Paragon Bank Managing Director of Mortgages Richard Rowntree writes in Mortgage Solutions about why there has been an increase in landlords choosing to hold their properties within a limited company structure. Read his thoughts below.

In 2015, the Government proposed the restriction of mortgage interest tax relief through the introduction of Section 24 (s24) of the Finance Act. Announcing the changes in his Budget speech, then Chancellor George Osborne pitched buy-to-let landlords against homeowners, speaking of “creating a level playing field between those buying a home to let and those buying a home to live in”.

Whilst the policy certainly achieved its objective of increasing first-time buyer numbers and putting the brakes on buy-to-let acquisitions, its critics were also right to predict that it would contribute to rising rents and supply constraints.

A by-product of the policy has been a sharp increase in the number of landlords utilising limited company structures for property ownership.

The findings of a survey of over 1,000 landlords, carried out for our recent report The rise of the limited company landlord, suggest that this is because landlords are choosing to purchase property through limited companies from the off, or switching property from personal name through incorporation.  

More than eight in 10 (82%) said the main reason for owning properties through limited companies was the ability to deduct mortgage interest payments and other fees, such as mortgage product fees, from income.

Taxing issue

A further 57% of the landlords we spoke to cited being subject to corporation tax instead of income tax as a key driver for the limited company route. This is because rates on the former are between 19% and 26.5%, dependent on profits generated, while the latter has rates set at 40% for higher rate taxpayers and 45% on income over the threshold, currently £125,140.

Additionally, unlike individual ownership, where inheritance tax may be payable by beneficiaries upon inheriting property following the former owner’s passing, transferring limited company shares offers a more straightforward and tax-efficient way to pass on assets.

Tax, however, isn’t the only factor behind the increase in Special Purpose Vehicles (SPVs), which grew from 14,031 in 2015 to 47,000 by 2021, according to analysis undertaken by Hamptons.

A number of specialist lenders, Paragon being one, stress mortgage applications for limited companies at interest coverage ratios of 125%, compared to the 145% that higher-rate taxpayers are assessed at, helping with affordability.

While the potential benefits are clear, owning portfolios through limited companies isn’t always the right option, so we would always urge landlords to seek specialist advice based on their individual circumstances, usually from accountants or specialist tax advisors.    

Personal name is still the most prominent ownership structure amongst landlords, chosen by a third (34%) of those we surveyed, and of the 31% who hold property using a mix of individual and limited company structures, over four in 10 (44%) intend to incorporate those that remain in their personal name.

This suggests that the trend will continue, offering opportunities for brokers who work to boost their knowledge on limited company lending, increasing the value they can provide clients. 

This article was first published in Mortgage Solutions.