Under the heading ‘Landlords get professional‘ Mortgage Strategy has published an article extolling the virtues of acquiring properties through limited companies.
The article can be seen here. NB: iHowz don’t provide taxation or financial advice, and merely reprint what was said. We recommend landlords get appropriate advise before changing the taxation structure.
The article says:
The past 12 months of rising interest rates have led to a notable outcome: landlords increasingly are choosing to acquire properties through limited companies. This shift brings several positive implications.
Portfolio landlords now operate more akin to small to medium-sized businesses. Adopting a suitable company structure not only improves operational efficiency but strengthens the perception of landlords as professionals.
Significant disruptive events always bring about lasting change
The advantages of limited company ownership are evident. These entities can offset mortgage interest, finance costs and arrangement fees against rental income. Limited companies are subject to corporation tax on profits, which currently stands at 19% for profits under £50,000 and rises to 25% for profits exceeding £250,000. In contrast, landlords with properties in personal names are liable for income tax on rental income, which can be tax inefficient. Rental income is combined with other income to determine the tax band for individual landlords.
Typically, limited company landlords manage portfolios and consider their buy-to-let operations as their primary occupation. According to our recent survey of landlords, 43% of those who hold all their properties within a limited company structure generate a profitable full-time income from their lettings business, compared to 26% among those who hold properties in personal names.
The acceleration of limited company lending will be one of those enduring transformations
Limited company ownership also offers more favourable mortgage financing options. For instance, most lenders set interest coverage ratios at 145% for higher-rate taxpayers, whereas limited company applications require a ratio of 125%. Additionally, limited company landlords can typically secure higher loan amounts, further driving the adoption of this approach.
In a recent survey of intermediaries, half of respondents anticipated completing a higher proportion of limited company portfolio landlord lending in the next 12 months, with 38% expecting a rise in non-portfolio limited company cases. A separate landlord survey from the first quarter (Q1) of this year found 62% of landlords planned to buy their next property within a limited company structure, up from 43% in Q3 2021.
Portfolio landlords interested in this route can explore incorporation relief, which can help reduce CGT
While predominantly the domain of the portfolio landlord today, the limited company route is one I expect the next generation of portfolio landlords to consider from the outset. The model of acquiring your first two or three properties in your personal name will evolve so that future portfolio landlords develop their property business within a limited company structure from an earlier stage. Brokers today are far more experienced in limited company lending and they will understand their customers’ portfolio ambitions.
At Paragon, we have already witnessed a notable rise in limited company lending following the Mini-Budget. I believe the current market disruption will serve only to further boost this trend.
Limited company ownership offers more favourable mortgage financing options
The proportion of limited company lending in our loan book has rapidly increased since 2017. Throughout this period we have refined our skills and expertise in this area, developing expert underwriters with whom brokers can communicate directly and employing our own team of in-house surveyors.
Although the trend towards limited company lending for landlords purchasing new stock is clear, challenges face those who wish to transition property held in personal names to limited company structures. The proportion of those who operate properties as an individual, rather than as a company, is 94%, according to government figures, so the scope to switch is vast.
Barriers to incorporation
Incorporation is growing in popularity, but there are some barriers to consider. Switching property to a limited company structure can incur stamp duty and capital gains tax (CGT) charges, which can be costly.
Portfolio landlords now operate more akin to small to medium-sized businesses
However, portfolio landlords interested in this route can explore incorporation relief, which can help reduce CGT, although it’s wise to consult a tax adviser to determine the best action based on their specific circumstances. We are among the few lenders that permit customers to switch from personal name to limited company ownership during a fixed-rate period, and we have observed a rise in customers choosing this option.
Conditions are challenging for brokers, lenders and customers. While the market eventually will stabilise, significant disruptive events always bring about lasting change. The acceleration of limited company lending will be one of those enduring transformations.
Richard Rowntree is managing director of mortgages at Paragon Bank