Should landlords run their buy-to-lets through a limited company?

Landlords operating through company structures are beginning to dominate the UK’s rental market as property investors find ways to minimise the effects of new regulations.

New analysis of the private rented sector has found that the percentage of “complex” or professional buy-to-let landlords applying for mortgages, including those running through corporate structures or with property portfolios, grew from 72% to 88% in the first six months of this year.

The research, conducted by buy-to-let mortgage lender Paragon, also revealed that the number of landlords with just one property (including accidental landlords who have found themselves renting out a property not intended for this purpose) has fallen drastically since 2010, from 78% to 45%.

While this could be a sign that small-scale landlords may be exiting the market, it equally could indicate increased investment in the sector as people with only one investment property decide to acquire more buy-to-let homes and become professional or portfolio landlords. As tenant numbers continue to grow across the country, opportunities are rife for those looking to rent out properties.

Paragon also stated that professional landlords accounted for 92% of its future business at the end of March, which could be a sign of more landlords switching to limited company structures in order to alleviate the effects of some of the regulations and legislation that has been put in place in recent years.

The benefits of a limited company

The major benefit of operating through a corporate structure is that the owner might be able to take advantage of favourable tax rates – which is particularly important as the Section 24 tax changes continue to be rolled out resulting in buy-to-let landlords losing the tax relief they could once claim on their mortgages.

Before Section 24 came in, landlords could claim tax relief on all of their mortgage interest payments within their tax bracket (20% for basic-rate taxpayers, 40% for higher-rate taxpayers, 45% for additional-rate taxpayers). As the new regulation is rolled out between 2017 and 2021, the amount landlords can claim will be reduced to zero, with financing costs given as a basic rate tax reduction from 2021.

For those operating through a corporate structure or limited company, the full interest amount can still be off-set against profits, and these are subject to corporation tax (currently 19%) instead of individual income tax, while a variety of reliefs are also available. Corporation tax is also set to be lowered to 17% by April 2020.

Things to consider

Anyone can set up a limited company to operate their buy-to-let property, but it is worth getting proper financial advice before doing so.

Sometimes, buy-to-let mortgage rates for limited companies are higher than for individuals, so this must be weighed up against the potential tax savings. There could also be reduced lender choice, although more are entering the market as it becomes an increasingly popular option.

If you already own a property as an individual, the advice is to not transfer it into a limited company as doing so would incur stamp duty, legal costs as well as other potential costs, so it may be more applicable to those investing in new buy-to-let properties.

Professionalisation of private rented sector

Hamptons International, the estate and letting agency, found that company landlords own an estimated 641,480 properties in the UK, which is 42% higher than in 2015.

Hamptons International head of research Aneisha Beveridge says: “More than one in ten rental properties are now owned by private companies, an indication that the sector continues to professionalise.

“Increasing taxation for private landlords combined with the growth of the build to rent sector has meant that more companies are letting homes than at any time since our records began.”

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