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Recent years have seen a growing number of Buy-To-Let (BTL) landlords choose to buy and own their properties via a limited company, rather than through simple personal ownership. What are the reasons behind this growing trend? Perhaps the most important factor is the change in UK government tax regulations.
What has changed for BTL landlords?
In 2015, the Chancellor of the Exchequer at the time, George Osborne announced his intention to phase out landlords’ mortgage interest tax relief on BTL properties. The new policy came into force in 2017, with the new measures being phased in gradually. This meant that since 2020, private landlords have no longer been able to deduct any of their mortgage interest payments from rental income to reduce their tax bill. In practice, this change has little effect on basic rate tax payers, who are compensated by a tax credit. However, many BTL landlords owning properties under their own name pay income tax at a higher rate, which means a big increase in potential tax liabilities.
There have been other changes too, such as alterations in stamp duty rates and enforcement. The recent rapid rise in bank lending rates has also massively increased many landlords’ mortgage interest payments. Nevertheless, it is the government’s adjustment in mortgage income tax rules which has probably had the greatest effect on shaking up the market.
How have these tax changes affected the limited company buy-to-let mortgage market?
Fortunately, UK FTSE 250 listed financial services specialist Paragon Bank has just completed a survey of 1,000 landlords which deals with this very question. This enables us to see the effects these recent government changes have had on actual landlord behaviour.
Industry data shows that the number of newly formed landlord limited company set-ups has more than tripled: from under 14,000 in 2015 to over 48,000 in 2022. This rapid growth means that by 2021 nearly 270,000 such companies had been set up in the UK, the majority of which had been founded since the withdrawal of mortgage interest relief began in 2017.
Despite these rapid changes in the market, the survey found that more than a third of landlords (34%) continue to hold their properties under their own name. 31% of landlords hold a mixed portfolio (some properties are held personally, others as part of a limited company) and less than a quarter (23%) hold their properties entirely within a limited company set-up. The remaining 12% have alternative arrangements (such as partnerships or hold their property portfolios as part of larger trading conglomerates).
Future growth in the limited company as the major vehicle for landlord property ownership seems built in, as the landlords surveyed indicated a strong preference for any future purchases being acquired by limited company rather than personally. 73% indicated that any new additions to their property portfolio would be via this route, with only 7% opting for personal purchases.
One interesting result of these recent rapid changes in the BTL market is the typical landlord age profile of the two main ownership types. The overall trend is that limited company landlords tend to be younger, whereas a greater proportion of older landlords continue to opt for private ownership.
This is perhaps predominantly because it is younger landlords who are likely to be buying property for the first time, and they are overwhelmingly choosing to set up a limited company to do this because of the post-2017 tax changes. More than half of all limited company landlords are under 55, whereas only around 20% of this age group opt for private ownership. 78% of private ownership landlords were over 55.
What are the main reasons for the increasing preference for limited company BTL mortgage ownership?
More than 80% of the limited company landlords in the survey indicated that the ability to offset BTL mortgage interest rates was a major driver behind their decision. The recent rises in mortgage lending rates will have added a further incentive here. More than half preferred to pay corporation tax instead of the income tax they would be liable for as a private owner. This can be a big advantage for higher rate taxpayers: corporation tax is currently charged at 19%, whereas higher rate income tax payers can pay up to 45%.
Finally, nearly half of BTL landlords surveyed thought that the ability to separate their business and personal finances was a major advantage of the limited company option.
Where are BTL landlords choosing to get advice on Limited Company Vs Private Ownership Mortgages?
Setting up a limited company can be complicated; deciding between this and a private ownership structure is an important choice. More than two thirds of landlords in the survey consulted their accountant, while nearly a third also thought it worthwhile engaging a specialist tax adviser. Other popular routes of advice include employing a mortgage adviser, talking to fellow BTL landlords or professional associations and reading specialist media articles on the subject.
Conclusion
The decision on whether to buy property privately or via a limited company is a complex one. Getting the right advice is vitally important and many of the possible avenues available to potential buyers are outlined above. Fortunately, by reading this article, three of these excellent sources of information have already been covered… Readers will have enjoyed (hopefully!) a specialist media article; published by Advocate Finance, a major commercial mortgage adviser; quoting a survey of a thousand landlords, colleagues and peers.
How can Advocate Finance help?
Advocate Finance has a team of specialist advisers and access to more than 160 different lenders. Every landlord (and potential landlords) have their own specific circumstances and requirements. So why not contact us to discuss your options?
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