greater certainty, you may be able to apply for a:

Certificate of Lawfulness of Proposed Use or Development

often referred to as a:

Lawful Development Certificate

or:

CLOPUD

This isn’t the same as asking the council for planning permission.

Instead, you are effectively asking:

“Based on the proposed facts, would this use be lawful without a separate planning permission?”

If granted, the certificate can provide useful evidence of the planning position.

What Should the Certificate Application Explain?

A useful application may need to explain matters such as:

which part of the property will be used;
nature of the business;
number of people working there;
working hours;
whether clients visit;
deliveries;
parking;
signage;
noise;
storage;
alterations; and
whether the space remains capable of domestic use.

The important point is that the certificate relates to the facts actually described.

If you obtain confirmation based on:

One director, no staff, no customers

but the business later develops into:

Five employees and regular customer visits

you shouldn’t simply assume the original certificate covers the changed circumstances.

What About Neighbours and Planning Notices?

Lawful Development Certificates are sometimes confused with conventional planning applications.

There isn’t generally the same statutory neighbour-consultation process as for a normal planning application.

However, the planning authority can seek evidence from neighbours or other parties if it considers that information relevant to determining whether the proposed use is lawful.

So the important thing is to provide a clear and accurate description of the proposed activity.

Why Could a Certificate of Lawfulness Be Useful?

It can potentially help later when dealing with:

sale of the house;
purchaser’s solicitor;
mortgage lender;
neighbour complaint;
planning enquiry; or
possible enforcement concerns.

It may therefore be worth considering where the business use is more substantial than simply working occasionally from a spare room, but you believe it remains lawful without express planning permission.

Check Your Mortgage

Don’t forget the lender.

A residential mortgage could contain restrictions concerning:

business use;
commercial occupation;
leases or licences;
subletting;
alterations; or
granting rights over part of the property.

This becomes particularly relevant once you propose signing an agreement granting your company rights over the home.

Tax efficiency doesn’t override your mortgage conditions.

Check Your Insurance Too

Your household insurance may not automatically cover all business use.

Potential issues include:

company-owned computers;
stock;
equipment;
employees;
customers visiting; and
additional liability risks.

Make sure the insurer has enough information to ensure the appropriate cover remains in place.

Could Business Rates Apply?

Potentially.

A normal small home office does not automatically become separately rateable business premises.

But the risk increases where the area is clearly separated and used commercially.

Relevant factors could include:

exclusive business use;
physical alteration;
employees;
customers;
signage; and
separation from the domestic accommodation.

A useful general principle is:

MORE COMMERCIAL OCCUPATION = MORE PROPERTY CONSEQUENCES

Don’t Accidentally Create a CGT Problem

Private Residence Relief normally protects the gain on your main home.

But where part of the property is used exclusively for business, relief can potentially be restricted on that part.

That is why the agreement should reflect reality.

A room used:

Monday-Friday as an office and genuinely as a spare room at other times

may be very different from:

a permanently exclusive company office

The attached material similarly highlights the distinction between mixed use and exclusive business use for Private Residence Relief purposes.

Don’t manufacture artificial personal use.

But equally:

Don’t give the company more exclusive rights than it genuinely needs.

This matters for:

CGT + PLANNING + FRS 102

The New FRS 102 Home-Office Lease Issue

This is where I think the article becomes particularly distinctive.

For accounting periods beginning on or after:

1 JANUARY 2026

FRS 102 Section 20 introduced a substantially revised lessee-accounting model.

Previously, a straightforward operating lease might simply produce:

Profit & Loss Account

Rent expense

Balance Sheet

No corresponding lease asset or lease liability.

Under revised FRS 102, many qualifying leases are brought onto the lessee’s balance sheet.

The company may recognise:

RIGHT-OF-USE ASSET

and:

LEASE LIABILITY

The supporting accounting analysis identifies the same right-of-use model and replacement of straight rental expense with depreciation and interest for most FRS 102 lessee arrangements.

Calling It a Licence Doesn’t Necessarily Stop It Being a Lease

Suppose the document is headed:

Home Office Licence to Occupy

That doesn’t automatically determine the accounting treatment.

FRS 102 looks at the substance of the arrangement.

If your company obtains the right to control use of an identified asset for a period in exchange for consideration, the arrangement could contain a lease.

For example:

“The first-floor study measuring 14 square metres”

is much more clearly an identified asset than a general permission:

“The company may use suitable workspace somewhere within the house as available.”

The underlying analysis similarly notes that identifying and controlling a particular room can cause a home-office arrangement to fall within revised Section 20 even if the document is called a licence.

FRS 102 Worked Example – Consultancy 4 Business Ltd

Let’s use the same company.

Consultancy 4 Business Ltd enters into an arrangement for use of an identified room.

Assume:

Monthly payment

£400

Lease term

3 years

Number of payments

Total contractual payments:

£400 × 36 = £14,400

Now assume, purely for illustration:

Discount rate = 5% per annum

The precise rate would need to be determined under the requirements of FRS 102.

The present value of the payments is approximately:

£13,350

Assuming no material initial direct costs, incentives or prepayments, the opening accounting entry might therefore be approximately:

Debit

Right-of-use asset £13,350

Credit

Lease liability £13,350

Nothing about the monthly £400 cash payment has changed.

But the accounting has.

What Happens in Year One?

Assume the right-of-use asset is depreciated evenly over three years.

Opening ROU asset

£13,350

divided by:

3 years

gives approximate annual depreciation of:

£4,450

The lease liability also attracts interest.

Using our simplified 5% assumptions and monthly payments, first-year interest would be approximately:

£580

So instead of the Profit & Loss Account simply showing:

Rent expense £4,800

it may approximately show:

Year 1 charge	Amount
Depreciation	£4,450
Finance/interest expense	£580
Total approximate P&L charge	£5,030

Meanwhile, cash paid remains:

£4,800

This illustrates the front-loading effect of lease interest.

What Could Consultancy 4 Business Ltd’s Balance Sheet Show?

At commencement:

Right-of-use asset

£13,350

Lease liability

£13,350

After roughly one year:

ROU asset

£13,350

less depreciation £4,450

£8,900

The remaining lease liability might be approximately:

£9,130

depending on the exact amortisation calculation.

The accounts might therefore contain approximately:

Fixed / Non-Current Assets

Right-of-use property asset:

£8,900

Creditors – amounts falling due within one year

Lease liability:

approximately £4,400

Creditors – amounts falling due after more than one year

Lease liability:

approximately £4,700

The precise current/non-current split would come from the full lease amortisation schedule.

Same £400 a Month – Different Accounts

This is perhaps the simplest way of understanding the new rules.

	Old Operating Lease Treatment	Revised FRS 102
Cash rent paid	£4,800	£4,800
Rent expense	£4,800	—
Depreciation	—	~£4,450
Interest	—	~£580
Right-of-use asset	No	Yes
Lease liability	No	Yes
Rent reduces EBITDA	Yes	No

The cash flow hasn’t changed.

But:

THE PROFIT PRESENTATION AND BALANCE SHEET HAVE

Potential impacts can include:

higher reported assets;
higher liabilities;
changed EBITDA;
changed gearing;
increased finance costs; and
potentially altered lender covenant calculations.

For a very small home-office payment these figures may be immaterial.

For a larger director-owned company with a substantial multi-year arrangement, the issue deserves proper consideration.

Could a 12-Month Arrangement Be Simpler?

Potentially.

Revised FRS 102 includes a recognition exemption for qualifying:

SHORT-TERM LEASES

Broadly, where the relevant conditions are met and the exemption is elected, payments can continue to be recognised as expenses rather than creating a right-of-use asset and lease liability.

The supporting material identifies the exemption for qualifying leases with a term of 12 months or less.

But don’t create a fictional:

“12-month agreement renewed automatically forever”

simply to avoid lease accounting.

The actual rights and commercial substance need to support the accounting treatment.

What If the Company Uses FRS 105?

This distinction is very important.

Don’t automatically apply the revised FRS 102 lease model to every small owner-managed company.

Many micro-entities report under:

FRS 105

The accounting treatment can therefore be different.

The first question should always be:

FRS 102 OR FRS 105?

before calculating a right-of-use asset and lease liability.

There is another accounting point.

The director/homeowner and their own company are related parties.

A home-office rental arrangement therefore needs to be considered under the applicable related-party disclosure rules.

For FRS 102 entities, relevant matters can potentially include:

nature of the relationship;
amount paid;
outstanding balances;
lease terms; and
commitments.

The attached analysis identifies home-office rent as a related-party transaction and leases/commitments as potentially relevant disclosure matters.

Putting Everything Together

Consultancy 4 Business Ltd:

uses a room in the director’s home;
pays £400 per month;
is VAT registered;
buys its own office equipment;
and applies FRS 102.

Rent

£4,800 per year

Equipment

Computer/monitors:

£3,000 + £600 VAT

Furniture/equipment:

£1,500 + £300 VAT

Potential considerations include:

COMPANY

Home-office payment:

£4,800

Qualifying equipment expenditure:

£4,500

Potential VAT recovery:

£900

subject to the normal conditions.

DIRECTOR

Rental income:

£4,800

less qualifying expenditure.

CGT

Avoid unnecessary exclusive business rights where genuine domestic use continues.

PLANNING

Check whether the use remains incidental to residential occupation.

Consider a Certificate of Lawfulness where useful.

MORTGAGE

Check lender restrictions.

INSURANCE

Ensure business use and equipment are appropriately covered.

FRS 102

If the agreement constitutes a three-year lease:

approximately:

£13,350 opening ROU asset

and:

£13,350 opening lease liability

rather than simply £400 rent expense every month.

This is why the arrangement should be considered as:

ONE COMPLETE PACKAGE

12 Questions to Ask Before Charging Your Company Home-Office Rent

Does the company genuinely need the workspace?
What is a commercially supportable rent?
Who legally owns the home?
What household expenditure can be allocated?
Will genuine domestic use continue?
Should the company buy the office equipment?
Can capital allowances be claimed?
Can VAT be recovered?
Does planning permission need consideration?
Would a Certificate of Lawfulness provide useful certainty?
Have the mortgage and insurance conditions been checked?
Does revised FRS 102 lease accounting apply?

Frequently Asked Questions

Can my limited company pay me rent for a room in my home?

Potentially yes, where there is genuine business use and the amount is commercially supportable.

Is the rent tax-free?

No. It is generally property income, although qualifying expenses may reduce the taxable profit.

Is the £312 allowance simpler?

Yes. In many cases it is considerably simpler and involves much less administration.

Can my company buy the office computer, furniture and equipment?

Potentially yes. Qualifying expenditure can potentially attract capital allowances and, where appropriate, VAT recovery.

Will I lose Private Residence Relief?

Not necessarily. The particular CGT concern is exclusive business use of part of the home.

Do I need planning permission?

Not necessarily. Incidental homeworking may not amount to a material change of use, but more substantial commercial activity should be checked.

What is a Certificate of Lawfulness?

It can provide formal confirmation from the planning authority that the proposed use or development described in the application would be lawful.

Does a licence count as a lease under FRS 102?

Potentially. The accounting treatment depends upon the substance of the company’s rights rather than simply the title printed on the agreement.

Will the home-office arrangement appear on the balance sheet?

Where FRS 102 applies, the arrangement contains a lease and no recognition exemption is available, potentially yes.

Download Our Example Home Office Licence Agreement

If you’re considering charging your company rent, we’ve prepared an example Word template covering:

the workspace;
permitted company use;
genuine continuing domestic use;
rent;
household outgoings;
company equipment;
planning;
mortgage and insurance;
visitors and employees;
termination;
FRS 102 review; and
a pre-signing checklist.

[Download the Example Home Office Licence Agreement]

The template should be adapted to the circumstances. More substantial property rights or formal commercial occupation may require specific legal advice.

Bicknell Business Advisers’ Home Office Review

Before putting an arrangement in place:

USE → RENT → TAX → EQUIPMENT → VAT → PROPERTY → PLANNING → ACCOUNTING → AGREEMENT

USE

What does the company genuinely need?

RENT

What is the commercial value of the space and facilities?

TAX

What does the company save and what personal tax arises?

EQUIPMENT

What should the company purchase and own?

VAT

What input VAT can properly be recovered?

PROPERTY

Consider CGT, business rates, mortgage and insurance.

PLANNING

Does the use require permission or would a Certificate of Lawfulness provide useful certainty?

ACCOUNTING

FRS 102 or FRS 105?

Does the agreement contain a lease?

Does an exemption apply?

AGREEMENT

Only then document what has actually been agreed.

Bicknell Business Advisers’ Advice

The mistake is focusing only on:

“How much rent can I charge my company?”

A proper home-office review potentially involves:

CORPORATION TAX

↓

PERSONAL TAX

↓

VAT

↓

CAPITAL ALLOWANCES

↓

CGT

↓

PLANNING

↓

MORTGAGE / INSURANCE / BUSINESS RATES

↓

FRS 102

For some directors, the conclusion will be:

JUST CLAIM £312

For others, particularly where their company makes substantial genuine use of their home, a properly structured rental arrangement could be considerably more valuable.

The key is to calculate the whole position before signing the agreement.

How We Can Help

At Bicknell Business Advisers, we can help directors and owner-managed companies assess whether renting part of the home to the company makes financial and commercial sense.

We can assist with:

£312 versus rent calculations;
commercial rent calculations;
household-cost apportionments;
Corporation Tax;
property Income Tax;
VAT;
capital allowances;
CGT and Private Residence Relief;
FRS 102 lease assessment;
right-of-use asset calculations;
lease-liability schedules;
related-party accounting; and
home-office rental documentation.

Where specialist planning or property-law advice is required, those issues can be identified before documents are signed.

About the Author

The Biggest Tax Mistakes Made by New Landlords

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Becoming a landlord can seem like a straightforward way to generate additional income and build long-term wealth. However, many first-time landlords quickly discover that property taxation is far more complex than expected.

HMRC has increased its focus on property income in recent years, and simple mistakes can lead to unnecessary tax bills, penalties, and costly investigations.

Here are some of the most common tax mistakes new landlords make — and how to avoid them.

1. Not Registering for Self Assessment

One of the biggest misconceptions among new landlords is assuming that HMRC will automatically know about their rental income through mortgage companies, letting agents, or the Land Registry.

Unfortunately, that is not how it works.

If you receive rental income from a property, you are generally required to register for Self Assessment and submit annual tax returns. HMRC register-for-self-assessment

When Must You Register?

You normally need to register if:

Your rental income exceeds £1,000 in a tax year
You make taxable profits from property
You already complete tax returns for other reasons

https://www.gov.uk/renting-out-a-property/paying-tax

The Risks of Not Registering

Failing to register can result in:

Late filing penalties
Interest charges
HMRC investigations
Higher penalties for deliberate non-disclosure

HMRC now receives increasing amounts of data from:

Letting agents
Deposit schemes
Airbnb and online rental platforms
Mortgage providers

As a result, undeclared rental income is becoming much easier for HMRC to identify.

Practical Tip

If you have recently started renting out a property and have not yet informed HMRC, it is usually better to make a voluntary disclosure before HMRC contacts you. We have help many new client with voluntary disclosures.

2. Missing Allowable Expenses

Many new landlords end up paying more tax than necessary simply because they fail to claim legitimate expenses.

Rental tax is based on profit, not rental income. That means you should deduct allowable business expenses before calculating your tax liability.

https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

Common Allowable Expenses

Landlords can usually claim:

Letting agent fees
Insurance
Repairs and maintenance
Council tax and utilities (if paid by the landlord)
Accountancy fees
Replacement furniture and appliances
Service charges and ground rent
Advertising costs

Repairs vs Improvements

This is an area that often causes confusion.

Generally:

Repairs are deductible
Improvements are capital expenses and may only reduce Capital Gains Tax when the property is sold

For example:

Replacing a broken boiler with a similar model is normally a repair
Upgrading to a significantly enhanced heating system may be treated as an improvement

Mortgage Interest Restrictions

Many landlords are also caught out by the mortgage interest rules introduced under Section 24.

Individual landlords can no longer deduct mortgage interest in full when calculating profits. Instead, they receive a basic rate tax credit.

This means some landlords pay tax on profits that are much higher than their actual cash surplus.

3. Joint Ownership Issues

Couples often purchase rental properties together, but many fail to consider how ownership structure affects taxation.

By default, HMRC usually assumes rental income for married couples is split 50:50, regardless of actual ownership proportions.

https://www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17

This can create unnecessary tax exposure if:

One spouse is a higher-rate taxpayer
One spouse has unused personal allowances or lower tax rates

The Importance of Beneficial Ownership

In some cases, couples can structure ownership differently to improve tax efficiency.

However, this must be properly documented.

Simply deciding between yourselves how to split the income is not enough.

Where appropriate, couples may need:

A declaration of trust
Form 17 submitted to HMRC
Legal advice regarding ownership arrangements

A Common Mistake

Many landlords assume that because one person “manages the property”, all income can be declared on their tax return.

HMRC looks at legal and beneficial ownership, not who deals with the tenants.

4. Poor Record-Keeping

Good record-keeping is essential for landlords, yet it is one of the most overlooked areas.

https://www.gov.uk/self-assessment-tax-returns/records

Many landlords:

Lose receipts
Mix personal and rental spending
Fail to track mileage or expenses
Cannot evidence repairs carried out years earlier

This becomes a serious issue if HMRC opens an enquiry.

What Records Should Landlords Keep?

You should retain:

Rental statements
Bank records
Invoices and receipts
Mortgage interest certificates
Tenancy agreements
Mileage logs
Purchase and legal documents

Records should generally be kept for at least:

5 years after the 31 January filing deadline

Digital Record Keeping

With Making Tax Digital expected to expand further in future years, digital record-keeping will become increasingly important.

https://www.gov.uk/guidance/check-if-you-need-to-use-making-tax-digital-for-income-tax

Using:

Cloud accounting software
Separate bank accounts
Digital receipt storage

can save significant time and reduce errors.

Final Thoughts

Property can be a strong long-term investment, but many new landlords underestimate the importance of proper tax planning and compliance.

The most common mistakes — failing to register with HMRC, missing expenses, structuring ownership incorrectly, and poor record-keeping — can all become expensive problems later.

Taking advice early and setting up good systems from the start can help landlords:

Reduce tax liabilities legitimately
Avoid penalties
Improve profitability
Stay compliant with HMRC

If you are a new landlord and want to ensure your property affairs are structured correctly, professional advice can often save far more than it costs.

Book a meeting to discuss how we can help

We also have the following useful resources

Property Fact Sheets | Bicknell Business Advisers

Monthly Property Newsletter | Bicknell Business Advisers

Tax Benefits of Incorporating Your Property Portfolio

Many UK landlords are exploring the idea of holding their buy-to-let properties in a limited company structure. This trend has accelerated in recent years as tax reforms have made traditional personal ownership less profitable for higher-rate taxpayers. By incorporating a property portfolio, investors can potentially reduce their tax bills, take advantage of business tax treatment, and plan more effectively for the future. Below, we outline the key tax advantages of operating through a limited company – from lower tax rates on rental profits to full mortgage interest relief, inheritance tax planning, and deferring personal taxes. We also highlight some important drawbacks (like added costs and Stamp Duty) that need to be weighed in any decision.

Lower Corporation Tax on Rental Profits

One of the main reasons landlords incorporate is to pay Corporation Tax on rental profits instead of Income Tax. Rental income received by an individual is added to their other income and taxed at their marginal income tax rate (which for higher earners is 40% or even 45%). In contrast, profits in a company are subject to Corporation Tax – currently 19% for small profits, up to 25% for larger profits (as of April 2023). Even at the new 25% rate, this can be significantly lower than personal tax rates for many landlords. For example, a higher-rate taxpayer with £20,000 of annual rental profit would face around £8,000 of Income Tax, whereas a company paying the small profits rate might owe just ~£3,800 in Corporation Tax – leaving much more after-tax profit to reinvest. Put simply, paying 19–25% Corporation Tax instead of 40–45% Income Tax can dramatically lessen a landlord’s tax bill. This is especially beneficial if you’re already in a high tax bracket or if the rental profits push you into one.

It’s important to note that the tax advantage exists at the company level. If you want to draw the profits out for personal use, you’ll then pay personal tax (for example, dividend tax) on those withdrawals. We’ll discuss this more under “retained profits,” but the key idea is that keeping profits inside the company is taxed more lightly up front than taking them personally. In summary, operating via a company converts rental income into corporate profits, taxable at generally lower rates than personal income – a fundamental tax saving for many property investors.

Full Mortgage Interest Deductibility

Another major driver for incorporation is the mortgage interest relief treatment. In recent years, individual landlords have lost the ability to fully deduct mortgage interest from their rental income. Under Section 24 rules (phased in from 2017), individual buy-to-let owners can only claim a basic-rate tax credit (20%) on their finance interest, rather than deducting it as an expense. This means higher-rate taxpayers effectively pay tax on part of their mortgage interest, significantly increasing their tax bills on geared properties. For example, an individual landlord paying £10,000 in mortgage interest annually only gets a £2,000 tax credit now, even if they are in the 40% tax band (whereas prior to Section 24 they would have deducted the £10k and saved £4,000 in tax). This change has turned many geared portfolios barely profitable or even loss-making on a post-tax basis for higher-rate landlords.

Limited companies are not subject to Section 24. When you hold property in a company, the mortgage interest is treated as a business expense – it can be deducted in full against rental income before calculating taxable profit. The company’s tax bill is thus based on net profit after interest, just like any other business. All the interest costs provide tax relief at the Corporation Tax rate. In practice, this restores the old tax treatment: the full mortgage interest offset can result in substantial tax savings for highly leveraged investors. For instance, if your rental property earns £15,000 in rent and has £10,000 in mortgage interest, an individual higher-rate landlord would still be taxed on the full £15,000 (with only a £2k credit), whereas a company landlord is taxed only on the £5,000 net profit – a far smaller taxable base.

This difference is a key reason 69% of landlords plan to buy new rental properties via limited companies. By using a company, landlords can maintain interest as a deductible expense and avoid the punitive effective tax rates that Section 24 created for personally owned properties. In short, incorporation can preserve interest relief and keep your financing costs fully tax-deductible – critical for those with mortgages on their rentals.

Inheritance Tax Planning via Company Structures

Using a company can also open up inheritance tax (IHT) planning opportunities for landlords who want to pass their property wealth to the next generation. If you own properties personally, it can be complicated and costly (in terms of IHT and Capital Gains Tax) to transfer bits of property to your children or other heirs during your lifetime. However, with a company, you have much more flexibility in transferring ownership gradually by way of shares. You can bring family members in as shareholders or directors, and gift or sell shares in the company over time, rather than having to slice up the property titles themselves. Small transfers of shares can potentially be done within annual gift allowances or via trust planning, helping to reduce the taxable value of your estate bit by bit.

More sophisticated planning is also possible. Many advisers use Family Investment Companies with special share classes (sometimes called “freezer shares”) to control how future growth in the company is allocated between generations. For example, parents can retain a class of shares that hold the current value of the portfolio, and issue a new class of shares to their children that will accrue all future growth in value. This effectively “freezes” the parents’ estate at today’s value for IHT purposes, while any appreciation in the property portfolio from this point forward happens in the children’s shares. As a result, if the properties continue to grow in value, that growth can bypass the parents’ estate (and thus avoid inheritance tax) and belong to the next generation. Crucially, when set up correctly, this does not trigger immediate tax – the new shares have only nominal value initially, so parents aren’t making a taxable transfer of substantial value at the time of structuring.

It should be noted that standard buy-to-let companies are usually considered investment companies for tax purposes, which currently do not qualify for Business Property Relief (BPR) – a relief that can make certain business assets IHT-free after two years. (BPR is generally available for trading businesses, not passive investment portfolios.) However, with careful planning, some landlords restructure activities to become more active property businesses (e.g. development or holiday lets) or use the share structuring techniques mentioned above to mitigate IHT. In any case, holding properties in a company gives greater flexibility to plan for inheritance, allowing strategies like gifting shares, issuing growth shares, or using trusts. This can substantially reduce the inheritance tax eventually due on the portfolio, compared to simply holding properties until death and leaving them in a will with a 40% IHT exposure. Given that property values often far exceed the IHT nil-rate bands, this kind of planning can save heirs a significant tax bill in the long run.

Retaining Profits and Deferring Personal Tax

A less immediate but powerful benefit of a company structure is the ability to retain profits within the company, deferring any personal tax liability. If you own properties personally, any profit (after expenses) is yours – which also means it gets taxed as part of your personal income each year. But within a company, you have a choice: you can pay out profits to yourself (as salary or dividends) or you can simply leave the profits in the company to reinvest or pay down debt. The profits that are retained in the company only suffer Corporation Tax in that year. No further tax is due until you decide to extract the money for personal use. This creates a valuable tax-deferral advantage.

For example, suppose your property company makes £50,000 in profit this year. The company will pay, say, 19% Corporation Tax (if within the small profits limit), leaving about £40,500 after tax. If you don’t need that money personally right away, you can reinvest the £40k into buying another property or improving existing ones. No personal tax is triggered because you haven’t taken a dividend or salary from those profits. In contrast, if you owned the portfolio personally and earned £50,000 net profit, you’d pay income tax on it in the same tax year – possibly £20,000 (40%) if you’re a higher-rate taxpayer – leaving you only £30k to reinvest. Over time, this ability to reinvest a larger portion of your earnings (since only the lower corporate tax is taken out) can accelerate the growth of your portfolio.

Another way to view this is that a company lets you time your personal tax events for when it’s most efficient. You might choose to take dividends in years when your other income is low, or spread dividends over time to stay in lower tax bands. Or you might retain profits until retirement, using them to fund a future income when you stop other work. There is also the possibility of extracting some profit as a modest salary (which can be set to use your personal allowance tax-free) and some as dividends, achieving a tax-efficient mix. The key point is flexibility – a company gives you much more control over when and how you take income, allowing you to defer or minimize personal taxes in a way an individual landlord cannot.

Of course, whenever you do draw the profits out, you’ll pay personal tax at that point (dividend taxes, which are currently 8.5% basic rate, 33.75% upper rate, etc., after a small allowance). This means incorporation isn’t about avoiding personal tax altogether, but about delaying it and potentially reducing it. For many investors, the strategy is to use retained earnings for growth and only take out what they need when they need it – thereby maximising the funds kept in the low-tax company environment. This can be especially useful if your goal is to build a larger portfolio for the long term, or if you already have other income and don’t require the rental profits immediately.

Potential Drawbacks of Incorporating

Incorporating a property portfolio isn’t a one-way ticket to tax savings; it comes with its own costs and complications. It’s crucial to weigh these drawbacks against the benefits discussed above. Here are some key considerations to keep in mind before you rush to set up a property company:

Upfront Transfer Costs (Stamp Duty and CGT): If you are moving existing properties from personal ownership into a new company, it isn’t as simple as “re-registering” them – you typically have to “sell” the properties to your company at market value. This can trigger Stamp Duty Land Tax (SDLT) on the transfer, as well as potential Capital Gains Tax (CGT) on any increase in value of the properties. The company will pay SDLT just like any buyer (including the 5% additional rate), and you, as the seller, could face CGT on the gain (18% or 28% for residential property, depending on your tax band). There are some reliefs available – for instance, Incorporation Relief under certain conditions – but many landlords find that incorporating an existing portfolio can come with a hefty upfront tax bill. It’s essential to calculate these costs to see if the long-term tax savings justify the immediate hit.
Ongoing Compliance and Administration: Running a limited company means more paperwork and expense. You’ll need to file annual accounts and confirmation statements at Companies House, submit Corporation Tax returns to HMRC, keep proper company books, and likely pay an accountant to ensure all this is done correctly. If you pay yourself a salary or take dividends, there are additional reporting requirements (PAYE payroll filings, dividend documentation, etc.). In short, the administrative burden is higher than just declaring rental income on a personal Self-Assessment. These compliance costs will eat into the financial benefits of incorporation. Landlords should factor in accountancy fees and the value of their time. For a single property or small portfolio, the savings may not outweigh these extra costs – incorporation tends to make more sense as the portfolio (and the tax saving) grows larger.
Double Tax when Extracting Profits: As discussed, while profits inside the company are taxed at a lower rate, when you take money out for personal use you’ll face personal tax. Typically this is via dividends (since most buy-to-let company owners don’t put themselves on a large salary). Dividend tax rates are lower than income tax rates, but they still apply. For example, after the first £500 of dividends (2024–25 allowance), a basic-rate taxpayer pays 8.5% and a higher-rate taxpayer 33.75%. This second layer of tax can reduce the overall advantage, especially if you withdraw most of the profits each year. In a scenario where a landlord wants to live off the rental income fully, the combined Corporation Tax + Dividend Tax might not be much better than simply paying Income Tax personally. The benefit is greatest when you reinvest or hold profits in the company. If you need all the cash out, the benefit shrinks (though you could still gain some advantage up to the basic-rate band, etc.). It’s important to plan distributions carefully. In other words, the “tax deferral” only helps if you actually defer taking the income; otherwise, you end up with two layers of tax. (On the plus side, if you plan to eventually sell the company or its properties, having paid down debt with retained profits, you might take profits via a capital route or at a time when tax rates are different. It adds strategic options, but requires foresight.)
Mortgage Availability and Costs: Many landlords don’t realize that getting a mortgage through a company can be a bit more involved. Fewer lenders cater to limited company buy-to-lets (often these are considered Special Purpose Vehicles (SPVs)), and interest rates can be slightly higher to account for perceived additional risk. Lenders will almost always require personal guarantees from the directors/shareholders for small property companies, effectively tying your personal liability to the debt anyway. You might also find arrangement fees higher or loan-to-value ratios slightly lower. This isn’t a tax issue per se, but it does affect the overall profitability of the investment. It’s worth checking with mortgage brokers what rates/terms your company could get versus personal mortgages. With interest rates currently higher than they’ve been in recent years, even a small rate difference can outweigh some tax savings. Always factor in financing costs under a company structure.
Loss of Personal Allowances/Reliefs: Holding property in a company means you personally no longer get certain perks. For instance, individuals each have a Capital Gains Tax annual exemption (£3,000 for 2024–25) that can be used against property sales – companies do not get this; every pound of gain is taxed. Likewise, if you have any personal rental losses carried forward, those can’t be used by the company. A company also doesn’t benefit from your personal tax-free allowance (though you could use that via a salary). These trade-offs are usually minor compared to the big-ticket items above, but they are part of the picture. If you anticipate selling properties, remember a company’s sale profits are taxed at Corporation Tax rates (which could be higher than the 18% basic-rate CGT for individuals, for example).

In summary, incorporation has pros and cons. The tax benefits – lower tax on profits, full interest deductibility, potential IHT advantages, and flexibility of profit withdrawal – need to be balanced against the costs and practicalities – immediate taxes on transferring in, ongoing administrative costs, double taxation on extraction, and financing considerations. For some landlords (especially higher-rate taxpayers with multiple properties they plan to hold long-term), the scales tilt in favor of incorporation. For others (small-scale or basic-rate landlords, or those planning to sell in the short term), staying as an individual may be simpler and more cost-effective.

Conclusion

Choosing whether to hold your property investments through a limited company is a significant decision that should be evaluated case by case. This structured approach can offer substantial tax savings and planning flexibility for the right investor profile – particularly those looking to grow portfolios and pass on wealth efficiently. We’ve seen that lower corporate tax rates, unrestricted mortgage interest relief, and the ability to reinvest profits can make a compelling case for incorporation. Real-world scenarios bear this out: it’s no coincidence that the number of buy-to-let companies has surged fourfold since mortgage interest relief was curtailed for individuals. However, incorporation is not a one-size-fits-all solution. The compliance responsibilities, upfront costs (SDLT/CGT), and the need for careful profit extraction planning mean that professional advice is essential.

Often forming a company for new acquisitions (while leaving existing properties as they are) can be the best option.

Ultimately, operating via a limited company is a powerful tool in the landlord’s tax planning arsenal, but like any tool, it must be used in the right circumstances. By understanding the tax benefits – and the pitfalls – outlined above, property investors can make an informed choice about whether incorporation is the best route for their portfolio. As always, consult us first before making any decisions we can tailor the advice to your specific situation and help navigate the process if you decide to proceed. With the proper planning, incorporating your property business can be a savvy move that pays dividends (quite literally) in the years ahead.

How Section 24 Affects Property Investors – What You Need to Know

Property investment remains one of the UK’s most popular routes to building long-term wealth—but recent tax changes have significantly impacted profitability. One of the most important changes affecting landlords is Section 24 of the Finance (No. 2) Act 2015, commonly referred to as the “mortgage interest relief restriction.”

This restriction now affects Furnished Holiday Lets as well as Buy to Lets and HMO’s.

The changes to Holiday Lets and Serviced Accommodation are covered in this blog.

Holiday Lets – Good news for Capital Allowances – Steve J Bicknell Tel 01202 025252

More details on Section 24 are in this blog

Residential Letting – What is the Finance Cost Allowance and how are Unused Finance Costs used up? – Steve J Bicknell Tel 01202 025252

If you’re a portfolio landlord or considering property investment, understanding Section 24 is essential for financial planning and compliance.

❓ What is Section 24?

Introduced in 2017 and phased in over four years, Section 24 removes the ability for individual landlords to deduct all of their mortgage interest from rental income before calculating their income tax.

Instead of full relief, landlords now receive a basic rate tax credit (20%) on their finance costs.

💡 Why It Matters

If you own property in your personal name, this change can push you into a higher tax bracket—even if your real profits haven’t changed.

Example:

Rental income: £40,000
Mortgage interest: £25,000
Before Section 24: You paid tax on £15,000
Now: You pay tax on the full £40,000, then receive a 20% credit on the £25,000 mortgage interest

This could increase your tax bill substantially, especially for:

Higher rate taxpayers
Portfolio landlords with significant debt
Those receiving child benefit or working tax credits, where higher income triggers a clawback

🏛️ Company Ownership as an Alternative

Many investors are now considering buying property through a limited company, which is not affected by Section 24.

Key benefits:

Mortgage interest remains fully deductible
Corporation tax applies (currently 19–25%)
Potential long-term inheritance tax planning advantages

But it’s not right for everyone—incorporation involves costs, complexity, and potential capital gains tax (CGT) or stamp duty implications.

🔎 What Should You Do?

A professional review is essential. At Bicknell Business Advisers, we help landlords and property investors across the UK understand:

How Section 24 affects your tax position
Whether incorporation is right for you
How to structure your investments tax-efficiently
Planning strategies to reduce your tax exposure

📞 Book a Free Consultation Today

If you’re unsure how Section 24 is impacting you, or want to explore your options, get in touch today.

📞 Call: 01202 025252
🌐 Visit: www.bicknells.net

At Bicknell Business Advisers, we specialise in helping landlords and property businesses navigate complex tax legislation with clarity and confidence.

Factors to Consider When Determining Your Main Residence in the UK

When you own more than one home, deciding which one will be your main residence can have significant tax implications. In the UK, HM Revenue and Customs (HMRC) provides guidelines on how to determine your main residence for capital gains tax (CGT) purposes. In this blog post, we will discuss the factors you should consider and the process of nominating your main residence. Additionally, we’ll explore various scenarios where you might have a second home for work or as a holiday retreat, and provide case studies and examples to illustrate the concepts.

What is a Main Residence Election?
The HMRC’s main residence election allows you to nominate the property you consider your main residence for CGT purposes. It is crucial because it determines which property will be exempt from CGT when you sell it. There is no requirement for it to be the property you spend most time on.
Why Nominate a Main Residence?
Nominating a main residence is particularly beneficial if you own multiple properties. By designating one as your main residence, you can save on potential CGT liabilities when selling the other properties. The Nomination Election once made can be varied CG64510
HMRC CG64545 – Nine Factors to Identify Your Main Residence:
For a nomination to be accepted, HMRC considers several factors, including:

Length of occupation
Where your family resides
Degree of furnishing and personal belongings
Residency status for voting, car registration, etc.
Bills and correspondence addresses
Where your business is located (if applicable)
Schooling and medical registrations
Bank accounts and club memberships
Intention to return to the property

Having a Second Home for Work:
In some cases, you might own a second property near your workplace to avoid daily commuting. It is essential to consider whether this property qualifies as your main residence and how it impacts your taxation.
Having a Second Home as a Holiday Retreat:
If you own a second property primarily for recreational purposes, such as a vacation home, it is crucial to understand the implications of CGT. Determining which property is your main residence becomes vital to minimize potential tax liabilities.
Two-Year Election Deadline:
To nominate a property as your main residence, you must make the election within two years of acquiring a second property. Every time there is a change in combination of available residences in re-starts the clock, this could be triggered by renting out and re-occupying, but seek advice first.
Format for the Election:
While there is no specific format, you should provide sufficient information to convince HMRC that your nominated property should be considered your main residence. It is advisable to keep documentary evidence supporting your claim.

Conclusion:
Determining your main residence when you own multiple properties is a crucial decision that affects your tax liabilities. By considering the factors outlined by HMRC and making a nomination within the designated timeframe, you can minimize your CGT liabilities.

steve@bicknells.net

How does Principle Private Residence Relief Work? (CGT)

As a UK accountant, one of the most common tax reliefs that clients ask about is Principle Private Residence Relief (PPR). This relief can be a significant tax saver for those selling their homes, but it is essential to understand the rules and regulations surrounding it.

What is PPR?

Firstly, PPR allows you to sell your main residence without incurring capital gains tax (CGT). However, if you have let out part of your home, it can affect your entitlement to PPR.

Tax when you sell your home: If you let out your home – GOV.UK (www.gov.uk)

If you rent out your home, then you will not be able to claim PPR for the period it is let. However, relief may still be available for the period you lived in the property and for the final 9 months of ownership.

a house for rent placard — Photo by Ivan Samkov on Pexels.com

How is PPR calculated if you let the property?

To calculate the PPR tax reduction for the let period, you will need to apportion the gain between the period it was your main residence and the period it was rented out. The amount of tax relief will be calculated based on the proportion of time the property was your main residence.

For example, if you lived in the property for five years, and then rented it out for two years, there would be seven years of ownership. The tax relief would apply for five years, but the remaining two years would be subject to CGT with an adjustment for the 9 month period.

How do you calculate the Gain?

Calculating the capital gain can be a complex process and may be affected by several factors such as the purchase and sale price, any home improvements made during ownership, and the length of ownership. It is recommended to seek specialist advice from a tax professional to ensure all factors are considered in the calculation.

person holding orange and white iphone case — Photo by cottonbro studio on Pexels.com

How is the Gain taxed and reported?

The rates of CGT vary depending on the individual’s income tax rate. Currently, basic rate taxpayers will pay CGT at a rate of 18%, and higher rate taxpayers will pay at a rate of 28% on gains above the tax-free allowance of £12,300 (2022/23), £6,000 (2023/24), £3,000 (2024/25).

This blog explains how CGT is reported to HMRC How and when do you report capital gains tax on residential property disposals? – Steve J Bicknell Tel 01202 025252

How can you use Form 17?

Its worth seeking advice before the sale of any property as there could be ways to reduce the CGT for example couples can use Form 17 to change the ownership Declare beneficial interests in joint property and income – GOV.UK (www.gov.uk) and make best use of their tax allowances.

Working away and conculsion

If you work away from home, you can still claim PPR if the property remains your primary residence. However, if you buy another property to live in, this may affect your eligibility for PPR.

In conclusion, PPR can be a valuable tax relief for those selling their main residence. However, if you have let out your property, this may affect your entitlement to PPR. It is essential to understand the rules and regulations surrounding PPR and seek specialist advice when necessary.

Massive changes under discussion for the tax of Property Investors!!

woman in white shirt showing frustration

First we had the OTS Property Income Review dated 25th October 2022, since then the Policy Paper has been issued (1st November 2022) so it looks like we will see the adoption of at least some of the recommendations in Autumn Statement on 17th November 2022.

Key findings and priority recommendations

Furnished holiday lettings

Short-term rentals meeting the conditions fall into the furnished holiday lettings regime. This regime provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.
The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
If the furnished holiday lettings regime is abolished the OTS recommends that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
If the regime is retained, the introduction of a private use restriction may allow for relaxation of other requirements to enter the regime, making it simpler to understand and predict whether one is in scope.
Should the government conclude that the furnished holiday lettings regime be retained, the OTS recommends that the government then consider:
- removing the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties
- restricting the regime to properties used for commercial letting by removing the potential for personal occupation. This would permit a simpler approach to defining the regime

Repairs, replacements, and improvements

A long-standing area of complexity for taxation of property is whether costs are allowable straight away as repairs and replacements, or represent capital expenditure as improvements and should be disallowed for Income Tax.
The OTS recommends that HMRC should enhance the guidance in respect of the boundary between repairs and improvements to include clear examples of common situations, perhaps using flow-charts to lead towards case-by-case answers.
The OTS recommends that the government consider introducing a broader immediate Income Tax relief for all property costs – other than where work is part of the capital cost of the building, such as the initial fit-out of properties bought in a dilapidated state or structural work such as extensions to the property.

Jointly owned property

HMRC data indicates that almost half (1.5 million) of all taxpayers renting out property do so jointly, mainly with a spouse or civil partner, or with others.
Those not married nor in civil partnership will by default declare the split of income based on beneficial ownership, but can instead choose any other split they like without any form of election.
Conversely, spouses and civil partners, (providing they are living together) default to equal 50:50 shares for property other than furnished holiday lets, and respondents made very clear that the process to instead use a split based on beneficial ownership (using form 17) is complex and burdensome even for advisers, and taxpayers themselves are normally unaware of the need. This creates an unnecessary complexity and burden, and potentially accidental non-compliance.
The OTS recommends that the government should consider removing the anachronistic 50:50 rule for spouses and civil partners and aligning treatment to that of other joint owners and to the position for spouses under Capital Gains Tax and Inheritance Tax. To prevent abuse, the default beneficial ownership position should not be capable of being displaced.
The government may also wish to consider removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

From April 2024, landlords in scope of Making Tax Digital (MTD) for Income Tax will need to keep digital records and file updates quarterly using compatible software. There was a very high level of concern common to all respondents about how the rules would apply to landlords.
The OTS recommends that HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties, for example by making a jointly owned property the MTD filing entity.
Landlords may rely on multiple parties to provide information and potentially to support submitting reports.
HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents. This is needed because letting agents and bookkeepers will maintain digital records and may support quarterly submissions on behalf of some landlords. Specific professional standards and responsibilities will be needed for MTD for Income Tax filing agents.
The gross rental limit for being required to adopt MTD for Income Tax has been set at £10,000. The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any. The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement.
The OTS recommends that HMRC give consideration to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
As is clear from the points above there are unresolved complexities within MTD for Income Tax.
The OTS recommends that MTD for Income Tax should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers. Time will be needed to test new systems before adoption.

These changes are huge, if implemented there will be widespread confusion about how to report property income, this is already a complex area of tax, most of these changes will probably mean property owners end up paying more tax!

steve@bicknells.net