Landlords who moved their rental homes into a limited company could be handed a surprise tax bill following changes to a valuable relief earlier this year.

Experts say some may be unaware of the change and subsequently may fall into a “quiet trap.”

We take a look at the changes and what landlords need to know.

Which landlords could be affected?

Landlords that rent out properties might choose to put them into a limited company as such structures can be more tax-efficient, particularly for higher-rate taxpayers.

They can also make it easier to keep profits within the business and grow a larger property portfolio over time.

But for tax purposes, transferring a property into a company is generally treated as though the home has been sold at its market value.

That means any increase in value since the property was bought can potentially generate a capital gains tax (CGT) bill – despite the fact the landlord has not sold the property to an outside buyer or received the sale proceeds they might normally use to pay the tax bill.

A tax benefit known as “Incorporation Relief” can effectively put off this CGT bill until you sell the property rather than making the landlord pay it when the properties are moved into the company.

Whilst this was previously applied automatically, when all conditions were met, this changed on 6 April this year and now landlords must actively claim the relief through their self-assessment tax return.

Experts say many may not realise they need to do so – leaving some facing potentially huge tax bills they may not be able to afford.

Harvey Dhillon, founder and chief executive of accountancy firm Zmartly, said the change could catch landlords out trying to simplify their tax affairs.

“Turning an automatic relief into one you have to ask for is a quiet trap,” he said.

“If you move properties into a company this tax year, your claim must be in by 31 January, 2029.

“The relief generally only applies where the landlord receives shares in the company rather than cash. If they fail to claim it, they could face a CGT bill even though they haven’t received any sale proceeds to pay it.”

Which landlords does the relief apply to?

HMRC has also updated its guidance to clarify how it decides whether a landlord is genuinely running a property business for the purposes of Incorporation Relief.

It says its staff should normally accept that a landlord is running a qualifying business where they personally spend at least 20 hours a week on relevant activities, but clarified that landlords doing less than this may still qualify, depending on the nature and extent of what they actually do.

That means some landlords who assumed spending fewer than 20 hours a week automatically ruled them out may want to check again if they could claim relief.

HMRC says the key question is whether the landlord’s activities are extensive enough to amount to running a business, rather than simply holding property as an investment.

This can include dealing with tenants, arranging repairs and maintenance, managing lettings and handling the day-to-day administration of the portfolio.

Dhillon said: “Who qualifies is exactly who qualified before – the test is still whether the landlord is running a business, which the rules for this relief never define.”

Should you put your properties into a business?

Whether it makes sense to move your rental properties into a limited company depends on your circumstances.

A company structure can be attractive because mortgage interest can generally be deducted as a business expense before corporation tax is calculated, and profits can be retained within the company, which can help fund future purchases.

But transferring properties you already own can come with significant upfront costs, including potential CGT, legal and refinancing fees and, in England and Northern Ireland, stamp duty which can be charged on the property’s market value when it is transferred to a connected company.

Todd Davison, managing director and founder of business insurer Purbeck Insurance, said: “For landlords with a small portfolio, particularly those purchasing a single residential investment property, incorporating may not provide enough benefit to justify the additional costs and administration.

“The costs of transferring an existing property can also make the decision difficult.”

For that reason, some landlords choose to keep existing properties in their own name but make future purchases through a limited company instead.

Davison said: “As portfolios grow, we increasingly see professional landlords consider limited company structures for future purchases.

“One consideration sometimes overlooked is that when purchasing through a limited company, lenders usually require directors to provide a personal guarantee, meaning personal exposure can remain despite the property being company-owned,” he added.

Landlords considering incorporation should therefore weigh up the potential long-term tax benefits against the immediate costs of moving existing properties, as well as checking if they qualify for Incorporation Relief and making sure any claim is submitted on time.

HMRC has been contacted for comment.