Limited Company or Sole Trader for Your STL Post-FHL? The Arithmetic Has Shifted
By STL Accounting and Finance
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In short: Post-FHL, the tax gap between sole trader and limited company structures for STL portfolios has widened for higher-rate taxpayers with meaningful borrowing. Ltd is now the right answer for a materially larger portion of our client base than it was two years ago. The transition costs, however, are real and non-trivial, and the fit depends heavily on how the portfolio is financed.
The question "should I run my STL through a Ltd company or as a sole trader?" was, under the FHL regime, often finely balanced. The mortgage interest deduction was available in full to either structure, the pension flexibility was better as a sole trader, and the incorporation cost was hard to justify for smaller portfolios.
The abolition of the FHL regime with effect from 6 April 2025 has moved the arithmetic. This is what the calculation looks like now.
The two changes that shifted the sums
1. Mortgage interest restriction now applies to sole traders but not Ltd companies. For a sole trader landlord, mortgage interest is now restricted to a 20% basic-rate tax credit. For a Ltd company, mortgage interest remains a fully-deductible expense against corporation tax profits. For a higher-rate taxpayer with meaningful borrowing, this is now a decisive difference.
2. CGT on disposal now runs at 24% higher-rate for sole trader disposals (post-BADR abolition for FHL properties), while a Ltd company disposal is a corporation tax matter (currently 25% on gains over £250,000 profits) with a subsequent tax event when funds are extracted. The Ltd route is not automatically better on disposal - it often is not - but the sole trader route is significantly worse than it was.
The rough shape of when Ltd starts to win
The tax gap depends on so many operator-specific variables that any general figure is a caricature. But the pattern in our client base is:
- Single property, no or low borrowing, basic-rate taxpayer: Sole trader still wins. Ltd is administrative overhead you do not need.
- Single property, meaningful borrowing (>50% LTV), higher-rate taxpayer: Ltd starts to look attractive on ongoing tax but the incorporation cost usually rules it out for a single unit.
- Two to three properties, mixed borrowing: Detailed modelling required. The break-even depends heavily on the operator's other income and their appetite for administrative complexity.
- Four or more properties, or meaningful borrowing across the portfolio: Ltd is now the default recommendation for most cases we see.
- Portfolios being acquired specifically for buy-and-hold with a view to compounding profits into further acquisitions: Ltd is strongly indicated, because retained corporation-tax-taxed profits compound faster than income-tax-taxed personal profits.
The transition costs nobody warns you about
Moving an existing sole-trader portfolio into a Ltd company is not free. The main costs:
Stamp Duty Land Tax (or LBTT in Scotland, LTT in Wales). Transferring a property from a sole trader to a Ltd company is a disposal and a re-acquisition. Land transaction tax applies. On a portfolio of any size, this can be a very large number - often the single biggest transition cost.
Capital Gains Tax on the disposal. The transfer to the Ltd company is a disposal at market value. CGT applies to any gain since acquisition. Incorporation relief (s162 TCGA) can defer this, but it requires specific conditions to be met (whole business transferred, in exchange for shares) and is not universally available for STL portfolios.
Mortgage refinancing. Sole trader mortgages generally cannot be transferred to a Ltd company. New Ltd company mortgages usually carry a higher rate and lower LTV than the sole-trader equivalents. The refinancing cost - both fees and ongoing rate uplift - is often material.
Ongoing corporate compliance. Corporation tax returns, statutory accounts, annual confirmation statements, and directors' obligations are all ongoing costs. Cheap to run at scale, disproportionate to run at small scale.
What operators should do
- Get a specific structural review from an accountant who understands STL. A generalist will miss FHL-abolition-specific consequences.
- Do not incorporate on the strength of a rule-of-thumb. The transition costs above make the wrong decision very expensive to reverse.
- If you are acquiring new units, model whether they should go into a new Ltd company from day one rather than being added to the sole-trader portfolio. Building a Ltd company alongside the sole trader can be a lower-friction path than incorporating an existing portfolio.
- Do not incorporate solely to solve the mortgage interest problem if your borrowing is modest. The Ltd company also has costs.
The pattern we see is that the FHL abolition has genuinely moved the needle on when Ltd wins - but it has not made Ltd universally right. Every case still needs the specific numbers run for it.
Book a free 15-minute consultation to talk through your structure.
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