Buy-to-Let Incorporations Booming

The number of buy-to-let companies has increased by more than 40,000 in a year as landlords streamline their property businesses to pay less tax.

Buy-to-let company incorporations have soared since 2017 when the government began tax changes that stopped high earners from setting off all their mortgage interest payments as business expenses.

In September 2017, Companies House listed 148,874 buy-to-let firms.

That rose from 260,862 a year ago to 302,404 this year.

Many of the moves from holding rental properties as an individual to running them as a company are to allow landlords to claim mortgage interest relief against their tax bills.

Stamp duty savings

The data from London estate agents Hamptons estimates that 40 per cent of all buy-to-let purchases are through limited companies.

Hamptons head of research Aneisha Beveridge says: “The number of new incorporations is likely to remain relatively high over the next 12 months on the back of the stamp duty cut, which saves the average investor just under £2,000 when moving a buy to let home from personal to company names.

“But the big driver is the financial advantage of being able to offset mortgage payments as interest rates rise. This means that limited company investors stand a better chance of turning a profit in a world where mortgaged landlords are coming under increasing pressure.

“While rapidly rising rents have softened the impact of higher interest rates for landlords, rental growth only offsets around a fifth of their increase in mortgage costs.

“This means that a landlord who bought an average home two years ago with a typical 25 per cent deposit would need to increase their equity from 25 per cent to 55 per cent if they remortgaged today in order to maintain the same monthly returns compared to when they first bought.  For the average investor, this means stumping up an extra £67,000 in cash.”

Incorporation pros and cons

For higher-rate taxpayers - those paying income tax at a rate of 40 per cent - the attraction of a buy-to-let company is the ability to offset 100 per cent of mortgage interest paid against tax. But, unfortunately, individual landlords can only set off 20 per cent.

However, part of the tax saving is wiped out by next April’s planned jump in corporation tax from a rate of 19 per cent to 25 per cent.

Incorporating can bring other benefits and disadvantages.

Companies can play an essential role in inheritance because the company stays the owner of any rental property when shareholders pass on, meaning ownership of the company changes hands rather than that of each property.

But companies can find competitively priced loans hard to source at a time of rising mortgage rates.

Companies do not have a capital gains tax allowance granted to individuals, so they pay tax on the entire profits of selling a property.

Landlords should also consider running a company comes with more regulation and higher annual running costs.

Buy to let and companies FAQ

Can I start calling my business a company?

No, by law, you must sell the assets of your personal buy to let business to a company.

What is incorporation?

Incorporation is the process of moving a personal buy to let business into a company.

How much does incorporation cost?

The cost of incorporation depends on the size of your buy-to-let business. The company must fund the purchase cost of the properties plus any stamp duty and legal fees. In addition, landlords may have to pay capital gains tax on any gains in property values.

Does the company pay deposits on the properties in cash?

No, landlords do not need cash to transfer any properties. The equity in the rental homes is treated as a director’s loan. Providing a landlord has enough equity, not cash input by the company, is needed.

Will I pay capital gains tax on the transfer to a company?

Probably. If you can show your buy-to-let set-up is a business rather than a passive investment, you may escape capital gains tax. Speak to an accountant to see how this works for you.