The record number of landlords now holding properties in a company means incorporation is rapidly becoming mainstream among investors. While historically, it was only large portfolio investors who owned their buy-to-lets in this structure, the tapering of mortgage interest tax relief since 2017 (known as Section 24) has encouraged more investors to jump on the bandwagon.
Rising mortgage rates have boosted this shift as an increasing number of landlords are moving their portfolios from personal to company names to stand a better chance of turning a profit in a world where mortgaged landlords are coming under increasing pressure. Arguably the biggest incentive is the fact that incorporated landlords are still able to offset mortgage interest before they’re taxed.
Last month saw the total number of companies set up to hold buy-to-let property pass 300,000 for the first time. This means that the total number of buy-to-let companies has doubled over the last five years since 2017. The increase has been driven by new buy-to-let purchases being made in a company structure as well as landlords moving properties from personal to company names.
As a result, it is likely that more buy-to-let companies will be set up in 2022 than in any previous year, despite there being fewer buy-to-let homes bought this year in comparison to last year.
Our estimates suggest that around 40% of all new buy-to-let purchases are now made via a company structure, a record figure and one which is up from around 10% in 2016 before the Section 24 tax changes were tapered in. The average company with outstanding mortgages, now holds 3.3 mortgaged properties.
Over the last 12 months to September 2022, a total of 50,445 new companies were set up to hold buy-to-let property, the second highest figure in any 12-month period. However, the total number of active buy-to-let companies increased more slowly than this. This is because 8,902 companies were dissolved, predominantly due to the sale of all the properties being held within the company, a figure which is up 25% on the previous 12 months.
How does owning a buy-to-let in a limited company impact profitability?
Rising interest rates have increased the advantages associated with incorporation, particularly for higher rate taxpayers with properties in their own name given they can no longer fully offset mortgage interest payments.
The average higher rate taxpayer purchasing a buy-to-let today with a 6% interest rate faces a £1,716 annual tax bill despite making a loss of £2,479. Meanwhile the same landlord with a property held in a company structure would not pay any tax, limiting their annual loss to £1,604.
A lower rate taxpayer would face a loss of £763. However, with mortgage rates above 5.0%, it’s becoming increasingly likely that even limited company landlords could fall into the red when re-mortgaging or making a new purchase.
Will rental growth soften the blow?
While rapidly rising rents have softened the impact of higher interest rates for landlords, rental growth only offsets around a fifth of their increase in mortgage costs. This means that a landlord who bought an average home two years ago with a typical 25% deposit would need to increase their equity from 25% to 55% if they re-mortgaged today in order to maintain the same monthly returns compared to when they first bought. For the average investor, this means stumping up an extra £67,000 in cash.
Additionally, the pace of rental growth continued to soften in September, with the average price of a newly let home rising 6.9% on the same time last year to stand at £1,186. Rental growth continues to be led by London, where rents rose 11.3% year-on-year across the capital and 26.1% in Inner London.
Does the stamp duty cut make it cheaper to incorporate?
Yes. Landlords who wish to shift a buy-to-let from a personal name into a limited company have to pay stamp duty on the property. The recent tax cut will save the average investor just under £2k when incorporating. This is one of the reasons why we think that the number of new incorporations is likely to remain relatively high over the next 12 months.
How has the rental cap in Scotland affected the rental market?
In Scotland, where a rent cap for existing tenants was introduced from the 6 September, the price of a newly let Scottish home (which is exempt from the cap) rose 8.9% on the same time last year. There were 60% fewer homes available to rent than in September 2019, a larger fall than anywhere else in the country over the same time period.
Meanwhile nationally, September saw the first annual increase in the number of homes available to rent in five years. Across Great Britain there were 14% more homes available to rent than in September 2021, although this increase is from a period when stock levels were at record lows. Stock levels may remain up on last year, however they are unlikely to rise far beyond 2021’s lows and remain 47% below 2019 levels.