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(Bloomberg) — A record number of buy-to-let firms were established in the UK last year as landlords sought to cut costs by shifting rentals into a corporate structure.
Over 50,000 limited buy-to-let companies were set up in 2023, beating the record of about 48,500 in the previous year, according to a report from broker Hamptons International. While the total number of outstanding buy-to-let mortgages fell 3% last year, home loans held in a limited company — often seen as a more profitable way to let — rose 10% over the same period.
“The growth has been driven mostly by existing landlords moving properties into a corporate structure to shelter themselves from higher interest rates,” said Aneisha Beveridge, head of research at Hamptons. “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.”
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For landlords whose properties are registered under a limited company, mortgage interest is treated as a business expense, meaning it’s possible to deduct interest costs before paying corporation tax. What’s more, buy-to-let investors choosing to run their homes through a limited company are not liable for capital gains tax.
These firms now own more than 615,000 properties in the UK, an 82% increase since the end of 2016 when tax changes made limited companies a more profitable way to let for some landlords. There was even more of an incentive last year, when a cycle of Bank of England hikes led to the sharpest series of interest rate rises in three decades.
Even so, the cost of transferring privately owned rental homes to a company is an expensive process, given mortgage-transfer costs and the taxes applicable when a property is shifted. The expenses occurred in setting up a firm and running it can also be high.
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Regardless, an eagerness to rein in costs saw the number of active limited buy-to-let companies rise to almost 350,000 at the start of this year, compared with just over 300,000 at the beginning of 2023.
In the first half of last year when mortgage rates were slowly declining from a post-mini-budget spike, the number of new buy-to-let incorporations ran at about 2% below the same period in 2022, according to the report. However, as home loan costs surged again in the second half, the number of firms established ran 9% above 2022 levels.
Almost two-thirds of limited companies in the North East were held in a buy-to-let firm that was set up outside the region last year, reflecting how landlords are targeting higher-yielding homes, particularly in northern England. Companies owning 20 or more properties were the only group to see the number of mortgage charges rise faster than the number of homes, suggesting these investors are leveraging up rather than reducing the debt on their portfolio.
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A steady reduction in mortgage rates over recent months has eased the financial burden on some landlords, coinciding with softer rent increases. The average rent on a newly let property in Britain rose more than 10% year-on-year in December, but the pace of growth has cooled slightly since the summer.
Still, Hamptons warned that rents are unlikely to decline dramatically this year. The strain on tenants’ finances has been driven by higher landlord costs and a shortage of homes available to rent. These issues are unlikely to change significantly in the short-to-medium term, according to the report.
“The number of buy-to-let incorporations each year is likely to continue running in the region of 40,000-50,000 for the foreseeable future,” Hamptons’ Beveridge said. “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.”
©2024 Bloomberg L.P.
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