A new report by the estate agency Hamptons found the number of buy-to-let companies has increased by 82% since the government introduced major tax changes for landlords in 2017.
Here, we explain why more landlords are looking to incorporate, and outline the differences between owning a property in your own name or via a company.
The growth of buy-to-let companies
Hamptons analysed data from Companies House and found there are 345,000 buy-to-let companies in operation in the UK, containing a total of 615,000 properties.
Historically, company structures were most commonly favoured by landlords with larger portfolios, while individual landlords with one or two properties would usually own them in their own name.
However, this is changing. The number of landlords with one property setting up a company increased by 22% in 2023.
Anesiha Beveridge of Hamptons says: ‘As long as landlords continue rolling off cheap mortgages onto rates twice or three times what they were paying, the number of homes being put into a corporate structure will remain high.
‘Longer term, the current tax regime could push half of all rental homes into a limited company, significantly reducing the existence of landlords who own buy-to-lets in their own name.’
Find out more:Why are landlords incorporating?
Before then, landlords who owned properties in their own name could offset interest payments on their mortgage when filing their taxes. However, this was phased out between 2017 and 2020, before being replaced by a flat 20% credit.
This meant many property investors saw their profits take a big hit, resulting in a sell-off. Previous Hamptons research showed landlords sold more properties than they bought every year from 2016 to 2023, with a net 294,000 homes disappearing from the rented sector.
Of those who remained, many switched to a company structure, allowing them to offset the entirety of their mortgage interest payments against their income.
The impact of higher mortgage rates
Mortgage rates have risen dramatically since late 2022, and over time, more landlords have been dragged into paying higher rates as they come to refinance their properties.
Higher rates mean bigger interest payments, adding a greater burden for those who own properties in their own name rather than a company structure.
There is some good news, however. While mortgage rates remain much higher than before, they have fallen in each of the past five months, as shown in the chart below.
The pros and cons of incorporating
At a time of high mortgage rates, setting up a company might seem prudent, but there are a series of pros and cons you'll need to consider.
The exact implications will depend on your current portfolio. For example, if you're setting up a company to buy additional properties, the calculations will be different than if you're setting one up to transfer existing properties into it.
Reasons to incorporate
Mortgage interest tax relief: Lower taxes:Easier stress testing:Reasons not to incorporate
Stamp duty and CGT implications: Higher mortgage rates: Income tax on dividends: Legal responsibilities:Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665 and is an Introducer Appointed Representative of the following: 1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance products (FRN 610689). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN 656479), for the introduction of Pure Protection Contracts, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts. LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386. 3.Optimise Media Limited (FRN 313408), for the introduction of HSBC Group, who are authorised and regulated by the Financial Conduct Authority to provide credit brokering activity. Optimise Media is registered in England and Wales to Exchange Street Buildings, 35-37 Exchange Street, Norwich, England, NR2 1DP and company number 04455319. We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.
source https://www.which.co.uk/news/article/record-numbers-of-landlords-setting-up-buy-to-let-companies-afUU01a5YciK