While on a mission to shore up homeownership rates which had been gently sliding backwards, the government irrevocably changed the buy-to-let landscape in 2016. The introduction of a 3% stamp duty surcharge on second home purchases put the brakes on growth. Meanwhile the introduction of section 24 - which stopped higher-rate taxpayers offsetting all their mortgage interest – sowed the seeds for a bigger crunch when interest rates eventually rose.
For much of the two decades leading up to this point, the invention in 1992 of the buy-to-let mortgage prompted a middle-class buy-in. Since then, the number of rental homes has more than doubled, with most bought by private individuals who own one or two homes in their personal name as a way to eke out a return on their wealth in a world of falling interest rates. Before this boom, most rented homes were owned by a handful of individuals and larger companies.
More recently, new landlords have increasingly sought to protect themselves from the more aggressive tax landscape. Primarily they have been doing this by using companies to hold buy-to-lets, just as they did prior to 1992 when very few rented homes had mortgages on them. While there are advantages and disadvantages of using a company structure, the main benefit of being able to fully offset costs (including mortgage interest) has become increasingly important as rates have risen.
Consequently, the number of buy-to-let companies set up has more than doubled between 2016 and 2022. While it looks like the numbers being incorporated might have peaked in 2022, there are still substantially more incorporations than a few years ago.
Up until recently this growth primarily reflected new buy-to-let purchases going into companies, rather than homes that are owned in personal names being moved across. Only around 12% (or just over 600,000) of all rented homes in England & Wales are held in a company structure. However, the tax advantages in a high-interest world are so acute that we’re now at a point where almost three-quarters (74% so far in 2023) of new buy-to-let purchases are going into a limited company, a figure which was still below half as recently as 2018.
While the total number of buy-to-let mortgages has fallen by just over 30,000 since November 2022 as some investors sell up or pay off their debt, the numbers held by limited companies have carried on rising. Today, around 22% of all outstanding buy-to-let mortgages are in a company structure, up from 15% three years ago. This predominantly reflects the very high proportion of new purchases going into limited companies.
The recent increase in the number of buy-to-let limited companies has come from smaller investors. While portfolio investors have long preferred a company structure, recent growth has primarily come from the increased appetite among those with one or two properties. 30% of company buy-to-let purchases in 2023 were made by companies containing a single property, up from just 14% in 2019. This suggests that companies are increasingly being used by the same individuals who were previously holding homes in their own name, despite the costs involved with making the switch.
So what does the future hold? There will always be some investors for which owning a buy-to-let in their own name will make the most financial sense. The minority without a mortgage and/or lower-rate taxpayers will continue to prop up the number of homes held in personal names. This means that the share of new buy-to-let purchases going into a company is probably pretty close to hitting its ceiling.
However, it’s likely that for as long as interest rates remain close to where they are today and investors’ ability to offset all their mortgage interest remains curtailed, the vast majority of new buy-to-let purchases will continue to go into a company structure. The upside is that as companies become a bigger chunk of the market, more lenders will look at the space, making mortgage rates more competitive. Yet as limited companies become the mainstream, the chances of a government ironing out some of the differences between personal and corporate ownership are probably also increasing.
For more information on how to set up a buy-to-let company with our partner GetGround, visit our buy-to-let company service page here.
