Three-quarters of landlords who intend to purchase a new rental property in the next year will use a limited company structure to reduce tax bill
The sharp rise in the switch to buying through a company rather than as a standalone landlord has been driven by changes to the tax system and the rising costs of running a rental portfolio, which has been exacerbated by soaring interest rates.
Research carried out for buy-to-let specialist Paragon Bank showed that 74% of landlords who intend to purchase buy-to-let property in the next 12 months will do so via a limited company.
This was the highest level recorded on BVA’s quarterly tracker survey and up from 62% of landlords who stated they would use a limited company during the first quarter of 2023.
Those who plan to buy in an individual name have fallen from 41% recorded in the final quarter of 2021 to 17% in the second quarter of this year.
Buying via a limited company structure offers a number of tax benefits. The main advantage is that limited companies can deduct mortgage interest from company income and pay tax at corporation tax rates, rather than an individual landlord’s personal income tax rate. Depending on profits corporation tax rate is 19% for those with profits under £50,000, rising to a standard rate of 25%.
Limited company ownership can also offer more favourable mortgage financing options. 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.
Louisa Sedgwick, Paragon Bank commercial director of mortgages, said: ‘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, but it has certainly accelerated in the past year.
‘As a lender that specialises in portfolio landlords, we have always attracted a higher proportion of limited company lending, but that has certainly increased, particularly as interest rates, and subsequently mortgage pricing, have risen.’
The research showed the average portfolio size of landlords with at least one property in a limited company has increased since the final quarter of 2021, suggesting portfolio landlords remain active purchasers of property.
The average portfolio size for those landlords in the second quarter of the year was 16.9, up from 15.6 in Q1 and 13.1 in the final quarter of 2021.
Of those landlords, the average number of properties held within a limited company in Q2 was 12.3, up from 11.7 in Q1 2023 and 7.8 in the final quarter of 2021.
The Paragon Bank research of nearly 1,000 landlords was carried out by BVA BDRC.