Why are buy-to-Let landlords setting up limited companies? 10/02/22

Changes to the property investment sector have forced thousands of buy-to-let landlords to regroup and adapt their investment strategies to soften the blow of their tax bill. As the years have ticked on, the sector has become more and more professionalised by property investors launching limited companies in a bid to maximise the return of their investment.

Since the tax changes for landlords were first announced in2016, the total number of buy-to-let companies has more than doubled by a staggering rate of 128% - that’s more than the preceding 50 years combined!

This is according to research from major London estate agency Hamptons, which showed that 41,700 limited companies were set up for buy-to-let businesses in 2020. Aneisha Beveridge, head of research at Hamptons, said: “We estimate that around half of all rental properties bought today are being put into a company, up from close to one-in-five during 2016.”

This increase of 23% from 2019 has led buy-to-let incorporations to become the second most common type of company set up in Great Britain throughout 2020. Taking this into account, buy-to-let investors and landlords are clearly optimistic about the future of the sector with thousands laying the groundwork for their next property investments.

How have property investors benefitted since the tax changes?

Numerous tax changes have fallen into consideration for investors and landlords since 2016. Starting with the 3% additional stamp duty surcharge for all buy-to-let properties as well as landlords losing the ability to deduct mortgage interest costs from their tax bill. As time has gone on, this tax relief has gradually been phased out from 100% in 2017 all the way to 0% in 2020. Therefore, in order to maximise the profits generated from an investment property, investors and landlords have had to adapt the way they conduct their business. Before long, building investment strategies around the more tax-efficient entity of a limited company has become the new norm for investors.

That’s because landlords who switch holding properties in their personal name to a company can offset 100% of their mortgage interest against profits. While in contrast, those that continue to hold the property in their own name can only offset 20% of their mortgage fees. To put that into context: If someone wanted to invest in a £250,000 property generating £1,000 per month in rent, a 75% loan-to-value mortgage via a limited company would equate to £1,033 in taxes payable per year. Meanwhile a lower-rate taxpayer opting to invest in the exact same property in their own name would pay £1,463 each year – that’s a whopping 42% more than a limited company!

Whilst the percentage of landlords and investors with large property portfolios make up the bulk of property purchases completed through a limited company; higher net-worth investors also stand to gain from this initiative.

Aneisha Beveridge insists: “While most of this growth has been driven by larger landlords, smaller landlords, particularly those who are higher rate taxpayers, have also reaped the tax saving benefits from incorporating.” Sticking with the example above, a higher-rate taxpayer would pay an astronomic 274% more in taxes, the equivalent of £3,863!

What are the pros and cons of investing in property as a limited company?

The obvious draw for investors and landlords to invest as a limited company is the potential for serious savings on their annual tax bill. Putting that aside, the suitability of any investment plan is centred around its longevity. Hamptons claim that the surge in limited companies has partly been due to rising property prices and the knock-on effect this has on mortgage bills for landlords. With that in mind, the all-time record of 223,743 buy-to-let companies up and running looks to show no sign of slowing as the property market continues to leap from strength to strength. The latest figures from the Office for National Statistics revealed average UK house price growth climbed to a remarkable four-year high in November 2020 following the boost of post-lockdown lifestyle shifts and government measures.

In addition to this, Hamptons suspect the rapid growth of the rental market has also contributed to the significant spike in new buy-to-let holding companies. This comes as projected rates of UK unemployment are set to drastically rise henceforth pushing a shift in demand for rental homes on the market. According to Hamptons, year-on-year rental growth soared from 1.4% in October, to 3% in November and then 4.1% in December. This is the fastest rate of rental growth recorded in more than four and a half years. At the same time, the number of rental homes on the market fell by double-digit percentages in every English region outside London. The North has pressed on with its conquest of becoming the UK hotbed for property investment by delivering greater year-on-year rental growth of 6.4% than all of London’s counterparts combined! As seen below:

However, mortgage interest rates are perceived to be considerably higher for limited companies than individuals. Beveridge argues that the development of this emerging market has intensified competition amongst providers which presents even greater opportunities for property investors to capitalise on.

She claimed: “Back in 2016 there were just a handful of lenders who offered company buy-to-let mortgages, often at a greater premium than today.” Insisting that the future is bright for landlords owning properties through a limited company. “With more high street names entering the limited company space in recent years, competition has driven down interest rates to within a percentage point of similar products designed for landlords purchasing in their own name,” she said.

From the standpoint of landlords and investors, a limited company offers a way to nullify the negative effects of recent regulation changes. It can also provide an efficient pathway to building a strong property portfolio. However, a limited company structure also creates extra administrative obligations which need to be weighed up with the lucrative tax savings. If you would like to learn more about building a sustainable property portfolio, then get in touch with Elavace today.