Limited company profits

More landlords could opt for limited company structures this year

The number of buy-to-let landlords buying and operating their properties through a limited company has accelerated, and 2024 looks set to be an equally busy year for professionalising landlords. 

Since mortgage interest tax relief changes were introduced by the government in 2017, which reduced the amount many landlords could claim towards lowering their income tax bill, investing in a company through a limited company has grown in popularity; particularly over the past year.

Now, new research from Paragon Bank, undertaken by BVA BDRC, has found that 49% of 300 brokers surveyed expect the amount of business they receive through limited company portfolio landlords to increase in 2024. A further 45% are expecting a rise in the number of non-portfolio landlords with limited companies.

Limited company structures are currently much more popular among portfolio landlords, with 29% of portfolio landlords operating in this way. This compares to 15% of non-portfolio landlords – many of which will only have a single buy-to-let property – as the majority still own and run their companies as individuals.

Around a third of brokers surveyed think the level of business they receive from landlords with limited companies will stay the same in the next 12 months, while only 11% expect more landlords to take out borrowing in a personal name.

Benefits are based on individual circumstances

The vast majority (82%) of landlords with the largest portfolios, of six properties or more, already use limited companies to purchase and operate their properties, according to the research, pointing to the fact that the greater the level of income from property, the more beneficial this structure can be.

As Louisa Sedgwick, Paragon Bank’s commercial director of mortgages, points out, there are certainly benefits to be had by using a limited company, but it won’t be the same for everyone.

“I think intermediaries are right to expect to see more limited company business this year. It is a structure that has become increasingly popular with landlords in recent years as they have responded to Government changes to the tax treatment of buy-to-let property ownership.

“Owning properties through a limited company can enable landlords to offset finance costs, such as mortgage interest, against rental income. It’s wise for borrowers to seek professional advice because incorporation may not be the best route for all landlords and the benefits can vary based on individual circumstances.”

Late last year, a separate survey by Paragon Bank revealed that around three quarters of landlords that were planning on buying a new rental property in 2024 would do so under a limited company structure.

Pros and cons of a limited company for landlord

One of the main differences between using a company to buy and let out property and doing it as an individual is linked to taxation. When the government began to phase out mortgage interest tax relief for landlords in 2017, this sparked a major setback for some landlord investors as their income tax bill increased.

The relief was replaced by a 20% tax credit, while effectively higher rate tax payers used to receive 40% tax relief on mortgage payments.

This change only applied to private landlords (who either own as a couple or an individual), while those operating through limited companies could continue to claim back the same level of mortgage interest costs, reducing their tax bill. They also pay corporation tax rates, rather than income tax rates, which can be beneficial.

Particularly since mortgage rates have increased, this is an important consideration for a growing number of buy-to-let landlords. According to Paragon, some lenders also offer more favourable coverage ratios for limited company purchases compared with individual ones.

However, there are downsides to consider too: if you don’t have a mortgage or you’re a lower earner, it may not be worth the hassle and legal fees of setting up a company. Also, if you already own the property as an individual, you would effectively be selling this property to the company, thereby creating a stamp duty charge.

BuyAssociation can help individual and limited company landlords find and secure their next property investment opportunity. Browse some of our current projects, or get in touch for more information.

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