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

Homeowners are increasingly buying properties through limited companies, rather than in their own names, to reduce their tax bills.

Three quarters (74 per cent) of all rental purchases in England and Wales this year have been made through a limited company, according to analysis by estate agent Hamptons.

It is a significant increase from 68 per cent last year and a big jump compared to 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 said to be a major factor behind this migration from personal property to business property.

According to Hamptons, the number of new buy-to-let limited companies that have been created has increased significantly since then.

Since the beginning of 2016, more than 250,000 buy-to-let companies have been created.

In the previous nine years, between 2007 and 2015, around 66,000 new buy-to-let holding companies had been created.

Why are more and more owners using limited companies?

Landlords who own buy-to-let properties in their own names 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 a month on a property rented for £1,000 a month would only pay tax on £500 of that income.

However, thanks to Osborne, this began to be phased out in 2017 before stopping completely in April 2020.

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

This means that a landlord who pays higher taxes with mortgage interest payments of £500 a month, again on a property rented for £1,000 a month, now pays tax on the full £1,000, but with a 20 per cent cut in rate. £500 being used for the mortgage.

This is much less generous for higher rate taxpayers, who previously received 40 per cent tax relief on mortgage payments.

A landlord who owns a limited company with mortgage interest payments of £500 a month on a property rented for £1,000 a month in rent 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 on profits, although sole proprietors can still offset costs such as letting agent fees and repairs. .

However, in addition to reduced mortgage interest, business ownership can provide other tax savings.

Manjinder Baths, A chartered tax adviser at UK Landlord Tax, says limited company ownership is becoming the norm thanks to the tax advantages of holding property this way.

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

‘Almost all of our higher rate taxpayer clients use limited companies, due to the income tax advantage.

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

‘To achieve this, the company must establish itself as a so-called family investment company, since a standard limited company does not offer this advantage.

“It is quite complex, so it would be worth speaking to a qualified tax accountant specializing in this area before making any decisions.”

Bains adds: ‘For basic rate taxpayers, the need for a limited company would only arise if they sought the inheritance tax advantages of long-term ownership and the transfer of property to their children, as there would effectively be no no savings on income tax.

“Proportionately, I would say at least 50 per cent of our basic tax paying clients still choose a limited company because of the inheritance tax advantages available if set up correctly.”

Molo, the buy-to-let mortgage lender, has seen a similar trend towards limited company ownership.

Francesca Carlesi, CEO of Molo, said: ‘At Molo, we have noticed a continued increase in public limited companies compromising around 65 percent of our applications.

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

Will the owner onboarding migration continue?

As this is a relatively new trend, according to Hamptons, only around 12 per cent (or 603,000) of all rented homes in England and Wales are in a corporate structure.

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 being offset by larger falls in the number of name mortgages of people.

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

This would suggest that there is definitely scope for buy-to-let mainstreaming to continue its current trend.

Furthermore, with mortgage rates now much higher, the advantages of owning a buy-to-let in a limited company could be even greater, given the interest reduction available to those owning a buy-to-let through a company.

However, Hamptons’ analysis has also detected a slowdown in the number of new investors creating joint stock companies this year.

Aneisha Beveridge, head of research at Hamptons, says: “The pace has stabilized in 2023, probably because those who stand to earn the most by joining have probably already done so.”

‘The growth of rental limited companies is not only due to new owners purchasing new properties in this way, but also because existing investors move their portfolio into a limited company to take advantage of the tax benefits.

“In fact, we believe that most of the growth in recent years has probably been driven by smaller investors looking to offset their mortgage interests, rather than new portfolio owners.”

David Fell, senior analyst at Hamptons, adds: “There will always be some investors for whom having homes in their name will make more sense.”

‘Those who do not have a mortgage or taxpayers with lower rates will continue to prop up the number of homes in personal names.

“This means the proportion of new buy-to-let purchases going to one business is probably pretty close to hitting its ceiling.

“However, it is likely that as long as interest rates remain close to where they are and investors’ ability to offset all mortgage interest remains restricted when the property is in their name, the vast majority of new home purchases for rent will be carried out by continuing to enter a company structure.