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March 2021 | Buy-to-Let

The rise of limited company landlords

Adrian Moloney is group sales director at Precise Mortgages

Many of us have had more time on our hands due to the lockdown measures, and it seems that we’ve been taking advantage by trying all sorts of new things.

Whether it’s keeping in touch with family and friends via Zoom, taking to the streets for a daily stroll or jog, bingeing the latest must-see boxset on Netflix, or learning a new language or musical instrument, we’ve all been trying to keep ourselves busy.

Landlords certainly seem to have been making the most of the last few months by looking at new ways they run their buy-to-let businesses.

According to estate agent Hamptons, a record number of landlords decided to incorporate and become a limited business in 2020.

In its latest Lettings Index, Hamptons found that there were a total of 41,700 buy-to-let incorporations in 2020, an increase of 23% on 2019. The numbers have more than doubled since 2016, rising 128%.

Apparently companies set up to run buy-to-let businesses were the second most common founded in 2020, just behind those set up to sell goods online or via mail order. By the end of the year, there were more than 228,000 buy-to-let companies up and running, an all-time high.

I’m often asked why I think there’s been such an uplift in the number of landlords choosing to run their buy-to-let businesses as a limited company in recent years.

The incentive to save up to £15,000 on a new purchase that the temporary stamp duty holiday has offered has undoubtedly had an effect, but I think the real reasons go deeper than that.

It is no coincidence that the number of landlords incorporating their businesses started to rocket in 2016, the year that the phased withdrawal of mortgage interest tax relief was introduced.

Up until the 2016/2017 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income before calculating their tax liability. Following the changes, however, landlords now only qualify for a 20% tax credit, meaning many of them are finding it harder to turn a profit.

The new rules don’t apply to limited companies, however. Landlords who have incorporated their buy-to-let business can offset mortgage interest against profits which, if they’re under £50,000, are only subject to corporation tax of 19%, instead of income tax rates. Furthermore, interest coverage ratios (ICRs) on limited company applications are often lower than for most individual applications.

So, if running a buy-to-let business as a limited company can be so beneficial, why aren’t even more landlords choosing to incorporate?

Well, running a rental business in this way may not be suitable for everyone. Landlords should always speak with a suitably qualified tax adviser and take legal advice before making any decisions, as the process can be quite complex.

If you’re finding it difficult to place a case with the traditional high street names, specialist lenders such as Precise Mortgages are ideally placed to help.

We understand how challenging these cases can be, and have a range of products and criteria specifically designed with limited company landlords in mind.

We’ve made our process as straightforward as possible, and you’ll receive support every step of the way.

The buy-to-let market has undergone significant changes in recent times, and the continuing growth in the number of limited company landlords shows that it will continue to evolve in the coming years.

If you’re approached by a customer who has recently incorporated their buy-to-let business, or is thinking of doing so, it’s good to know there are lenders which can help you secure the mortgage they need.