Recent market conditions have proven challenging for landlords. Factors such as climbing interest rates, unstable swap markets, and strained affordability assessments are hindering the acquisition of new properties and the remortgaging of existing ones. Compounding these financial pressures is the reduced assortment of available mortgage deals.
The Department for Levelling Up, Housing & Communities (DLUHC), in their recent survey – the first in-depth review of the Buy-To-Let (BTL) market in England in three years – highlighted these struggles. Approximately 10% of landlords are considering leaving the market altogether, with another 12% planning to decrease their portfolio size.
Legislative Labyrinth
Many landlords express discontent with recent legislative amendments, which have increased their tax burdens. These changes include the reduction of mortgage tax relief and increased stamp duty for investment properties, prompting around half of the landlords intending to exit the market to cite regulatory overhaul as a key motivator.
Future legislation, such as the new Section 21, proposes to make tenant eviction more difficult under certain conditions. Additionally, while there were anticipations that landlords would be mandated to enhance the energy efficiency of older properties, these expectations have been temporarily paused due to a government reversal on several net-zero initiatives.
Creative Adaptations in the Property Market
Instead of bowing out, many landlords are employing inventive strategies to circumnavigate these financial and regulatory challenges. A notable trend is the escalating number of landlords pivoting to operating their BTL properties through limited companies, primarily for tax benefits.
The Corporate Shield
Data from Hamptons reveal a sharp increase in new BTL company registrations, from 23,904 in 2017 to 48,540 in 2022. This surge aligns with the tax changes preventing personal landlords from deducting mortgage interest from their taxable income.
“The shelter of a company sometimes acts as damage limitation,” explains Aneisha Beveridge, head of research at Hamptons. By using a limited company, landlords pay corporation tax on profits (currently at 25%) rather than income tax on rental income, providing tax efficiency, especially for higher-rate taxpayers.
The Complications of Corporate Structure
Despite its advantages, a limited company structure isn’t without its complexities. It often involves higher mortgage rates for BTL loans, additional tax considerations upon selling a property, and accountancy costs for company management.
However, the current hike in mortgage rates is making corporate loans more appealing. “For some landlords, particularly higher-rate taxpayers, rising mortgage costs may put them at a loss if they own personally,” Beveridge adds.
Calling for Equity in Lending
The growth in landlords opting for a limited company structure has led to calls for fairer mortgage pricing, as these BTL loans typically attract higher interest rates and fees. Martin Wade, director at Your Mortgage Decisions, argues that there’s “no good reason” for such price disparity.
Conversely, Jeni Browne, development director at Mortgages for Business, suggests that these rates compensate for the extra underwriting required for companies, though she acknowledges the gap is lessening.
The Draw of Limited Companies
Richard Merrett, SimplyBiz Mortgages’ director of strategy relationships, notes a significant uptick in limited companies established by landlords, driven not only by tax incentives but also by favourable mortgage lending criteria.
Despite the advantages, operating through a limited company might not benefit every landlord. Advisors must tread carefully, providing accurate information while encouraging landlords to seek specialized tax advice.
Professionalisation of the Market
The ongoing trend towards limited company structures is influencing market dynamics, potentially leading to higher rents due to decreased competition and supply in the BTL market. “Small landlords have been unfairly targeted by the Treasury and through wider regulation,” Wade asserts, emphasizing the risk of eroding the private rental sector’s quality.
Conclusion: A Future of Continuous Evolution
The consensus among experts is that unless there are substantial changes in mortgage interest relief and stamp duty, the popularity of limited company BTL will continue to grow. This shift contributes to the ‘professionalisation’ of the sector, favouring landlords with extensive portfolios over those with one or two properties.