Why are more landlords buying through a limited company?

Purchasing buy-to-let property through a limited company can come with certain tax advantages, and the number of landlords choosing this route is continuing to climb.

Every year for the past three years, the number of buy-to-let landlords intending to purchase properties via a limited company structure has increased, according to the latest data released by Paragon Bank.

The survey, which was carried out by BVA BDRC, found that the number of landlords intending to buy in this way rose from 50% in the first quarter of this year to 62% in the second quarter, demonstrating how property investors are increasingly assessing their options for greater returns.

Almost half (47%) of landlords who own between one and five rental homes plan to buy their next one through a limited company, says Paragon. Portfolio landlords who own six or more properties are even more likely to buy in this way, with 78% planning a limited company purchase next time.

Landlords are still keen on UK property

Of the 700 landlords surveyed, 14% plan to buy a further buy-to-let property or properties over the next 12 months. Although some have been deterred by recent tax changes, many are still confident in the appetite and continued growth in the UK property market.

The buy-to-let mortgage market may have seen interest rates creeping up along with the mainstream market, but lenders have remained competitive and growing numbers of lenders are offering a range of buy-to-let products.

According to the survey, around two thirds of property investors will use a buy-to-let mortgage to fund their next purchase.

Meanwhile, almost a third (28%) will use equity from existing properties to fund their next buy-to-let purchase. This is up from 17% in Q1 2022, and could be an indication of the success property investors have seen in the capital appreciation of their rental homes.

The study also found that the number of landlords buying properties outright using previously invested funds was going in the opposite direction. In Q2, just 7% of people plan to buy in this way, compared with 14% last quarter.

Reduce costs through a limited company

Before considering setting up a limited company to purchase investment property, it is advisable to do thorough research to ensure this is the best and most cost-effective method based on your circumstances. Despite changes to some market conditions, it won’t be the right route for everyone.

Richard Rowntree, mortgages managing director for Paragon Bank, explained: “Since midway through the last decade, tax burdens on buy-to-let investment have increased significantly.

“Along with the recent rise in overheads bought about by increasing energy and maintenance costs, running a letting business has undoubtedly become more costly. It is unsurprising to see more landlords look for ways to reduce their costs, with incorporation being one option for some.”

He adds that, as it may not be the best decision for all customers, the bank offers services to help people make the “informed decisions”.

The tax burdens Rowntree refers to mainly centre around the Section 24 amendment to property tax rules, which began in 2017 and was gradually phased in. It means landlords can no longer deduct their mortgage interest payments in full from their income, so has affected some people’s tax bills.

For those operating through a corporate structure or limited company, the full interest amount can still be off-set against profits, and these are subject to corporation tax (currently 19%) instead of individual income tax, while a variety of reliefs are also available.

This can be particularly enticing for portfolio landlords or those in the higher income tax brackets, as these individuals can make bigger savings.

Sometimes, smaller landlords such as those with just one property, and those in the lowest income tax bracket, might not benefit as fully from setting up a limited company. Particularly for those who already own the property, this would involve effectively selling it to the company, which could incur stamp duty.