Increase in the number of landlords buying properties through companies to pay less taxes

Landlords are increasingly buying properties through limited companies rather than in their own names to reduce their tax burden.

According to analysis by estate agent Hamptons, three quarters (74 per cent) of all sales contracts in England and Wales this year were purchased through a limited company.

That’s a significant increase from 68 percent last year and a huge jump from the 41 percent in 2015, just before major purchases tax changes were introduced.

The rise of corporate ownership: So far this year, 74% of new buy-to-let purchases in England and Wales have gone into a corporate structure, up from 68% last year and just 41% in 2015

The tax changes introduced by then-Chancellor George Osborne in 2016 are said to be a key factor in this transition from private ownership to corporate ownership.

According to Hamptons, the number of newly formed buy-to-let limited companies has increased significantly since then.

It said more than 250,000 buy-to-let companies have been founded since the beginning of 2016.

In the past nine years between 2007 and 2015, around 66,000 new buy-to-let holding companies were founded.

Why are more and more landlords using limited liability companies?

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

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

However, thanks to Osborne, the phase-out began in 2017 before halting completely in April 2020.

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

This means that a landlord paying a higher rate of tax and paying mortgage interest of £500 a month, in turn, on a property rented out for £1,000 a month, will now pay tax on the full £1,000 – but with a tax cut of 20 per cent £500 to be used towards the mortgage.

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

A landlord owning a limited company with mortgage interest payments of £500 per month on a property rented out for £1,000 per month would only be taxed on £500 of that income.

Put simply, this means that individual landlords are effectively taxed on turnover, but corporate landlords are taxed on profit – although individual landlords can still offset costs such as agent fees and repairs.

However, in addition to easing mortgage interest payments, corporate ownership can also lead to further tax savings.

Manjinder Bains, A chartered tax adviser at UK Landlord Tax says owning a limited company is becoming the norm due to the tax benefits of holding property in this way.

He says: “Since 2017 there has been a huge increase in the number of customers now using a limited company to own their rental property.”

“Almost all of our customers who pay higher tax rates use limited liability companies because of the income tax advantage.”

“There can also be advantages when it comes to inheritance tax.” If you use a limited company and it is properly organized from the start with the involvement of your children, it is possible to save large amounts of inheritance tax in the future without affecting rental income having to forego.

“To achieve this, the company must be incorporated into what is known as a family investment company, as a standard limited company does not offer this advantage.”

“It is quite complex, so it is worth speaking to a trained tax advisor who specializes in this area before making a decision.”

Bains adds: “For property tax rate taxpayers, the need for a limited company would only arise if they were to take advantage of the inheritance tax benefits associated with long-term ownership and transfer of the property to their children, as there is virtually no income tax savings there would be.”

“Proportionately, I would say at least 50 per cent of our clients who pay the property tax rate still choose a limited company because of the inheritance tax benefits it offers when set up correctly.”

A similar trend towards limited company ownership has been seen with buy-to-let mortgage lender Molo.

Francesca Carlesi, managing director of Molo, said: “At Molo we have seen a continued increase in limited liability companies, impacting around 65 percent of our applications.”

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

Will the migration of 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 held by limited companies has continued to rise – although this is offset by a larger decline in the number of mortgages held by individuals balanced.

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

This would suggest that there is certainly scope for the inclusion of buy-to-let offerings to continue the current trend.

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

However, the Hamptons analysis also noted a slowdown in the number of new investors setting up limited liability companies this year.

Aneisha Beveridge, head of research at Hamptons, says: “The pace has moderated 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 onboarding has moderated in 2023, likely because those who would benefit most from onboarding are likely to have already done so

“The growth in buy-to-let limited companies is due not only to new landlords purchasing new properties in this way, but also to existing investors converting their portfolio into a limited company to benefit from the to benefit from tax advantages.”

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

David Fell, senior analyst at Hamptons, adds: “There will always be some investors for whom owning homes in their own name makes the most sense.”

“Those without a mortgage or taxpayers with lower tax rates will continue to support the number of homes that are in personal names.”

“That means the proportion of new buy-to-let purchases flowing into a company is probably pretty close to its cap.”

“However, it is likely that this will be the case for the vast majority of new buy-to-let purchases, as long as interest rates remain close to their current levels and investors’ ability to offset their overall mortgage interest if they do so their personal names are restricted.” continue to be incorporated into a corporate structure.’