Surge in new buy-to-let property companies due to tax changes

The number of landlords setting up buy-to-let property companies continues to rise, according to new research.

Changes to buy-to-let mortgage relief, which started in 2017, have encouraged landlords to transfer ownership of their properties due to tax benefits.

Read on to find out where landlords are setting up companies, the impact of the controversial tax changes, and whether landlords using company ownership will continue to rise in 2022.

• How to do a landlord tax return
• The ultimate guide to building a property portfolio in the UK
• How can landlords get a buy-to-let remortgage?
• How much tax does a landlord pay?

Huge rise in landlords setting up property companies

Analysis of Companies House data, carried out by estate agency Hamptons, shows that more buy-to-let companies were set up in 2021 than in any previous year.

Here’s an overview of the key findings:

• 47,400 new buy-to-let companies were incorporated in the UK last year
• this is a rise of 14 per cent since 2020
• during 2021, half of new buy-to-let mortgages were taken out by landlords with a company
• buy-to-let companies now account for 29 per cent of active buy-to-let mortgages

Where are landlords setting up buy-to-let companies?

The biggest annual rise in new buy-to-let companies last year was recorded in Northern Ireland (36 per cent).

This was followed by:

• Scotland (23 per cent)
• Wales (15 per cent)
• East Midlands (14 per cent)

London and the South East accounted for 45 per cent of all new incorporations last year, with over 15,000 set up in the capital alone.

A higher number of incorporations in these areas is because there are more tax advantages for landlords due to higher average rents.

The North East was the only UK region where fewer buy-to-let companies were set up year-on-year, dropping by six per cent.

How many property companies are there in the UK?

The number of buy-to-let companies in the UK rose to 269,300 last year, up from 200,000 in mid-2020.

UK buy-to-let companies hold a total of 583,000 mortgaged properties, almost a third (29 per cent) of all outstanding buy-to-let mortgages. The figure has increased three per cent over the last 12 months.

Will there be more buy-to-let companies set up in 2022?

Despite a surge in the number of new buy-to-let companies in 2021, the rate of growth fell compared to previous years.

The 14 per cent rise recorded between 2020 and 2021 is less than half of the 30 per cent increase between 2019 and 2020.

According to Aneisha Beveridge, Head of Research at Hamptons, the number of new buy-to-let companies may have peaked last year:

“This is partly a product of last year's stamp duty holiday which served to slow the fall in new investor numbers.

“Additionally, many investors who have wanted to make tax savings by transferring properties from a personal to a company name have had five years to do so.”

Buy-to-let mortgage interest changes – five years on

The reason why so many landlords have set up property companies in recent years is because of controversial tax changes that started in 2017.

Previously, landlords could deduct 100 per cent of mortgage interest from rental income when paying tax.

However, the government gradually reduced buy-to-let mortgage interest tax relief, replacing it with a 20 per cent tax credit in 2020.

This means many landlords – particularly higher-rate taxpayers – can reduce their tax bill by starting a property company and paying corporation tax instead of income tax.

A third of landlords said the reforms have had the greatest effect of all tax changes on their rental business, according to a recent survey by the National Residential Landlords Association and the London School of Economics.

What are the benefits of setting up a buy-to-let company?

Landlords who own properties individually have to pay tax on turnover, while landlords with a property company pay corporation tax on their profits.

As a result of the government restricting buy-to-let tax relief, it’s more profitable for many landlords to move their properties into company ownership.

Some of the other benefits of incorporation include:

• inheritance tax, capital gains tax, and stamp duty won’t need to be paid if you transfer your properties to a limited company
• greater legal protection due to ‘limited liability’ (which means only the money you’ve put into the company is at risk)

Despite the advantages, there are downsides to consider such as increased costs and admin. That’s why you’ll need to weigh up the pros and cons carefully, getting professional advice when you need it.

How to set up a property company for your portfolio

If you’re thinking about transferring ownership of your property in 2022, read our guide to setting up a property company.

It includes top tips on:

• how buy-to-let tax relief works
• corporate tax rates versus individual tax rates
• the key steps to setting up a property company

Are you considering starting a property company in 2022? Let us know in the comments below.

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Photograph 2: fizkes/stock.adobe.com