Landlords looking to make ends meet amid a tight tax structure and rising interest rates are increasingly turning towards company structures, and many are growing their portfolios.
According to research from buy-to-let lender Paragon Bank, three-quarters of landlords who intend to purchase a new rental property in the next year will do this under a limited company structure, as opposed to paying income tax as a private landlord.
This has been a growing trend since late 2021, and was up markedly from the 62 per cent of landlords who said the same in the early parts of this year.
Buying as a limited company offers a number of tax benefits. It allows landlords to deduct mortgage interest from company income and pay tax at corporation tax rates, rather than an individual landlord’s personal income tax rate.
The structure can also offer more favourable mortgage financing options. Paragon said most lenders set interest coverage ratios at 145 per cent for higher-rate taxpayers, whereas limited company applications require a ratio of 125 per cent. They can often get higher loan amounts too.
This seems to have struck a chord with landlords.
Louisa Sedgwick, Paragon Bank's commercial director of mortgages, said: "Holding rental property within a limited company structure has been growing in popularity since the mortgage interest relief changes introduced by the government in 2017, but it has certainly accelerated in the past year.
"As a lender that specialises in portfolio landlords, we have always attracted a higher proportion of limited company lending, but that has certainly increased, particularly as interest rates, and subsequently mortgage pricing, have risen."
Interest rates rose sharply after the Liz Truss government last summer, and although they have since retreated somewhat, the average rate is still well above what it used to be in the past decade.
HSBC for instance currently charges 5.84 per cent for a standard 2-year fixed rate mortgage at 60 per cent loan to value, and 7.6 per cent variable rate.
But it's not just interest rates, landlords have also been hit by a 3 per cent stamp duty surcharge on second homes since 2016, and have seen the amount of tax relief they can claim on interest payments reduced to 20 per cent, regardless of their income.
Conversely, instead of the 40 per cent income tax a higher rate taxpayer would pay on the rental income, limited companies pay between 19 and 25 per cent corporation tax.
Paragon spoke to 1,000 landlords in July and said the share of them planning to buy in an individual name has fallen from 41 per cent in the final quarter of 2021 to 17 per cent in the second quarter of this year.
This seems to be in line with more landlords planning to exit the market altogether amid harsh economic conditions.
But Paragon found portfolio landlords were still buying. It found the average portfolio size of landlords with at least one property in an LC has increased in the second quarter of the year to 16.9 properties, up from 15.6 in Q1 and 13.1 in the final quarter of 2021.
A greater switch to LC structures seems to be connected to the trend, as of those landlords, the average number of properties held within an LC in Q2 was 12.3, up from 11.7 in Q1 2023 and 7.8 in the final quarter of 2021.
Charles Breen, founder and director at Montgomery Financial, said portfolio landlords were now the dominant players, which, he said, reflected a growing trend toward greater professionalism in property investment.
"This shift has fuelled a substantial demand for limited company buy-to-let mortgages. The transition from occasional and unintentional landlords to more dedicated investors, who prefer limited company buy-to-let financing, has undeniably been instrumental in sustaining the market, particularly in the face of rising interest rates.
"Notably, there has been a noticeable uptick in landlords who own one or two properties opting to sell and exit the industry."
Riz Malik, founder and director at R3 Mortgages, said the benefits of holding property under a limited company framework "may be keeping high-rate and additional-rate taxpayers in the rental market".
Stephen Perkins, managing director at Yellow Brick Mortgages, agreed. He said: "Limited company products massively help the buy-to-let market, as despite rates for the products being higher, they benefit usually from a lower stress test on the rental calculation allowing more scope for borrowing needs.
"Also as a limited company, landlords can still offset the mortgage interest against their tax bill, which for larger portfolio landlords can be a massive saving on tax."
carmen.reichman@ft.com
