A record 50,000 landlords set up buy-to-let companies in 2023, as investors sought to protect themselves against high mortgage costs. 

A new report by the estate agency Hamptons found the number of buy-to-let companies has increased by 82% since the government introduced major tax changes for landlords in 2017.

Here, we explain why more landlords are looking to incorporate and outline the differences between owning a property in your own name or via a company.

The growth of buy-to-let companies

Hamptons analysed data from Companies House and found there are 345,000 buy-to-let companies operating in the UK, containing a total of 615,000 properties. 

Historically, company structures were most commonly favoured by landlords with larger portfolios, while individual landlords with one or two properties would usually own them in their own name. 

However, this is changing. The number of landlords with one property setting up a company increased by 22% in 2023. 

Anesiha Beveridge of Hamptons says: ‘As long as landlords continue rolling off cheap mortgages onto rates twice or three times what they were paying, the number of homes being put into a corporate structure will remain high.

‘Longer term, the current tax regime could push half of all rental homes into a limited company, significantly reducing the existence of landlords who own buy-to-lets in their own name.’

• Find out more: things landlords need to know in 2024

Why are landlords incorporating?

The growth in buy-to-let companies stems back to 2017 when the government began phasing in changes to the taxation of mortgage interest.

Before then, landlords who owned properties in their own name could offset interest payments on their mortgages when filing their taxes. However, this was phased out between 2017 and 2020, before being replaced by a flat 20% credit. 

This meant many property investors saw their profits take a big hit, resulting in a sell-off. Previous Hamptons research showed landlords sold more properties than they bought every year from 2016 to 2023, with a net 294,000 homes disappearing from the rented sector.

Of those who remained, many switched to a company structure, allowing them to offset the entirety of their mortgage interest payments against their income.

The impact of higher mortgage rates

Mortgage rates have risen dramatically since late 2022, and over time, more landlords have been dragged into paying higher rates as they come to refinance their properties. 

Data from Moneyfacts shows the average fixed-rate buy-to-let mortgage is priced at 5.95% this month, compared to just 3.09% in January 2022. 

Higher rates mean bigger interest payments, adding a greater burden for those who own properties in their own name rather than a company structure.

There is some good news. While mortgage rates remain much higher than before, they’ve fallen in each of the past five months, as shown in the chart below.

The pros and cons of incorporating

At a time of high mortgage rates, setting up a company might seem prudent, but there are pros and cons you’ll need to consider. 

The exact implications will depend on your current portfolio. For example, if you’re setting up a company to buy additional properties, the calculations will be different than if you’re setting one up to transfer existing properties into it. 

Whatever your situation, it’s a good idea to take independent financial advice on your options. 

Reasons to incorporate

• Mortgage interest tax relief: companies can offset 100% of their mortgage interest payments, compared to just 20% for individuals.
  
• Lower taxes: companies are subject to corporation tax on their profits, rather than personal income tax. Corporation tax is charged at 19% or 25%, depending on the company’s profit. This is considerably lower than the higher rate of income tax. 
• Easier stress testing: as companies generally pay lower rates of tax, lenders may offer more relaxed stress testing when you apply for a mortgage to buy a new investment property. This means it might be easier to expand your portfolio further. 

Reasons not to incorporate

• Stamp duty and CGT implications: if you own a property in your own name, you’ll need to sell it to your new company. This means you’ll need to pay stamp duty at the additional rate, and may trigger a capital gains tax (CGT) bill. 
• Higher mortgage rates: mortgages for limited companies are usually more expensive than for individuals, both in rates and fees. Additionally, fewer lenders offer mortgages to companies.
• Income tax on dividends: if you choose to take money from your company as a salary or as dividends, you’ll need to pay income tax. Only the first £1,000 of dividends each year are tax-free. This would most likely be an issue if you sell a property held in your company and want to access the funds yourself rather than keeping them in the company. 
• Legal responsibilities: company owners are required to keep regular financial records and submit them to Companies House and HMRC. This means the cost of running your portfolio, taking into account legal and accountancy fees, will be higher in a company structure.

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