Using a limited company to run a buy-to-let business was not uncommon. But pre-2016, most of the landlords operating in this way were portfolio investors with several properties, whereas most smaller landlords owned their buy-to-lets in their personal name.
That began to change in 2016 when it was announced that personal landlords would no longer be able to offset their mortgage interest before tax*, instead receiving a 20% tax credit. Since then, smaller landlords have been shifting their properties into ltd’s where they can still fully offset their costs before paying tax. And in 2023, a record number of buy-to-let limited companies were created.
Despite a sharp fall in the number of homes bought by landlords in 2023, the number of limited companies set up to hold buy-to-let properties continued to rise. Last year a record 50,004 limited buy-to-let companies were set up across the UK surpassing 2022’s previous record (48,540) by 3% as more investors began to look for shelter as they faced remortgaging at higher rates.
The rising number of incorporations means that at the start of 2024, there were 345,426 active limited companies designed to hold buy-to-let property in the UK, up 11.6% since the beginning of 2023. 68% of current companies had been set up between 2017 and 2023 when the tax changes* were phased in.
Overall, these companies own a total of 615,077 properties across England & Wales. This marks an 82% increase from the end of 2016 when landlords who were higher rate taxpayers started to see the share of mortgage interest they could offset from their tax bill for homes in personal names reduce. However, companies set up after 2016 still only own 38% of all buy-to-lets held in a limited company, with most investors having set up shop beforehand.
Of the 615,077 limited company buy-to-let properties, 458,838 (75%) have a mortgage charge against them. This means that limited company landlords are more likely to have a mortgage than investors who own buy-to-let property in their personal name. The number of outstanding limited company mortgages has risen 10% over the last 12 months, despite the total number of buy-to-let mortgages falling 3% over the same period.
Most of the growth in buy-to-let incorporations over the last year has come from smaller landlords. Over the last 12 months, there was a 21.9% increase in the number of homes held in companies with a single property. This compares to a 3.8% increase in the number held by companies owning 20+ homes. Given the upfront costs associated with setting up a new company, this suggests a long-term commitment from landlords.
Many of these new incorporations by smaller single-property landlords reflect young co-investors. Data from GetGround shows that 60% of all new shareholders in 2023 were aged 45 or below, up from 51% in 2019. While 10% of companies set up in 2023 had at least three shareholders, up from 7% in 2022. Companies with multiple shareholders are disproportionately likely to be owned by younger investors, those aged under 35.
Companies owning 20+ homes were the only ones to see the number of mortgage charges increase faster than the number of homes, suggesting that these investors are leveraging up rather than reducing the debt on their portfolio.
Scotland recorded the largest pick-up across the UK with an 8.4% year-on-year uplift in the number of new companies set up. This primarily reflects the bigger difference here in tax rates paid by individual landlords and limited companies, and so landlords often stand to gain from incorporating.
For overseas investors, the limited company structure increasingly tends to be the vehicle of choice. 53% of new shareholders in buy-to-let companies set up by GetGround during 2023 were based overseas, up from 45% in 2021. Together investors from Hong Kong and Singapore accounted for just under a third of all overseas shareholders.
For as long as landlords continue rolling off cheap fixed-term mortgages onto rates which are twice or triple what they were paying, the number of homes being put into a corporate structure will remain high. The number of buy-to-let incorporations each year is likely to continue running in the region of 40,000-50,000 for the foreseeable future. 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 personal name.
*Section 24 Changes
In 2015 former chancellor George Osborne announced he would change the law to remove landlords' right to claim mortgage interest as a tax-deductible expense. In a change rolled out between 2017 and 2020, all landlords lost the ability to claim mortgage interest as an expense.
Instead, they can now receive a 20% tax credit, which whilst broadly equivalent to the tax payable for a landlord who was a lower-rate taxpayer, means higher-rate taxpayers are materially worse off. The impact of this change has been felt more acutely as mortgage rates have risen.
For example, in 2015 a landlord who was a higher rate taxpayer receiving £1,000 per month in rent whilst paying £500 per month in mortgage interest (and assuming no other costs) would pay 40% tax (or £2,400) on their £6,000 profit.
By 2020 they would be taxed at 40% on the £12,000 rent they earned and receive a 20% tax credit on the mortgage interest equivalent to £1,200. This means they would pay £3,600 in tax, a 50% uplift. As interest rates have risen over the last two years, the policy has hit landlord’s bottom lines increasingly hard.
