October 21, 2024 2:04 pm

Insert Lead Generation
Nikka Sulton

Incorporation continues to be a popular choice among landlords, with 5,312 new limited companies established for buy-to-let properties across Britain last month. 

Data analysis from Hamptons, a brand owned by Connells, reveals that this number is 28% higher than the previous record set in September 2023. This also marks the third-highest monthly total ever, following April 2024’s figure of 5,854 and February 2024’s 5,442.

The surge in new incorporations this year has resulted in a total of 46,449 companies formed between January and September 2024. This represents a 23% increase compared to the same period last year, which was already a record year for new company formations.

This year has seen more companies established for buy-to-let properties than in all of 2021. The growing trend reflects significant changes in the way landlords are structuring their investments, particularly in response to evolving tax regulations. 

The increase in new company formations is largely driven by the differing tax treatments for buy-to-let properties held by companies compared to those owned personally. As tax policies continue to change, landlords are increasingly seeking ways to optimise their tax positions. The contrast in taxation has made the corporate structure more appealing for many investors.

One significant factor influencing this shift is the restriction on landlords’ ability to fully deduct mortgage interest as an expense. Previously, landlords could claim this cost in full against their rental income. However, recent tax changes have limited this benefit, prompting many to consider purchasing properties through a limited company structure instead. This change allows for more favourable tax treatment and greater financial flexibility.

In addition to new purchases, existing investors are also taking action to shift their buy-to-let properties into limited companies. By doing so, they can reduce their overall tax burden and benefit from the advantages of corporate ownership. This trend is gaining momentum as landlords recognise the potential long-term savings associated with this approach.

Furthermore, properties sold by companies are exempt from Capital Gains Tax, making this a particularly attractive option for many landlords. As the financial landscape continues to evolve, this trend is likely to persist, potentially deepening the divide between those who own properties personally and those who choose to operate through a corporate structure. As such, understanding the implications of these changes is crucial for landlords looking to maximise their investment strategies.

Hamptons reports that by the end of this month, the number of limited companies established for buy-to-let properties will likely surpass the total for all of 2023. It is estimated that by the close of 2024, between 60,000 and 62,000 limited companies will have been formed, exceeding last year’s figure of 50,004.

Notably, around 59% of these new companies have been established in the South of England. This region has been particularly affected by rising interest rates, and a larger percentage of households there fall into the higher tax bracket. Consequently, these landlords are in a prime position to benefit from incorporating their investments.

Despite this trend, only 42% of properties acquired by limited companies this year have been located in the South of England. This discrepancy indicates that many landlords based in the South are choosing to invest in the Midlands or the North, where rental yields are generally more favourable. 

This shift suggests that landlords are actively seeking better returns on their investments by looking beyond their immediate region. As the market continues to evolve, these patterns could have lasting implications for where landlords decide to focus their efforts. 

In summary, the trend towards forming limited companies is gaining traction, particularly in areas with higher taxation, but the investment choices reveal a broader strategy aimed at maximising rental yields across the UK.

Currently, there are 382,007 companies in Great Britain set up to hold rental properties. Nearly three-quarters (74%) of these companies have been established since early 2016, when higher-rate taxpayers lost the ability to fully offset their mortgage interest against their tax bill.

The increase in companies holding buy-to-let properties indicates that most new landlord purchases are now made through limited companies. So far this year, 70% of new buy-to-let purchases in England and Wales have been made using a limited company, while 30% were bought in personal names.

In total, there are 666,831 properties held within a buy-to-let limited company structure across England and Wales. This number has grown by 175% from 242,249 a decade ago. However, even with the trend towards limited companies for new purchases, only about 15% of all rental homes owned by private landlords are structured this way.

Before 2016, the limited company structure was mainly used by larger landlords. However, the tax benefits for higher-rate taxpayers have attracted smaller investors as well. This year, 54% of new purchases have come from companies making their first, second, or third acquisition.

 

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