Record Number of Landlords Created Corporations to Reduce Rental Purchase Taxes

A record number of landlords have set up limited companies to buy rental properties this year, in a bid to reduce taxes on their investments.

Between January and September this year, 46,449 buy-to-let companies were created, an increase of 23 per cent on the same period last year.

This is according to analysis of Companies House data by property company Hamptons.

Holding property in a limited company, also known as an “incorporation”, is an alternative to holding it in your personal name, and the tax structure is different.

Owners have created more corporations so far this year than in all of 2021.

Hamptons estimates that between 60,000 and 62,000 corporations will have been created by the end of the year, up from 50,004 last year or any year before.

There are currently a total of 382,007 such companies, with almost 667,000 properties within them, in England and Wales.

This figure has increased 175 percent from 242,249 a decade ago.

But even though most new purchases are made in a limited company structure, only about 15 per cent of all existing rental housing owned by private landlords is maintained this way.

Why do owners use limited companies?

The rise has been driven by the different ways in which buy-to-let in businesses and buy-to-let in personal names are taxed.

According to Hamptons, seven in 10 of new buy-to-lets in England and Wales are made through a limited company, and the remaining three in 10 are purchased in individual names.

Prior to 2016, the limited company structure tended to be the exclusive domain of large property owners.

However, Hamptons says growing tax advantages for higher-rate taxpayers have attracted the attention of smaller investors.

So far this year, 54 percent of new purchases have been made by companies making their first, second or third purchase.

Being a landlord within a limited company comes with several tax advantages, including the fact that corporation tax, which is paid in a company structure, is lower than income tax, which is paid to owners who own property. in his own name.

This allows owners to accumulate profits within the company, which they can use to reinvest in another property sooner than they would have if they had owned it in their own name.

Owning a limited company also allows property investors to fully offset all of their mortgage interest against their rental income, before paying taxes.

This differs from landlords who own property in their own name. They only receive a tax break based on 20 percent of their mortgage interest payments.

This is less generous for higher rate taxpayers, who previously received a 40 per cent tax break on mortgage costs before a rule change in 2016.

A landlord who pays higher taxes and pays mortgage interest of £500 a month on a property rented for £1,000 a month now pays tax on the full £1,000, with a rate of 20 per cent on the £500 he They are used for the mortgage.

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

Simply put, it means that while sole proprietors effectively pay taxes on turnover, business owners pay taxes only on profits.

Almost three quarters of buy-to-let businesses have been set up since the beginning of 2016, when landlords who were higher rate taxpayers were no longer able to fully offset mortgage interest from their tax bill.

Existing investors are also moving their rental purchases into limited companies to reduce their tax burden when selling properties.

Since properties sold by companies are not subject to capital gains tax, any increase will deepen this divide.

There are rumors that capital gains tax could be increased in the upcoming Budget, which may have contributed to the increase in owner additions.

Aneisha Beveridge, head of research at Hamptons, said: “While home purchase figures by homeowners are well below pre-pandemic levels, there has been no sign of a slowdown in the number of businesses “they are created to be installed”.

‘Most new purchases are now made in a corporate structure. However, there has also been a significant increase in the number of homeowners moving their homes in their personal names to a company to protect themselves from an increasingly aggressive tax environment.

‘While the benefit of being able to offset mortgage payments before paying taxes has been the main driver of new additions in recent years, more recently rumors of possible capital gains tax or inheritance tax increases are further fueling the increase.

“An increase in personal tax rates will only further widen the gap between the taxes paid by homeowners who own homes in their own name or in the name of a company.”

Disadvantages of limited companies for owners

However, whether or not an advantage can be obtained depends on the owner’s individual circumstances.

For example, lower rate taxpayers, particularly if they do not have a large mortgage on their buy-to-let, may be better off keeping their buy-to-let in their personal name.

There are also additional mortgage costs to consider when buying through a limited company, as lenders often charge higher rates.

Finally, there is an additional layer of bureaucracy that comes with the structure of a company. The company’s accounts must be formally prepared and filed, records kept and directors appointed.

This creates more work for owners who choose the limited company route and additional cost if they use an accountant.

There is also likely to be an additional cost for those purchasing with a mortgage. This is because business mortgages tend to have higher rates and fees on average.