Rise in landlords using limited companies to buy properties

The number of UK landlords using limited companies to buy properties has hit its highest level for more than three years.

In a survey of more than 700 landlords commissioned by Paragon Bank, the number of individuals planning to set up a UK limited company to purchase a new buy-to-let property increased from 50% in Q1 of 2022 to a whopping 62% in Q2.

For reference, a buy-to-let property is a piece of real estate that an individual or company purchases to produce an income stream through a rental return. Buy-to-let properties ideally cover the cost of the buyer’s mortgage, and they also generally grow in value — which means they produce a capital gain when the landlord ultimately decides to sell up in the future.

According to Paragon’s research, the propensity to incorporate limited companies in the UK also generally increases with the size of a landlord’s portfolio.

How are limited companies financing purchases?

In terms of how limited company owners are financing these new purchases, it’s also worth pointing out that two out of three landlords planning to purchase new buy-to-let properties in the next 12 months would specifically be financing that purchase using a buy-to-let mortgage.

Meanwhile, 28% of landlords told researchers they’d be funding a new property purchase by releasing equity from existing properties in their respective portfolios. That represents a noticeable rise since the start of 2022, when just 17% of limited company owners said they’d be funding new purchases by freeing up equity.

Unsurprisingly, the proportion of landlords using limited companies to purchase properties outright has continued to drop as the year wears on.

During the first quarter of 2022, 14% of landlords operating limited companies were in a position to purchase properties with cash. In the three months from April to June, only 7% of landlords said they were planning on buying properties outright.

To better understand why such a large proportion of landlords are now using limited companies to buy real estate, it’s worth taking a closer look at the wide range of benefits (and a small number of drawbacks) associated with purchasing a buy-to-let property through a limited company.

What are the benefits of using limited companies to buy properties?

According to researchers, this rise in the use of limited companies to purchase buy-to-let properties is hardly surprising. With utility overheads, maintenance costs, and inflation on the rise, running a property-based business in the UK has become costlier than ever.

Incorporating a limited company is now considered one of the quickest and most sure-fire ways a landlord can reduce their running costs.

First and foremost, there’s an inherent tax benefit for most business owners.

When you make a profit through rental income as a private landlord, it’s generally taxed by HMRC through your income alongside other earnings. But if you opt to purchase a property through a limited company, the profit your investment generates through rental income will be subject to Corporation Tax rather than income tax. At present, HMRC’s Corporation Tax rates range from 19% to 25%.

That means if you’re a higher-rate taxpayer, buying a property through a limited company will likely save you a considerable amount in taxes.

Landlords purchasing a property through a limited company are also going to benefit from added flexibility in terms of income withdrawal. With a limited company, you’re only taxed on the profits extracted from your company. A sole trader or partnership would get taxed on all profits generated — whether those profits were withdrawn from the company or not.

By purchasing a property through a limited company, you’re also going to be able to protect your own personal assets.

When you form a limited company, you’re effectively driving a legal wedge between your finances and your company’s finances. That means if your property business ever runs into money trouble, you’re only going to be held liable for any outstanding debts up to the monetary value of your company shares.

Finally, purchasing a property through a UK limited company may also offer company owners a degree of mortgage relief.

Private landlords can’t typically deduct mortgage interest charges from their rental income. Instead, they get a tax credit which is equivalent to 20% of their mortgage interest payments. If you’re a higher-rate taxpayer, that means you aren’t likely to receive a full tax refund on your mortgage payments.

By contrast, limited companies can classify mortgage interest payments as a business expense. Consequently, limited company owners are generally able to deduct these costs before paying Corporation Tax to HMRC if they opt to purchase a property using their company.

When should a landlord not use a limited company to buy properties?

While Paragon’s survey revealed that an increasing proportion of landlords are opting to purchase their buy-to-let properties using a limited company, it’s worth noting that more than a third of landlords are still using a sole trader structure.

That’s because there are a few disadvantages to buying a property through a limited company, which may affect some individuals more than others.

The biggest disadvantage to buying a property using a limited company is that it can often be hard to find a lender.

Most buy-to-let lenders don’t offer mortgage products that cater to limited companies — and a lot of the lenders that will offer a mortgage to a company require personal guarantees from company directors. Some buy-to-let mortgages also carry higher interest rates when they’re awarded to limited companies.

If you fail to incorporate your limited company before purchasing a new property, it could turn out to be a logistical challenge. That’s because you would need to purchase the property as an individual, then form a limited company, and then sell your personal property to the company.

This would generate a capital gains tax because the property you’re selling to your company will have likely increased in market value since your original purchase. You’d also have to pay stamp duty on the repurchase.

The final challenge is accessing your rental income. To utilise rental income from a buy-to-let property owned by a limited company, you’d have to pay yourself a salary or a dividend. Unfortunately, these forms of payment are subject to income tax, because rental profits taken as dividends don’t count as a business expense.

At the end of the day, it’s important to bear in mind that no two landlords are alike.

As a result, it will make more sense for some landlords to purchase future buy-to-lets using a limited company than others. Yet by ensuring that you adequately understand the pros and cons of using UK limited companies to purchase a property, you should be in a position to make the best choice for you and your property business.

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