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Sharp rise in landlords using companies to buy rental properties

3-minute read

Sharp rise in landlords using companies to buy rental properties
Mollie Millman

Mollie Millman

12 February 2021

A record number of new companies were set up by landlords last year, new research has revealed.

  • When is corporation tax due?

The practice – known as incorporations – allows landlords to buy their rental properties via a company structure and benefit from more attractive tax rates.

The findings by estate agent Hamptons found there were 41,700 so-called buy-to-let incorporations last year, up 23 per cent on a year earlier.

The numbers have more than doubled, rising 128 per cent since 2016, when the tax relief reductions for landlords were introduced.

Why set up a limited company for buy-to-let?

Buying a rental property via a limited company means a landlord can continue to offset their mortgage interest against their profits.

By contrast, those who buy an investment property in their own name have had this tax relief phased out over four years and replaced with a 20 per cent tax credit.

It also means their profits are subject to corporation tax of 19 per cent rather than the higher individual income tax rates.

Record numbers of buy-to-let companies

Hamptons reported that between the beginning of 2016 and the end of 2020 more companies were set up to hold buy-to-let properties than in the preceding 50 years combined.

Companies set up to hold buy-to-let properties were the second most common company founded during 2020, with companies selling goods online or by mail order in first place, it said.

It means that by the end of 2020 there were a record 228,743 buy-to-let companies up and running.

Southern-based landlords have been most likely to incorporate, according to Hamptons.

The agent suggested that given the high cost of property, landlords based in the South are more likely to be mortgaged – which means that in cash terms their mortgage interest bill is likely to be higher.

As such, the benefits of incorporating a buy-to-let portfolio into a company are likely to be bigger.

More than a third – at 34 per cent – of all companies set up to hold buy-to-let properties in 2020 were in the capital. At the same time, London and the South East combined accounted for almost half of all incorporations, at 47 per cent.

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Landlords could make savings

Hamptons calculated some potentially huge savings for landlords who choose the company route to purchase their rental investments.

It said that someone buying a:

  • £250,000 property
  • with a mortgage that covers 75 per cent of the value of the investment
  • generating £1,000 a month in rent via a company
  • could pay around £1,033 a year in tax

This contrasts with a lower rate taxpayer owning the same property in their own name, potentially paying 42 per cent more – or £1,463 a year.

A higher rate taxpayer could end up paying 274 per cent more – or £3,863 a year.

But while those landlords holding their property in a company can offset more costs against their rental income, mortgage interest rates tend to be higher. It means that setting up a company to hold buy-to-let property tends to benefit higher-income taxpayers, or those with multiple buy-to-let properties.

Aneisha Beveridge, head of research at Hamptons, said: “An increasing proportion of buy-to-let purchases are now being held in limited companies.

“We estimate that around half of all rental properties bought today are being put into a company, up from close to one-in-five during 2016.

“While most of this growth has been driven by larger landlords, smaller landlords, particularly those who are higher rate taxpayers, have also reaped the tax saving benefits from incorporating.

“As the company buy-to-let market has matured, more mortgage lenders have entered the space.

“Back in 2016 there were just a handful of lenders who offered company buy-to-let mortgages, often at a greater premium than today. But with more high street names entering the limited company space in recent years, competition has driven down interest rates to within a percentage point of similar products designed for landlords purchasing in their own name.”

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