Professional landlords who hold buy-to-let properties inside a company structure, rather than under their personal name, are on the rise.
In 2020, a record 41,700 new limited companies owning buy-to-let properties were formed, meaning that on average close to 3,500 new companies were added each month to the current UK pool of 500,000. This is a sizable jump from five years ago, when just 14% of buy-to-let properties were purchased through a company, compared to almost 60% in 2020.
This jump has happened for two reasons: landlords are finally making the most of the business benefits and legal protections offered to incorporated entities; while at the same time the environment for traditional buy-to-let landlords who hold properties under their personal name has become increasingly difficult.
Investors are realising the benefits a company structure
Investors are waking up to the financial rewards and legal protection of operating a property like a small business. It reduces personal liability risk by separating investments from a personal name, allows for better estate and inheritance planning, has favourable exit terms and is incredibly tax efficient.
Under this structure, investors can offset 100% of mortgage interest against profits, while those holding a property under their own name can offset just 20%. This can lead to significant savings and reduce income liability.
In practice, this means that someone who owns a £250,000 property as a company, with a 75% loan-to-value mortgage creating £1,000 a month, would pay around £1,033 each year in tax. A lower rate taxpayer owning the same property in their own name would pay 42% more or £1,463 each year, while a higher rate taxpayer would pay nearly two and half times more.
Furthermore, when selling under this structure investors could be charged a flat rate corporate tax of 19%, instead of a 28% capital gains tax.
Meanwhile, the environment has become less favourable for traditional buy-to-let owners that own property under their personal name, pushing more landlords to consider opting for a company structure. Tax breaks for landlords holding properties under their personal name have steadily reduced, decreasing profits from the rental market. The amount of mortgage interest that landlords could deduct from rental income before paying tax dropped from 100% to zero, between April 2017 and April 2020, and was replaced with a 20% tax credit on mortgage interest.
The potential risk: expensive and time-consuming. But this can be easily resolved.
The main thing holding back many investors is the costly and time-consuming registration and management process. As with any business, there’s a list of administrative tasks that if executed poorly can end up costing a lot. But with the right help, this process can be seamless.
GetGround makes it easier, faster and more cost-effective for landlords and property investors globally to manage their residential property investments in England and Wales.
Our innovative platform allows customers to establish UK limited companies entirely online within 30 minutes. We then provide a current account for rental income and expenses and take care of the day-to-day management of the companies, from bookkeeping and accounting to tax returns, relieving investors and landlords of these time-consuming administrative burdens.
We are moving into the era of the professional landlords, with company buy-to-let swiftly becoming the norm, not the exception. In 2020, letting and operating real estate was the second most common company set up, just behind retail - and shows no sign of slowing down. But there are always challenges to face when setting up any business and here are GetGround we hope to offer a practical solution to help investors make the most of their portfolio.
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Need help forming a company? E-mail us at firstname.lastname@example.org for more information.