Landlords are increasingly turning to limited company structures to hold their properties. According to Hamptons analysis of Companies House data, September 2024 saw 5,312 new limited companies established for buy-to-let purposes in Great Britain, at least 28% more than in any previous September.
While the benefit of being able to offset mortgage payments before being taxed has been the primary driver for new incorporations over the last few years, more recently, rumours of potential increases to Capital Gains Tax or Inheritance Tax have further fuelled the rise.
Between January and September 2024, a total of 46,449 companies were set up, representing a 23% rise compared to the same period in 2023. This also means that more companies have been set up so far this year than in the whole of 2021. At the current rate, it’s likely that between 60,000 and 62,000 limited companies will have been created by the end of 2024, far surpassing last year's total of 50,004.
The driving force behind this trend is the widening gap between personal and corporate tax rates. Nearly three-quarters (70%) of new buy-to-let purchases are now made in a company structure. However, there's also been a significant rise in the number of landlords moving homes they own in their personal name into a company to shelter from an increasingly aggressive tax environment.
The shift towards corporate structures has been particularly pronounced since 2016 when changes to tax legislation began to impact higher-rate taxpayers in particular. Since then, landlords can no longer fully offset their mortgage interest payments as a cost. Instead, they receive a 20% tax credit, which has pushed up tax bills, particularly for higher-rate taxpayers. Nearly three-quarters (74%) of the current 382,007 companies set up to hold rental property in Great Britain have been incorporated since this pivotal year.
Despite this surge, only about 15% of all rental homes owned by private landlords are currently held in corporate structures.
The regional distribution of these new companies is telling. 59% of new incorporations are in the South of England, where higher interest rates have hit hardest and where a larger proportion of households are higher-rate taxpayers. However, only 42% of properties bought by limited companies this year are in the South, indicating that many Southern-based landlords are looking to the Midlands and North for higher yields.
Prior to 2016, the limited company structure tended to be the preserve of larger landlords. However, the growing tax advantages have attracted the attention of smaller investors too. So far this year, 54% of new purchases have been made by companies who are making their first, second or third purchase.
The rising number of buy-to-let incorporations suggests that the investors seeking shelter are in it for the long-run. There can be multiple costs involved with setting up a company, such as accountancy costs, stamp duty when transferring a property and potentially capital gains tax too. But with the government continually tinkering with personal tax rules, operating through a company has offered investors longer-term certainty.
There can also be financial benefits further down the line when selling a limited company or passing it down to family. With inheritance tax hikes set to be a key theme in the upcoming Budget, this could further add to the number of landlords incorporating.
Rental Growth Cools
Rising rents, whilst painful for tenants, have softened the impact of higher mortgage rates on landlords. While the average rent for a newly let property in Great Britain reached £1,384 per calendar month in September, the pace of growth has slowed to 4.5% year-on-year, down from 5.0% in August and 11.7% in September 2023.
Notably, September 2024 marked the first month since March 2021 when no region in Great Britain recorded a double-digit percentage rental increase, suggesting that tenant affordability is close to reaching its limit. Back in September 2023, six of the 11 regions in Great Britain recorded +10% annual rental growth. But in August, the North East was the only region to record double-digit rental growth of 12.1%, a figure that slowed to single digits (8.1%) in September.
London, in particular, has seen rental growth decelerate dramatically, from a peak of 17.2% in August 2023 to just 2.1% in September 2024. However, there are few signs of rental growth slowing much further in the capital given that these figures have stagnated in recent months. And even though the pace of growth has slowed, tenants in the capital have faced large cash terms increases. The average rent in Inner London reached £3,284 pcm in September 2024, £1,099 pcm more than it cost tenants who moved three years ago.
