The Covid pandemic did not dampen the enthusiasm for investing in buy-to-let properties, quite the contrary; according to figures released by Hamptons International, a leading estate agency, landlords created 41,700 buy-to-let firms last year. That represents a 23% increase over 2019.

Registering buy-to-let businesses through limited companies has grown considerably since the introduction of new regulations in the industry which changed the basis on which rental income is taxed for individual landlord, restricting a landlords’ ability to claim tax relief on mortgage interest payments.

The result has been a doubling of the number of buy-to-let rental companies since 2016, after the tax changes where introduced, preventing landlords from being able to claim relief on their mortgage interest payments, on a phased-in basis.

What some call a tax perk – though others have call it a right to interest relief, like on any other business loan – was reduced gradually and removed altogether in April.

However, if a buy-to-let business is operated under the umbrella of a limited company, landlord owners are still able to claim full tax relief on their mortgage interest payments – it’s the driving force behind the surge in the formation of these limited companies holding buy-to-let properties.

The table below shows how the tax changes impacted on a high-rate taxpaying landlord receiving £950 rent a month and paying £600 towards their mortgage, courtesy of consumer champion Which?

Mortgage tax relief for property with £950 rent and £600 mortgage per month
Tax yearProportion of mortgage interest deductible under previous systemProportion of mortgage interest qualifying for 20% tax credit under new systemTax billPost-tax and mortgage rental income
Prior to April 2017100%0%£1,680£2,520
From April 20200%100%£3,120£1,080
Source: Which?

Three other spurs to the continued growth of investing in buy-to-let properties have been:

One, the intra-low interest rate environment where investors with cash are given few other opportunities to invest their money in alternatives which give anything near the modestly respectable, usually around 4 to 6%, return of a buy-to-let, at such low risk;

Secondly, the stamp duty holiday which currently, unless the Chancellor decides to extend the deadline, ends on the 31st of March, means that on properties worth up to £500,000 gives landlords a potential £15,000 when buying. They still need to pay the 3 per cent buy-to-let SDLT surcharge, but £15,000 is not to be sniffed at;

Three, the opening up of mortgage offers to the buy-to-let market of around 728 limited company mortgages for landlords, that’s according to the data provided by Moneyfacts. These offers are said to make up about a third of all buy-to-let deals.

There are still quite a few high street lenders that don’t offer these types of company mortgages for buy-to-let as they don’t think there’s enough demand, or because they cautiously demand personal guarantees from landlords for their company loans.

However, by December 2020 there existed a record 228,743 buy-to-let companies and Hamptons have estimated that around 50% of all buy-to-let purchases are put into a limited company, compared to just 20% in 2016.

Limited company mortgages do tend to cost more, on average around 3.71% for a two-year fixed deal, which compared to around 2.91% for an individual taking out a buy-to-let mortgage.

Because of the specialist nature of lending to buy-to-let companies, mortgage lenders in this field will be more expensive in their fees and rates and this may off-set some of the benefits of the tax savings. Some accountants even doubt the overall benefits of incorporation for small-scale buy-to-let landlords owning just one or perhaps two properties.

For individual landlords wishing to move existing investments into a buy-to-let company the economics of the change can be debatable as it in-effect means a sale and buy-back into the company, which triggers both capital gains and stamp duty liabilities. This of course depends on the circumstances involved, the amount of any gain and the size of the translations.

Within a company structure the income is subject to corporation tax, capital gains tax when properties are sold, and the landlord is subject to income tax when earnings are drawn out as dividends. Generally, if a company structure is beneficial, it is best set this up from the outset.

Anyone considering investing in this way should seek financial advice first.


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