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Growing demand means 1 million extra homes are needed in England & Wales

Landlord decisions

According to Savills research, up to 1 million extra homes will be needed in England and Wales to house singles and families – this is a continually growing market for the private rented sector.

There are many factors involved in producing the growing demand for accommodation, much of which will be required in the private rented sector (PRS).

Factors behind the growing demand

In 2022 net migration into the UK, the amount that migration adds to the population, was around 600,000 people. Although this figure was the highest level of immigration and net migration ever recorded by the Office for National Statistics (ONS), it is likely to be reduced by Government initiatives in the future. Nevertheless it is likely to continue at a positive level for some time to come, and the PRS will benefit from this extra demand for housing.

Other factors include a recent slowing down of buy-to-let investing, and some divestment as mainly small-scale landlords have decided to either retire or look for other ways to invest their money. 

Housing affordability has got worse with the higher cost of living, continuing high house prices and high interest rates. These factors keep people in the private rented sector longer. In addition, the Government has ended its help-to-buy scheme, so for some, renting for longer has become the only viable option.

The figure of 800,000 to 1 million households by 2031 is Savills’ estimate of the growth needed between 2021 and 2031, albeit a swath of this demand could be taken up by the build-to-rent sector, which is growing apace.

Scope for new investment 

This growth however, still leaves plenty of scope for the enterprising buy-to-let investor to take up some of the slack. With people renting for longer, or even lifetime renting, which is becoming socially acceptable, and even a necessity for some, there is an expanding market. Family PRS households in the 25–34-year-old age group, and additionally for those in the 35–44-year-olds and older have been growing strongly.

English Housing Survey PRS statistics

The latest available figures from the English Housing Survey 2021-22 show that there were approximately 4.6 million households within the private rented sector, representing 19% of all households in England. This figure was similar to previous years, so immediate growth has been relatively flat.

The PRS in 2021-22 was larger than the social rented sector which had 17%, or 4 million households, but smaller than the owner-occupied sector which had 64%, or 15.6 million households.

London has the highest proportion of private renters at 29%, compared to the rest of England which had 17%. London had over 1 million private renters, 806,000 social renters, and 1.8 million owner occupiers.

Jacqui Daly, Director of Residential Research at Savills, says: “We need to adopt a positive response to the housing crisis, across all tenures.”

Buy-to-let – a tough environment

While buy-to-let landlords have found the going tough over recent years, with an increasingly regulated PRS, and a tighter tax regime, it’s not all bad news. Some are still expanding, learning to cope and manage more efficiently, particularly those who are committed portfolio landlords (defined as landlords with 4 or more rental properties). They are often the ones who have decided to operate through a limited company.

More landlords using a limited company

Running a buy-to-let business through a limited company is becoming much more common, especially for serious portfolio investors who intend to grow the number of rentals they operate. Before 2016 few buy-to-let landlords were using a limited company. Their investments were in personal names, but the tax regime now goes against this.

Adverse tax measures

Since 2016, when the Chancellor announced that personal landlords would no longer be able to offset their mortgage interest before tax, there’s been a steady growth in the number of buy-to-let landlords using limited companies. 

Buy-to-let owners have experienced a number of punitive tax changes since 2016, according to Hamptons, resulting in more than 250,000 fewer rental properties than at the peak in 2017. The tax changes, phased in since 2017, and to the 2020-21 tax year, started to eat into the profitability of buy-to-let operations, particularly for those taxpayers in the higher rate bracket.

Dip in the number of buy-to-lets bought

Although there was a drop in the number of homes bought by buy-to-let landlords in 2023, mainly due to the hike in inflation and high mortgage rates, there was a record number of buy-to-let incorporations. Last year over 50,000 limited companies were formed for buy-to-let purposes in the UK, an even higher number than the previous record in 2022.

Forming a limited company to own a buy-to-let business gives landlords a way to improve their tax efficiency. Individuals owning buy-to-lets in their own name are effectively taxed on turnover (rental income before expenses). Company buy-to-lets are taxed on profits – this makes a big difference. 

Incorporating is not for everyone

Not every landlord, especially the small-scale landlord, with few properties, may not gain by incorporating. And transferring existing rental properties into a limited company has tax implications in itself. However, every landlord should investigate the possibility by seeking expert financial advice.    

How does one form a limited company?

Setting up a limited company using standard documentation is relatively straightforward through Companies House. And for a DIY process, relatively inexpensive. However, it is advisable to seek knowledgeable professional advice as non-standard documentation may be advantageous in some circumstances.

The typical buy-to-let company will use the following SIC codes:

68209 – Other letting and operating of own or leased real estate

68100 – Buying and selling of own real estate

This, says Hamptons, is important for accounting and mortgage purposes. Most lenders will only lend to companies used solely for buy-to-let purposes, one with its own bank account. Some will require a personal guarantee from the landlord director/s. 

The process of putting a property into a company involves paying stamp duty on the sale transfer and capital gains as well, if there is a taxable gain. The property must be sold to the company at its market price, so an independent valuation will be required. For mortgaged properties, landlords will need the lender’s consent to transfer it into a company. Be warned, not all lenders will lend to a limited company, so alternative loan arrangements may be necessary.

How will it benefit you?

The main tax benefit of holding property in a limited company is the landlord’s ability to offset 100% of the mortgage interest payments against profits, rather than just 20% against turnover for personally owned rentals.

Hamptons give the example of: 

“Someone who owns a £250,000 property with a 75% LTV mortgage generating £1,000 a month in rent in a company will pay around £1,033 per year in tax.  While a lower rate taxpayer owning the same property in their own name would pay 42% more or £1,463 each year.  And a higher rate taxpayer would pay 274% more or £3,863.” 

This benefit needs to be offset against the fact that mortgage interest rates on company loans tend to be higher, though these are becoming more competitive as incorporation gets more popular. 

The main benefits accrue to higher-income taxpayers and those with multiple buy-to-let properties. In general, landlords in London and the South East benefit most due to the higher property values: 34% of all companies set up for buy-to-let businesses in 2020 were in London.  Together, London and the South East accounted for almost half (47%) of all incorporations.

Of the 615,077 limited company buy-to-let properties in 2023, says Hamptons: “458,838 (75%) have a mortgage charge against them. This means that limited company landlords are more likely to have a mortgage than investors who own buy-to-let property in their personal name. The number of outstanding limited company mortgages has risen 10% over the last 12 months, despite the total number of buy-to-let mortgages falling 3% over the same period.”

And interestingly, Hamptons found that: 

“Most of the growth in buy-to-let incorporations over the last year has come from smaller landlords. Over the last 12 months, there was a 21.9% increase in the number of homes held in companies with a single property. This compares to a 3.8% increase in the number held by companies owning 20+ homes. Given the upfront costs associated with setting up a new company, this suggests a long-term commitment from landlords.”

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