Rising interest rates, volatility in swap markets and stretched affordability calculations have created difficulties for landlords looking to buy or remortgage existing properties, an issue not helped by the more restricted range of mortgage deals now available.
Earlier this year the Department for Levelling Up, Housing & Communities (DLUHC) published its Private Landlord Survey, the first comprehensive look at the BTL market in England for three years. Its findings show just how challenging the market has been over this period, with around 10% of landlords saying they were planning to sell up completely, and a further 12% looking to reduce the size of their portfolios.
Every customer should have both personal name and limited company options
It is clear many are unhappy with legislative changes that have sought to raise additional taxes from landlords, primarily by reducing mortgage tax relief and raising stamp duty charges on investment properties. Around half of those exiting the market cited regulatory change as a major reason.
On the horizon are further changes, not least the new Section 21 legislation, making it harder to evict tenants in certain circumstances.
It was expected that the government would force landlords to improve the energy efficiency of older homes with an energy performance certificate rating of D or lower, although plans have been shelved — for now, at least — after last month’s government U-turn on a range of net-zero measures.
Mitigating hurdles
Rather than exit the market, however, an increasing number of landlords are looking at more creative ways to mitigate these financial and regulatory hurdles. Recent figures show a significant rise in landlords owning BTL properties through a limited company structure.
The shelter of a company sometimes acts as damage limitation
Figures published by Hamptons show that in 2022 there were 48,540 new BTL incorporations — an increase on 42,092 the year before, and a significant increase on 23,904 recorded in 2017.
Hamptons head of research Aneisha Beveridge says: “Ever since personal landlords have no longer been able to offset their mortgage interest from their tax bill, the number of incorporations has risen. In latter years, most of this growth has come from smaller landlords moving their properties into a limited company, rather than those purchasing new buy-to-lets.”
Beveridge points out the biggest tax benefit of using a limited company structure is that landlords are effectively taxed on profit, rather than turnover. Under a company structure, landlords pay corporation tax on profits, currently 25%.
Landlords who own rental property in their own name must add rental income to other earnings, with the total taxed at their marginal rate. For higher-rate taxpayers paying 40% tax, this can be less efficient than a company structure — albeit the picture is complicated by a number of factors, not least the tax treatment when a property is sold, the accountancy costs involved in running a limited company, and the fact mortgage rates are often higher on BTL loans for these.
Small landlords have been unfairly targeted by the Treasury and through wider regulation
However, Beveridge points out higher mortgage rates across the board are making limited company loans look more attractive.
“The benefit of still being able to offset mortgage interest pre-tax has grown as interest rates have risen. For some landlords, particularly higher-rate taxpayers, rising mortgage costs may put them at a loss if they own personally. However, the shelter of a company sometimes acts as damage limitation, potentially putting them back in profit.”
Level playing field
Given the numbers buying via limited companies, brokers would like a more level playing field for mortgage pricing, with limited company BTL loans typically having higher interest rates and fees.
Your Mortgage Decisions director Martin Wade thinks there is “no good reason” for this differential.
Stress testing is often lower for limited companies than for individuals, meaning you could access more money per pound of rent
“If banks believe landlords can make more money from using a limited company structure, they simply charge them a higher interest rate for the privilege,” he says.
But Mortgages for Business development director Jeni Browne says rates can be higher due to the additional underwriting lenders have to complete, albeit the differential is narrowing.
“Limited company borrowing is becoming more commonplace,” she says. “With more lenders entering this space, some specialists — such as Fleet Mortgages — now offer the same price across their standard BTL and limited company ranges.”
SimplyBiz Mortgages director of strategy relationships Richard Merrett agrees the interest rate gap is “far less pronounced” than it was a year ago, and says this is contributing to the ongoing rise in limited companies being set up.
Unless there is a major change around mortgage interest relief and stamp duty, limited company buy-to-let will continue to grow
“Specialist lenders report that as much as 85% of their BTL purchase business has been done via limited companies — although it should be noted that this is natural among their target customers,” he says.
“Intermediaries too report that the majority of purchase business — 85% to 90% — is done via company structures. The interesting point to note here is that this is often driven by the fact it is the only way to meet rental stress-test requirements, as opposed to the potential long-term taxation benefits.”
Shift in balance
Merrett says that, while the initial shift to limited company vehicles was driven by the tax changes, for a significant number of investors, particularly basic-rate taxpayers, there was often little initial financial advantage in opting for such structures.
The shift towards more limited companies has contributed to less supply and competition in the buy-to-let market, leading to rising rents
But changes to the mortgage market this year, in terms of pricing and lending criteria, have shifted this balance again, giving those buying via a limited company greater leverage.
Browne agrees this is a factor that has helped drive further interest in limited company structures.
“Stress testing is often lower for limited companies than for individuals, meaning you could access more money per pound of rent.”
But not all borrowers will benefit from buying via a limited company. This can create potential issues for brokers, who are not qualified to give personal tax advice but need to ensure borrowers explore all relevant options.
Merrett says: “The industry has done a fantastic job of raising awareness of the options, from lenders and distributors providing education, to brokers offering the right information to ensure good customer outcomes.”
We’ve tended to see landlords using limited companies when adding to portfolios, rather than moving existing properties held in their individual names
Merrett says brokers need to have a basic understanding of the various options and then encourage borrowers to seek appropriate advice from a specialist.
He adds: “In my opinion, every customer should be presented with both personal name and limited company options, so they are in a position to make an informed choice with all factors considered.”
Existing properties
It is clear limited company structures are no longer the preserve of portfolio landlords but increasingly are being used by smaller BTL investors.
Hamptons suggests landlords are not only buying via a limited company but transferring existing properties into this structure. However, Fleet Mortgages chief commercial officer Steve Cox disagrees.
Specialist lenders report that as much as 85% of their BTL purchase business has been done via limited companies
“We’ve tended to see landlords using limited companies when adding to their portfolios, rather than moving existing properties held in their individual names into a limited company.”
He points out these transfers would be treated as a sale, which could trigger capital gains tax and stamp duty costs.
Most industry experts expect this trend to continue, with a Paragon Bank survey suggesting 74% of landlords who intend to buy a rental property in the next year will do so using a limited company. That is an increase from 62% in the first quarter of this year.
“Unless there is a major change around mortgage interest relief and stamp duty, limited company buy-to-let will continue to grow,” says Cox.
This will contribute to the ‘professionalisation’ of the BTL sector, with a smaller proportion of BTLs run by those with just one or two properties; a change that is not universally welcomed.
With more lenders entering this space, some specialists now offer the same price across their standard BTL and limited company ranges
“The shift towards more limited companies has contributed to less supply and competition in the buy-to-let market, leading to rising rents in some areas,” says Joe Garner, founder of Joe Garner Consulting.
Wade agrees: “Small landlords have been unfairly targeted by the Treasury and through wider regulation.”
This “army of small landlords” provides the private rental sector with good-quality accommodation, and the majority take their duties to tenants very seriously, he adds.
“If you remove these landlords, we will have more people chasing fewer properties, even higher rent increases, and the government will be in a bigger mess over housing than it is today.”
