Why are more landlords using limited companies?

Landlords who own buy-to-let properties in their own name could previously deduct mortgage expenses from their rental income before tax, reducing their overall bill.

This meant a landlord with mortgage interest payments of £500 a month on a property rented out for £1,000 a month would only pay tax on £500 of that income.

However, thanks to Osborne, this started to be phased out in 2017 before being stopped completely in April 2020.

Now landlords receive a tax credit instead, based on 20 per cent of their mortgage interest payments.

This means a higher rate tax-paying landlord with mortgage interest payments of £500 a month, again on a property rented out for £1,000 a month, now pays tax on the full £1,000 – but with a 20 per cent rate cut on the £500 that is being used towards the mortgage.

This is much less generous for higher-rate taxpayers, who previously received a 40 per cent tax relief on mortgage payments.

A landlord who owns in a limited company with mortgage interest payments of £500 a month on a property rented out for £1,000 a month in rent would only pay tax on £500 of that income.

Put simply, it means that whilst individual landlords are effectively taxed on turnover, company landlords are taxed on profit – albeit individual landlords can still offset costs such as letting agent fees and repairs.

However, on top of mortgage interest relief, company ownership can provide other tax savings.

Manjinder Bains, a chartered tax advisor at UK Landlord Tax, says that limited company ownership is becoming the norm thanks to the tax advantages of holding property in this way.

He says: ‘Since 2017 there has been a huge rise in the number of clients who now use a limited company to own their rental property.

‘Nearly all of our higher rate taxpayer clients use limited companies, due to the income tax advantage. 

‘There can also be an inheritance tax advantage too. If you use a limited company and it’s setup correctly from inception with your children included, it is possible to save large amounts of inheritance tax in the future without giving up the rental income.

‘The company needs to be setup in what is known as a family investment company to achieve this as a standard limited company does not offer this advantage. 

‘It is quite complex, so it would be worth speaking to a fully qualified tax accountant who specialises in this area before making any decisions.’

Bains adds: ‘For basic rate taxpayers the need for a limited company would only arise if they sought the inheritance tax advantages that come with long term ownership and passing the properties to their children, as there would effectively be no income tax saving. 

‘As a proportion I would say at least 50 per cent of our basic rate tax-paying clients still choose a limited company because of the inheritance tax advantages available if set up correctly.’

A similar trend towards limited company ownership has been noticed by the buy-to-let mortgage lender, Molo.

Francesca Carlesi, chief executive at Molo said: ‘At Molo, we have noticed a continuous increase in limited companies which compromises around 65 per cent of our applications.

‘We expect this to continue as rates in the market start to stabilise, demand for rental properties remains high, and landlords take advantage of the tax benefits of limited companies.’

Will the landlord incorporation migration continue?

As this is a relatively new trend, only around 12 per cent (or 603,000) of all rented homes in England and Wales are held in a company structure, according to Hamptons.

While the total number of buy-to-let mortgages has fallen by just over 30,000 since November 2022, the number of mortgages held by limited companies has carried on rising – though it is beingoffset by larger falls in the number held in personal names.

Hamptons estimates that around 22 per cent of all outstanding buy-to-let mortgages are now in a company structure, up from 15 per cent three years ago.

This would suggest there is definitely scope for the incorporation of buy-to-let to continue on its current trend.

Furthermore, with mortgage rates now far higher, the advantages of owning a buy-to-let in a limited company could arguably be even greater, given the interest relief available to those who own buy-to-let via a company.

However, Hamptons analysis has also detected a slowdown in the number of new investors setting up limited companies this year.

Aneisha Beveridge, head of research at Hamptons says: ‘The pace has levelled off in 2023, likely because those who stand to gain the most by incorporating have probably already done so.