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Should you set up a company for your buy-to-let portfolio?
As the number of landlords using company structures passes 400,000, we explore the pros and cons of incorporating
The number of landlords using companies to hold their buy-to-let property portfolios passed 400,000 in February.
The estate agency Hamptons says buy-to-let companies have quadrupled since the government introduced changes to mortgage interest taxation in 2017.
Here, we explain why landlords are continuing to set up companies, and why for some investors, doing so may be more hassle than it's worth.
61,000 companies set up in 2024
Data from Hamptons shows 61,000 companies were set up to hold buy-to-let properties in 2024, up 23% year-on-year. This took the overall total above 400,000.
The agency estimates that around 70-75% of all new buy-to-let purchases are now made via company structures.
Hamptons says there are 3.8 times more buy-to-let companies than hairdressers listed on Companies House, and 3.7 times more than fast food takeaways.
Will the buy-to-let company boom continue?
Aneisha Beveridge of Hamptons says: ‘Current tax rules mean that most, although not all, new investors find themselves better off in a company structure than owning an investment property in their own name.
'This means the number of limited companies is likely to continue its upward trajectory for the foreseeable future.
‘However, 2024 may prove to be a high watermark for the number of new companies set up. Higher stamp duty rates from April will be a big barrier for investors looking to move an existing rental home from their own name into a company structure.
'This will also weigh down on the number of new buy-to-let purchases overall, likely suppressing the number of companies being set up.’
The impact of mortgage interest changes
Companies holding buy-to-let properties became more prevalent from 2017, when the government began phasing in changes to the taxation of mortgage interest.
Before this, landlords who owned properties in their own name could offset their mortgage interest payments against their income when filing taxes.
However, between 2017 and 2020, this option was phased out, before being replaced by a flat 20% tax credit.
Hamptons estimates the changes resulted in 223,000 more companies being set up to hold investment properties.
The pros and cons of setting up a company
Whether a company structure is right for you will depend on your individual circumstances, such as the number of properties you own and whether you’re planning to expand your portfolio.
To ensure you consider all of the pros and cons, it may be helpful to take independent advice before making a decision.
Reasons to incorporate
- Mortgage interest tax relief: individuals can offset 20% of their mortgage interest payments, while companies can offset 100%.
- Lower taxes: corporation tax is charged at a considerably lower rate than personal income tax – 19% or 25%, depending on the company's profit.
- May be easier to get a mortgage: lenders may adopt more relaxed stress testing when you apply for a mortgage to buy a new property.
Reasons not to incorporate
- Stamp duty and CGT implications: when you transfer a property from your own name to a company, the company will need to pay stamp duty at the higher rate. You may also be liable to pay capital gains tax. This is an important consideration, especially given the higher rate of stamp duty for buy-to-let purchases recently rose by 2%.
- Higher mortgage rates: typically, personal mortgage rates are lower than those offered to limited companies. In addition, mortgage fees tend to be higher for company mortgages, and a smaller pool of lenders provide them.
- Income tax on dividends: the first £1,000 of dividends from your company each year are tax-free, but then you'll need to pay income tax. This means that if you sell a property and would like to withdraw the funds from the company, you will have a significant tax bill.
- Legal responsibilities: there are additional requirements for operating a company that will add to your costs. For example, company owners are required to keep regular financial records and submit them to Companies House.
What's happening to buy-to-let mortgage rates?
Whether you're looking to expand your portfolio or are due to remortgage, you're sure to be keeping a close eye on mortgage rates.
Rates have been falling slightly, but overall they remain stubbornly high. This means landlords coming off longer-term fixed-rate deals lasting three or five years will face much higher bills when remortgaging.
Landlords who own properties in their own name will be most affected by high rates, as they can only offset 20% of their interest payments.
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