Landlords across Britain have been rapidly setting up limited companies to manage their buy-to-let properties. This move is seen as a strategy to protect themselves from the financial strain of higher interest rates.
According to the latest data from Hamptons, a record-breaking 50,004 new limited buy-to-let companies were established in 2023, a 3% increase from 2022’s figure of 48,540. This comes despite a drop in property purchases by landlords. These companies now hold a staggering 615,077 properties in Britain, marking an 82% rise since the end of 2016.
Why the Shift?
This shift in strategy is primarily due to tax changes introduced in 2016. These changes made it more financially viable for some landlords to hold their buy-to-let properties through limited companies. Notably, a 3% stamp duty surcharge on second homes and buy-to-lets, along with the reduction of tax relief on mortgage interest, spurred this change. Previously, landlords could deduct mortgage interest from their rental income, paying tax only on profits. Now, they pay income tax on the full rental income, receiving a maximum of 20% tax credit on mortgage interest.
Aneisha Beveridge from Hamptons highlights that the current tax regime prompts landlords to use companies as a shelter from higher interest rates. Despite a slowing sales market, the record number of company formations suggests a long-term commitment by landlords, despite the initial costs of incorporating.
Future Trends
Beveridge predicts that the trend of transferring buy-to-let properties into corporate structures will continue, especially as landlords move off cheap fixed-term mortgages onto higher rates. She forecasts a steady number of 40,000 to 50,000 buy-to-let incorporations annually, potentially leading to half of all rental homes being held in limited companies.
The Pros and Cons of Corporate Ownership
Owning a property through a company, whether registered in England or overseas, can offer tax benefits. For example, gains on property sales are taxed at lower corporation tax rates compared to personal tax rates.
However, incorporating is not without its complexities. There are significant compliance requirements, including company reporting and the practicalities of setting up company bank accounts. Additionally, transferring a property from an individual to a company is considered a disposal for Capital Gains Tax (CGT) purposes, potentially incurring a substantial tax bill and Stamp Duty Land Tax (SDLT) charges.
Regional Variations
The trend varies regionally. Scotland saw the most significant increase in new company formations, reflecting the larger tax difference between individual landlords and limited companies. The South West and North East witnessed a small decline in new company formations
, but the number of homes owned in corporate structures continued to rise. Interestingly, in the North East, 58% of limited company buy-to-lets were owned by companies established outside the region, underscoring the appeal of higher-yielding properties in northern England.
Rising Incorporations and Mortgage Trends
As of the start of 2024, there were 345,426 active limited companies for buy-to-let property in Britain, an 11.6% increase from the previous year. These companies predominantly arose between 2017 and 2023, following the phased introduction of tax changes. Notably, 68% of current companies were established during this period. Although new companies post-2016 own only 38% of all buy-to-lets in limited companies, the number of outstanding mortgages for these companies has risen by 10% in the past year.
The Shift in Landlord Profiles
Interestingly, the growth in buy-to-let incorporations over the last year mainly came from smaller landlords. There was a 21.9% increase in homes held by companies with just one property, compared to a 3.8% increase for those owning 20 or more homes. This indicates a significant shift towards corporate ownership among small-scale landlords.
Rental Market Dynamics
2023 was a landmark year for rental growth. The average rent for newly let properties in Britain surged by 10.2% year-on-year in December, the strongest growth recorded since 2014. This increase translates to an additional £1,488 annually for the average tenant. Notably, rental growth has consistently outpaced inflation since March 2023.
The East of England experienced the most significant rent increases, with average rents rising by 13.3% in December 2023. Other regions, including Greater London, the Midlands, and the North of England, also saw substantial hikes.
Future Outlook
While slightly lower mortgage rates in 2024 might ease some pressure, Hamptons predicts that rental growth will continue to outpace the pre-Covid average. Rents on newly let properties are expected to rise by 7% in 2024, followed by 5% in the subsequent two years. This sustained increase is attributed to the continuous cost pressures faced by landlords due to higher interest rates.