Landlords Rush to Set Up Buy to Let Companies

Landlords are flocking to buy their next rental home through a limited company to avoid higher tax bills. 

The number of landlords purchasing property through a buy-to-let company has increased, a study by specialist buy-to-let lender Paragon Bank has revealed. 

At the start of the year, half of landlords opted to buy a property through a company. Since then, this has increased by a quarter to 62 per cent of landlords. 

Nearly half (47 per cent) of landlords owning up to five rental properties want to buy with a company, while almost 80 per cent of professional landlords with five or more properties want to buy this way. 

The rising number of landlords reading as property companies follows the phasing in of reduced mortgage interest tax relief and a new way of calculating rental profits.

Buy-to-let is still viable

The latest tax measures impact individual landlords but not those trading through a company. Paragon asked 700 landlords about their plans to buy more homes for rent over the next year. Many are still confident with the viability of buy-to-let as an investment, and 14 per cent stated they want to buy more property despite the tax changes. 

The bank also looked at how buy to let lenders perform. Despite interest rates rising, buy-to-let lending and interest rates have stayed competitive. Many landlords leverage their portfolios with buy-to-let mortgages, and around two-thirds expect to fund their next purchase with a loan. A third will raid the equity in their property portfolios to raise the cash they need for deposits, up from 17 per cent in Q1 2022. 

The bank suggests rising house prices have opened a window of opportunity for landlords to expand their portfolios.

Richard Rowntree, mortgage managing director at Paragon Bank, said: “Since midway through the last decade, tax burdens on buy-to-let investment have increased significantly. Along with the recent rise in overheads brought about by increasing energy and maintenance costs, running a letting business has undoubtedly become more costly. It is unsurprising to see more landlords look for ways to reduce their costs, with incorporation being one option for some. 

“Purchasing a buy-to-let property through a limited company may not be the best route for all landlords, so it is important that we provide customers with the complete picture to enable them to make informed decisions.”

Profits suffer from tax revamp

A separate landlord survey by insurer Simply Business found one in three were concerned about the profitability of their buy-to-let businesses. 

Most cited the scrapping of mortgage interest relief for higher rate taxpayers as a worry as interest rates, and other costs are steadily rising to erode their profits. 

Claiming mortgage interest relief was scrapped in April 2020. Until then, higher rate taxpayers could claim 40 per cent of any interest paid as a business expense to set off against rental profits. Now, they can only claim 20 per cent of the interest they pay. 

A third of landlords said higher taxes are a challenge, while 11 per cent are passing the additional costs on to tenants by increasing rents. 

However, 16 per cent - one in six landlords - say the tax changes have forced them to sell a property. Another 18 per cent are worried about how they can maintain their properties as business costs rise.

The insurer’s CEO Alan Thomas said: “With countless changes to regulations, along with rising costs over the last few years, landlords are feeling the squeeze. Our study has revealed the worries they face, with many questioning the value of their portfolio and some even considering selling.”

Buy to let companies FAQ

What is mortgage interest relief?

Landlords can offset 20 per cent of the financial interest they pay each year against tax as a credit against taxable profits. 

Finance interest includes mortgage interest, interest against overdrafts, credit cards and other forms of borrowing. 

So, suppose a letting business makes a taxable profit of £30,000, and the mortgage interest paid for the portfolio is £10,000. In that case, a landlord can offset £2,000 (20 per cent of £10,000) against the taxable profit, reducing the amount to £28,000. 

The tax credit is 20 per cent regardless of the rate of income tax paid by the landlord.

How do I set up a property company?

Contact a company formation agent or try the DIY set-up through the Companies House website. Forming a company online costs £12, but the prices are higher through agents.

Why does a property company save tax?

Companies pay corporation tax rather than income tax. Most property companies pay at a rate of 20 per cent - the same as the basic income tax rate - which means higher rate taxpayers who pay income tax at 40 per cent keep more of their profits to reinvest or draw as dividends. 

Companies can also offset all the finance interest they pay against tax. Other pros and cons apply, but these are the tax factors encouraging landlords to incorporate.

How many property companies are there?

Official data for 2021 revealed the UK has 269,300 buy-to-let companies holding 583,000 rental homes with mortgages, which adds up to 29 per cent of all buy-to-let mortgages.

Is switching to a company tax avoidance?

Moving a buy-to-let business to a limited company is tax avoidance, but this is legal. Tax law says anyone can arrange their financial affairs to avoid paying too much tax - providing they do not break the law, which is tax evasion.