Buy-to-let landlords continue to find ways to maximise their investments in the current climate, and many do so by investing using a limited company.
The number of limited company landlords – particularly those with larger portfolios – continues to rise, as it has done for the past eight years since tax changes were phased in for investors in the private rented sector.
While not all landlords will benefit from buying and running their properties through a company structure as opposed to as an individual, many find their investments are more profitable due to the differences in the way they are treated for tax purposes.
This growing trend has been noted in the latest research released by Paragon Bank, using data from Pegasus Insight, which found that 81% of the portfolio of the average limited company landlord is now incorporated (ie. is owned by the company rather than the individual). This is a significant rise from Q2 2020, when this figure was 48%.
And looking at landlords’ plans for the future, more than two thirds (67%) of landlords involved in the survey said they intended to buy a rental home over the next 12 months through a limited company. Again, this marks a notable rise from the results four years ago, when 45% planned to do the same.
Of those that said they planned to invest in a property over the coming year, only 31% said they planned to buy in a personal capacity rather than as a limited company, which is down from 36% who planned to do this in 2020.
Why invest through a limited company?
Section 24 of the Finance Act 2015, which was phased in since 2016, essentially capped the amount of mortgage interest tax relief landlords could claim to reduce their income tax bill. Now, landlords can claim up to the basic income tax rate of 20% as a tax credit instead of the previous tax relief.
For higher tax payers in particular, this has made a big difference to landlords’ tax bills. Because Section 24 increases the amount of taxable income being assessed, a higher tax bill is often due. For some, this perceived additional income has pushed them into a higher tax band.
This tax change only applies to personal owners of buy-to-let properties, which is one reason why many landlords have looked into limited companies as an option. A limited company is a business structure that can be owned and directed by one “shareholder” – ie. one person – but it is a distinct entity from its owners.
Because the limited company is the legal owner of any investment properties bought through it, landlords are no longer paying income tax on their rental profits. Instead, they pay corporation tax, which is currently 25%, and therefore lower than the 40% tax bracket of higher earners.
There are, of course, drawbacks and considerations for any landlords looking at setting up a company structure as opposed to personal ownership, and landlords are advised to seek proper financial and legal advice.
Mortgage market is responding
While the number of portfolio landlords setting up and investing through limited companies continues to rise, so too does the number of lenders offering tailored options for this buyer type.
However, as Paragon’s research points out, it is the more experienced landlords with the greatest number of properties that are more likely to professionalise their portfolios, rather than own them all as an individual. But the majority of landlords do not have large portfolios, and still own their rental properties on an individual basis.
Among investors with four or more mortgaged buy-to-let properties, around 37% now operate via limited companies. This falls to just 15% for landlords with between one and three rental homes – and in total, 78% of landlords still hold their properties solely in their own name.
Louisa Sedgwick, Managing Director for Mortgages at Paragon Bank, said: “Landlords have increasingly used limited companies to mitigate the impact of tax changes phased in from 2016. This has accelerated in recent years as more landlords have looked for ways to run their businesses more efficiently amidst a challenging economic environment.
“It’s really encouraging to see that brokers appear to be switched on to this because, despite the growth, 78% of landlords still hold their properties solely in individual name.
“While incorporation isn’t necessarily the best option in every situation, and landlords should seek advice from a professional financial or tax adviser, this highlights the opportunity for those that place this type of business.”
