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8:57 AM, 8th September 2023, About 8 months ago 1
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Three-quarters of landlords are planning to acquire a new rental property in the next year and intend using a limited company structure to do so – a record high.
The findings from Paragon Bank, which surveyed nearly 1,000 landlords, found that 74% of investors said they would do it – that’s up 62% of landlords expressing an interest in the last quarter.
However, the number of landlords planning to buy properties in their individual names has dropped from 41% in the final quarter of 2021 to just 17% in the second quarter of this year.
Buying through a limited company structure offers several tax advantages, including the ability to deduct mortgage interest from company income.
Limited companies are also subject to corporation tax rates, rather than the personal income tax rates of individual landlords.
Paragon’s commercial director of mortgages, Louisa Sedgwick, said: “Holding rental property within a limited company structure has been growing in popularity since the mortgage interest relief changes introduced by the government in 2017, but it has certainly accelerated in the past year.
“As a lender that specialises in portfolio landlords, we have always attracted a higher proportion of limited company lending, but that has certainly increased, particularly as interest rates, and subsequently mortgage pricing, have risen.”
Also, limited company ownership can provide more favourable mortgage financing options, as most lenders require a lower interest coverage ratio of 125% compared to the 145% required for higher-rate taxpayers.
This then allows limited company landlords to secure higher loan amounts, driving the increasing adoption of this approach.
The research also revealed that the average portfolio size of landlords with at least one property in a limited company has been on the rise since the final quarter of 2021, indicating that portfolio landlords continue to be active property investors.
In the second quarter of the year, the average portfolio size for these landlords increased to 16.9 properties, up from 15.6 in the first quarter and 13.1 in the final quarter of 2021.
Also, the average number of properties held within a limited company within these portfolios increased to 12.3 in the second quarter, up from 11.7 in the first quarter of 2023 and 7.8 in the final quarter of 2021.
Mark Alexander, the founder of Property118, said: “There is an unmistakable trend where an increasing number of landlords are expressing interest in establishing limited company structures.
“According to Companies House records, there were over 50,000 companies formed with the SIC code 68209 last year, and this trend has been on an upward trajectory since the Summer 2015 Budget announcement by George Osborne, which introduced restrictions on finance cost relief.”
He added: “Regrettably, only a minuscule fraction of these companies have taken the initiative to structure themselves as Family Investment Companies. In essence, they have opted for a budget-friendly approach, leaving their model Articles of Association unamended, lacking a shareholders’ agreement, and having only one class of ordinary shares.
“Consequently, these companies are inherently designed to generate the maximum amount of tax revenue for the HM Treasury.
“It is imperative that more landlords seek professional legal counsel to navigate these complex waters.”
Teessider
11:48 AM, 8th September 2023, About 8 months ago
Government needs to remove this ‘loophole’ or abolish Section 24 altogether. It was introduced when interest rates were virtually zero so it had little impact on landlords. Now that rates have risen to normal levels, the impact is much greater.