Record numbers of landlords launched buy-to-let companies in 2023 – but what are the risks?

Extra stamp duty and scaled back tax reliefs are making buy-to-let less attractive, but increasing numbers of landlords are holding on to some of the old perks by setting up limited companies for their portfolios.

Both individuals and companies have to pay the extra 3% stamp duty surcharge on additional homes, introduced in April 2016.

But while mortgage interest relief has been scaled back for individuals to the basic rate of income tax - taking away some of the attractiveness of buy-to-let - companies can still claim the full interest paid as an expense.

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Analysis of Companies House data by estate agent Hamptons found that despite a sharp fall in the number of homes bought by landlords in 2023, the number of limited companies set up to hold buy-to-let properties continued to rise. 

Last year a record 50,004 limited buy-to-let companies were set up across the UK, surpassing 2022’s previous record of 48,540, according to the research.

Holding a buy-to-let portfolio in a company may provide some tax benefits but there are also extra costs and responsibilities associated with setting up and running a property business, plus the mortgage rates may be higher even if you can claim back the interest.

There may also be extra stamp duty and capital gains tax to pay if moving an existing property portfolio into a company structure.

“Despite last year's slowing sales market, there was no let-up in landlords rushing to incorporate,” says Aneisha Beveridge, head of research at Hamptons.

“Rather, the record number of companies set up to hold buy-to-let homes suggests a long-term commitment from landlords - particularly given the upfront costs associated with incorporating. 

“The growth has been driven mostly by existing landlords moving properties into a corporate structure to shelter themselves from higher interest rates.  Meanwhile the number of new landlords setting up shop has remained relatively muted.”

The areas where most landlords are setting up buy-to-let companies

The increase in buy-to-let companies coincided with the rise in mortgage rates last year as landlords looked to hold on to more of their profits from property investing.

In the first half of 2023, the number of new buy-to-let incorporations ran at around 2% below the same period in 2022, Hamptons said.

However, as more investors began to face higher mortgage rates, the number of limited companies set up to hold buy-to-let homes increased to 9% above 2022 levels.

Scotland recorded the largest pick-up, with an 8.4% year-on-year rise.

The South West and North East were the only two regions of the UK to record a small fall in the number of new limited companies set up, although in both regions the number of homes owned in a corporate structure continued to rise.  

A record 58% of limited company buy-to-lets in the North East were held in a company that was set up outside the region, the highest proportion in any region. 

This reflects how landlords from across the UK are targeting higher yielding buy-to-lets, particularly in the North of England, the agent suggests.

At the start of 2024, there were 345,426 active limited companies designed to hold buy-to-let property in the UK, up 11.6% from 309,643 at the beginning of 2023.  

Two thirds of current companies had been set up between 2017 and 2023 when the stamp duty and tax relief changes were phased in.

Overall, these companies own a total of 615,077 properties across England & Wales, an 82% increase from the end of 2016, according to the research.

Of the 615,077 limited company buy-to-let properties, 458,838 or 75%, have a mortgage charge against them.  

Beveridge suggests this trend could continue as mortgage rates remain high.

The average buy-to-let mortgage rate is now 5.79% for a two-year fix and 5.76% for five years.

“For as long as landlords continue rolling off cheap fixed-term mortgages onto rates which are twice or triple what they were paying, the number of homes being put into a corporate structure will remain high,” adds Beveridge.

“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 personal name.”

The pros and cons of a buy-to-let company

The key benefit of holding a buy-to-let portfolio within a limited company is being able to offset your mortgage interest against the rental income and only pay corporation tax on the profits. 

Stephen Perkins, managing director of Yellow Brick Mortgages, said: “You can also decide to hold money in the company and decide when and how you draw money out to be tax efficient.

“Whilst mortgage rates are higher on limited company buy-to-let products than personal ones, the gap has been getting smaller as more landlords opt for incorporated model so these become more mainstream. 

“Despite the higher rates, the stress-testing is usually lower, allowing the landlord to often borrow more on the same rental figure. “

It may be more tax efficient to hold a buy-to-let in a company, but it can cost more to transfer an existing portfolio, plus there is less choice of finance.

Richard Jennings, founder of Richard Jennings Mortgage Services, said: “Landlords may face higher mortgage costs when buying via a limited company, a reduced range of lenders available and a limited value of mortgage brokers who understand the additional complexities involved with managing a limited company portfolio for clients.

“We always recommend liaising with a good accountant or tax specialist beforehand.”