The UK rental market is witnessing a significant shift. More landlords than ever are turning to limited company structures when purchasing buy-to-let homes. What’s driving this change, and why does it matter to both the industry and potential tenants?
A Dramatic Rise in Limited Company Buys
According to recent data from Paragon Bank, there’s been a notable change in the way landlords approach the purchase of rental properties. A record 74% of landlords who are considering buying a rental property in the coming year are planning to do so through a limited company. This is a jump from 62% who had similar intentions during the first three months of 2023.
The Allure of the Limited Company Structure
There are several compelling reasons why landlords might opt for this structure when buying property:
- Tax Benefits: One of the most significant advantages is the tax relief offered by the limited company structure. Landlords can deduct mortgage interest from the company’s income. This means they’re taxed at the corporation tax rate instead of their personal income tax rate.
- More Favourable Loan Conditions: As Paragon highlights, while most lenders set interest coverage ratios at 145% for higher-rate taxpayers, this requirement is reduced to 125% for limited company applications. This effectively allows landlords operating under a limited company to borrow more money, making pricier properties within their reach.
This move to limited companies isn’t just about the numbers, though. There’s been a general decline in landlords buying properties in their individual names. This figure has slumped from 41% in the last quarter of 2021 to just 17% in the second quarter of 2023.
Growing Portfolios under Limited Companies
An interesting trend is emerging alongside this shift. The average portfolio size of landlords operating at least one property in a limited company has grown. At the end of 2021, the average number of properties they held was 7.8. Fast forward to the second quarter of 2023, and this number has risen to 12.3.
This growth indicates that landlords with properties under limited company structures are actively purchasing more, leading to a swelling of their portfolios.
A Response to Policy Changes
The move towards limited company structures hasn’t come out of the blue. Louisa Sedgwick, Paragon Bank’s commercial director of mortgages, points out that the trend began in 2017. This was in response to changes made by the government related to mortgage interest relief.
She says, “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. However, it’s clear this trend has accelerated over the past year, particularly as interest rates and consequently mortgage pricing, have risen.”
A Comprehensive Overview
Paragon Bank’s findings are backed by substantial research. They collaborated with data group BVA BDRC, which carried out a survey spanning from 1st July to 21st July. During this period, they gathered responses from 983 landlords, ensuring a comprehensive overview of the current landscape.
Conclusion: A Market in Flux
The rental market in the UK is evolving. As landlords pivot towards limited company structures, there may be potential implications for the industry and renters. With favourable tax and lending conditions, it seems this trend is here to stay for the foreseeable future. As with all shifts in the market, only time will truly reveal its long-term impact.