Three-quarters of landlords who intend to purchase a new property in the next year will use a Limited Company structure, it’s claimed.
Paragon Bank’s research of nearly 1,000 landlords, carried out by BVA BDRC, showed that 74 per cent of landlords who intend to purchase buy-to-let property in the next 12 months will do so via a Limited Company.
This was the highest level recorded on BVA’s tracker survey and up from 62 per cent of landlords who stated they would use a Limited Company during the first quarter.
Conversely, those who plan to buy in an individual name have fallen from 41 per cent recorded in the final quarter of 2021 to 17 per cent in the second quarter of this year.
Buying via a Limited Company structure offers a number of tax benefits. Limited Companies can deduct mortgage interest from company income and pay tax at Corporation Tax rates, rather than an individual landlord’s personal income tax rate.
Limited Company ownership can also offer more favourable mortgage financing options. Most lenders set interest coverage ratios at 145 per cent for higher-rate taxpayers, whereas Limited Company applications require a ratio of 125 per cent.
Additionally, Limited Company landlords can typically secure higher loan amounts, further driving the adoption of this approach.
Louisa Sedgwick, Paragon Bank Commercial Director of Mortgages, says: “Holding rental property within a Limited Company structure has been growing in popularity since the mortgage interest relief changes introduced by the Government in 2017, but it has certainly accelerated in the past year.
“As a lender that specialises in portfolio landlords, we have always attracted a higher proportion of Limited Company lending, but that has certainly increased, particularly as interest rates, and subsequently mortgage pricing, have risen.”
The research shows the average portfolio size of landlords with at least one property in a Limited Company, as well as the average number of properties held in a Limited Company structure within those portfolios, have increased since the final quarter of 2021.
The average portfolio size for those landlords in the second quarter of the year was 16.9, up from 15.6 in Q1 and 13.1 in the final quarter of 2021.
Of those landlords, the average number of properties held within a Limited Company in Q2 was 12.3, up from 11.7 in Q1 2023 and 7.8 in the final quarter of 2021.
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Though relief for allowable loan interest is deductible landlords will pay a high price through tax on profits and disposals at 25% , incur income tax on getting money out, have no legacy protection, pay higher mortgage rates, sign directors PGs, pay higher compliance fees - all compounded if ‘incorporation’ is to be actioned. And all relatively unnecessary as there is a simpler, less costly and far more beneficial alternative
C'mon Chris, tell all about the simpler, less costly and far more beneficial alternative?
I think he means don't buy a house and put it in a higher rate savings plan!
Anyone buying now would be daft not to buy in a company but who knows what the next change in tax laws will be? Those of us not planning to be LLs for 20 years are just getting out & taking the hit with CGT. Fortunately, most will still have a decent gain to lock into cash investments at 6%.
Any of the houses I bought before 2008 have seriously painful CGT implications. I'm simply not willing to pay that level of tax. The government would effectively be stealing 2 bedrooms per property.
The ones I bought more recently I may consider selling especially if the current tenants gave notice. Selling two properties would improve my overall position significantly. It just goes against the grain to do so.
Cris, don’t understand although Company tax increases this year from 19% to 25% Its not 40/45% as it is for individuals landlords is it ?.
Capital gains is mainly 28%.
According to a quick Google search: From April 2023: The main rate of Corporation Tax will be 25% for Companies with profits of £250,000 or more – this applies to all profits. A Small Profits Rate of 19% will exist for Companies with profits of £50,000 or less. The main rate will taper in between £50,000 and £250,000.
How many landlords would have profits of over £250000? Especially as profit for limited companies is calculated in the traditional way - income minus all expenses (including finance costs).
Look at dividend rates though!
I'm not an expert, just a mathematician by trade, so anybody feel free to correct me on this.
As I see it, the problems with incorporation, aside from the extra bureaucracy and associated costs, are the higher interest rates and the higher levels of taxation. The tenant tax effectively increases your personal BTL rate by 33% if you are on higher rate tax (e.g. 6% interest costs the same as 8% without section 24). But this is eroded by corporate BTL rates often being not far off this anyway.
On top of that, for a basic rate taxpayer paying 20% personal tax, 19% corporation tax in most cases plus 7.5% dividend tax means approximately 25% tax overall if paying yourself via dividends, and is hardly mitigated with the dividend allowance being slashed nearly to zero. So overall, the benefit of incorporation may be hardly worth it or even negative.
One of the main advantages of incorporation therefore is that you can instantly "sell" the house just by transferring or selling the shares in the company, which would be free of legal fees, most stamp duty, CGT, etc, probably also free of inheritance tax if done right.
For a higher rate taxpayer, 19% tax plus 37.5% dividend tax equates to approximately 50% tax vs 40% personal tax, less the tiny tax-free allowance, so again potentially more than wipes out any advantage of incorporation except as explained above.
Of course if you are unencumbered, incorporation makes even less sense, unless you are investing jointly with another person who is not your partner/spouse, as the corporate section 24 advantage does not apply.
As with all things, individual circumstances will determine the best path to follow.
One thing you didn't mention was pensions or NI.
I'm not an expert on limited companies and find mine a bit confusing with how the accountant produces the numbers at times but as far as I am aware a limited company allows you to pay yourself a salary, which means you have an NI contribution even if the salary is too low to actually pay NI. £1048 a month seems to be the sweet spot if there are 2 of you. 80% of that salary can be paid into a SIPP, which is then outside your estate from an IHT perspective. Then there's things like trivial benefits provided by the company out of untaxed money (6 x £50 of gift vouchers for example). Also the ability for the company to provide a car, which if it's an EV has minimal Benefit in Kind tax. Plus the company can contribute more money to a SIPP. And not forgetting the company Christmas do with a budget of £150 per person. Mine tends to be a two night mini break.
So lots of little bits that add up over the year. Whether it's worth the extra accountancy fees will vary from person to person. If the objective is to extract a high salary it's possibly a bit questionable. If the focus is on SIPP contributions it can be very worthwhile.
There may be advantages buying property through a Ltd Co at the moment but how long do you think that will last? Things will change as soon as the powers that be realise the amount of landlords in this structure who can be hit for more taxes. They do what they want and we have to just accept the unfairness of it all. As far as I'm concerned (in Scotland)... The game is fooked! Time to leave the cesspit.... 💩 💩
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