Tax nightmare for landlords leads to huge rise in buy to let companies

Despite a sharp fall in the number of homes bought by landlords in 2023, the number of limited companies set up to hold buy to let properties continues to soar.  

Last year a record 50,004 limited buy to let companies were set up across the UK surpassing 2022’s previous record of 48,540 by three per cent. 

The data comes from lettings agency Hamptons, which describes 2023 as a year of two halves.  

In the first half of the year following the aftermath of the mini-budget, the number of new buy to let incorporations ran at around two per cent below the same period in 2022.  However, as more investors began to face higher mortgage rates, the number of limited companies set up to hold buy to lets picked up in the second half of 2023 to run at nine per cent above 2022 levels.

Scotland recorded the largest pick-up, with an 8.4 per cent year-on-year uplift in the number of new companies set up: this primarily reflects the bigger difference here in tax rates paid by individual landlords and limited companies.

A record 58 per cent of limited company buy-to-lets in the North East were held in a company that was set up outside the region, the highest proportion in any region. This reflects how landlords from across the UK are targeting higher yielding buy to lets, particularly in the North of England.

The rising number of incorporations means that at the start of 2024 there were 345,426 active limited companies designed to hold BTL property in the UK, up 11.6 per cent from 309,643 at the beginning of 2023.  Some 68 per cent of current companies had been set up between 2017 and 2023 when tax changes were phased in.

Overall, these companies own a total of 615,077 properties across England & Wales, an 82 per cent increase from the end of 2016 when landlords who were higher rate taxpayers started to see the share of mortgage interest they could offset from their tax bill for homes in personal names reduce.  However, companies set up after 2016 still only own 38 per cent of all buy to lets held in a limited company.

Of the 615,077 limited company buy-to-let properties, 458,838 - roughly 75 per cent - have a mortgage charge against them.  

The number of outstanding limited company mortgages has risen 10 per cent over the last 12 months, despite the total number of buy to let mortgages falling three per cent over the same period.  This also means that limited company landlords are more likely to have a mortgage than investors who own buy-to-let property in their personal name.

Most of the growth in buy-to-let incorporations over the last year has come from smaller landlords.  Over the last 12 months, there was a 21.9 per cent increase in the number of homes held in companies with a single property.  This compares to a 3.8 per cent increase in the number held by companies owning 20+ homes.

Companies owning 20+ homes were the only ones to see the number of mortgage charges increase faster than the number of homes, suggesting that these investors are leveraging up rather than reducing the debt on their portfolio.     

This means that limited companies set up to hold BTLs now account for 24 per cent of all properties held in any sort of limited company structure, up from 16 per cent in 2016.  Between 2016 and the end of 2023, the total number of properties owned by all limited companies, not just those set up to hold buy to let property, rose by 21 per cent.

Aneisha Beveridge, head of research at Hamptons, says: “Despite last year's slowing sales market, there was no let-up in landlords rushing to incorporate.  Rather, the record number of companies set up to hold buy to let homes suggests a long-term commitment from landlords - particularly given the upfront costs associated with incorporating.  The growth has been driven mostly by existing landlords moving properties into a corporate structure to shelter themselves from higher interest rates.  Meanwhile the number of new landlords setting up shop has remained relatively muted.

“For as long as landlords continue rolling off cheap fixed-term mortgages onto rates which are twice or triple what they were paying, the number of homes being put into a corporate structure will remain high.  The number of buy to let incorporations each year is likely to continue running in the region of 40,000-50,000 for the foreseeable future.  Longer term, the current tax regime could push half of all rental homes into a limited company, significantly reducing the existence of landlords who own buy-to-lets in their personal name.”

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