Spike in landlords buying properties via companies in order to pay less tax

Landlords are increasingly purchasing properties through limited companies, rather than in their own personal names, to reduce their tax bills.

Three-quarters (74 percent) of all buy-to-let purchases in England and Wales this year were purchased through a limited company, according to analysis from estate agent Hamptons.

It’s a significant increase on last year’s 68 per cent, and a huge jump from the 41 per cent recorded in 2015, just before major changes to buy to let tax were introduced.

The 2016 tax changes, introduced by then Chancellor George Osborne, are believed to be a major factor behind this migration from personal to corporate ownership.

The number of new buy-to-let limited companies formed has grown significantly since then, Hamptons said.

It says more than 250,000 buy-to-let companies have been created since the start of 2016.

Over the past nine years, between 2007 and 2015, approximately 66,000 new buy-to-let holdings have been created.

Why are more and more landlords using limited liability companies?

Landlords who own buy-to-let properties in their own name were previously able to deduct mortgage costs from their pre-tax rental income, reducing their overall bill.

This meant that a landlord with mortgage interest payments of £500 per month on a property rented for £1,000 per month would only pay tax on £500 of that income.

However, thanks to Osborne, this was phased out in 2017 before being completely discontinued in April 2020.

Now, landlords instead receive a tax credit, based on 20 percent of their mortgage interest payments.

This means that a higher rate paying landlord with mortgage interest payments of £500 per month, again on a property rented for £1,000 per month, will now pay tax on the full £1,000 – but with a 20 per cent rate reduction on the £500. that is used for the mortgage.

This is much less generous for higher-rate taxpayers, who previously received a 40 percent tax credit on mortgage payments.

A landlord who owns a limited company with mortgage interest payments of £500 per month on a property rented out for £1,000 per month would only pay tax on £500 of that income.

Simply put, this means that while individual landlords are actually taxed on turnover, business owners are taxed on profits – although individual landlords can still offset costs such as letting agent fees and repairs.

However, in addition to the mortgage interest deduction, business ownership can also provide other tax savings.

Manjinder Bains, an accredited tax adviser at UK Landlord Tax, says limited company ownership is becoming the norm thanks to the tax benefits of holding property in this way.

He says: ‘Since 2017, the number of customers who now use a BV to own their rental property has increased enormously.

“Almost all of our senior taxpayers use limited companies because of the income tax benefit.

‘There may also be an inheritance tax advantage. If you use a limited company and it is set up correctly from the start, including your children, you can save large amounts of inheritance tax in the future without giving up rental income.

‘To achieve this, the company must be set up in a so-called family investment company, because a standard public limited company does not offer this advantage.

‘It is quite complex so it would be worth speaking to a fully qualified tax accountant who specializes in this area before making any decision.’

Bains adds: ‘For basic rate taxpayers, the need for a limited company would only arise if they were to seek the inheritance tax associated with long-term ownership and passing the property on to their children, as there is actually no savings on income tax would occur.

‘Comparatively, I would say at least 50 per cent of our basic tax paying customers are still choosing a limited company because of the inheritance tax you get if you set it up correctly.’

A similar trend towards a private company has been noted by buy-to-let mortgage provider Molo.

Francesca Carlesi, CEO of Molo, said: “At Molo we have noticed a continued increase in the number of limited liability companies, putting approximately 65 percent of our applications at risk.

‘We expect this to continue as rates in the market begin to stabilize, demand for rental properties remains high and landlords take advantage of the tax benefits of limited liability companies.’

Will the migration to landlord formation continue?

Because this is a relatively new trend, only around 12 percent (or 603,000) of all rental properties in England and Wales are held in a corporate structure, according to Hamptons.

While the total number of buy-to-let mortgages has fallen by just over 30,000 since November 2022, the number of mortgages from limited companies has continued to rise – although this is offset by a greater fall in the number in personal names.

Hamptons estimates that around 22 per cent of all outstanding buy-to-let mortgages are now in a corporate structure, up from 15 per cent three years ago.

This could indicate that there is certainly room for buy-to-let integration to continue the current trend.

Furthermore, with mortgage rates much higher, the benefits of owning a buy-to-let in a limited company could arguably be even greater, given the interest relief available to those who buy a buy-to-let through a limited company own a company.

However, Hampton’s analysis has also found a slowdown in the number of new investors setting up limited liability companies this year.

Aneisha Beveridge, head of research at Hamptons, said: ‘The pace has leveled off in 2023, probably because those who would benefit most from incorporation are likely to have already done so.

Aneisha Beveridge says the pace of landlord incorporation has leveled off in 2023, likely because those who stand to benefit most from incorporation have likely already done so.

‘The growth in buy-to-lets for limited companies is not only coming from new landlords purchasing new properties in this way, but also from existing investors moving their portfolio to a limited company to take advantage of the tax benefits.

‘In fact, we think most of the growth in recent years has likely been driven by smaller investors looking to offset their mortgage interest, rather than new portfolio landlords.’

David Fell, senior analyst at Hamptons, added: ‘There will always be investors for whom owning homes in their own name will make the most sense.

“Those without mortgages or lower tax payers will continue to support the number of homes in personal names.

“This means that the share of new buy-to-let acquisitions going into a company is likely to be nearing its ceiling.

‘However, it is likely that as long as interest rates remain close to current levels and investors’ ability to offset all their mortgage interest if in personal names remains limited, the vast majority of new buy-to-let purchases will decline . continue to end up in a corporate structure.’