Record High: 50K Property Firms in 2023

Landlords are forming thousands of buy-to-let companies yearly to avoid punitive property taxes.

A record 50,000 companies were set up in 2023 - almost four times the number opened in 2015 when former Tory chancellor George Osborne ushered in mortgage interest relief for individual landlords.

The relief abolished a higher rate taxpayer's right to offset mortgage interest. The offset was replaced with a tax credit of 20 per cent.

The measure slashed buy-to-let profits for thousands of landlords who looked for alternative ways to reduce their tax bills.

For example, in 2015, paying higher rate tax (40 per cent) while receiving £1,000 a month in rent and paying £500 mortgage interest paid roughly £2,400 tax on yearly profits of £6,000.

How company tax works

By 2020, tax on the same profits cost 50 per cent more (£3,600 a year) due to the introduction of the mortgage interest relief tax credit.

Corporation Tax on profits of £6,000 is £1,140, charged at 19 per cent.

Since 2015, Companies House reports property investors have incorporated roughly 270,000 companies to run their buy-to-let businesses.

Landlords favour companies as corporation tax rules let them offset all their mortgage interest against rental income rather than just 20 per cent of the total allowed for individuals.

In 2015, landlords ran 13,863 companies, while now 345,426 hold 615,000 rental properties. Some 460,000 of these properties are mortgaged.

Property company controversy

“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,”  said Aneisha Beveridge of estate agents Hamptons, who researched the data.

“The number of outstanding limited company mortgages has risen ten per cent over the last 12 months, despite the total number of buy-to-let mortgages falling three per cent over the same period.”

The tax status of buy-to-let companies is attracting a lot of controversy as tax experts and HM Revenue and Customs claim many landlords have broken tax rules when transferring the ownership of investment properties on incorporation.

Some tax advisers claim landlords can transfer property ownership without paying capital gains tax as they are business assets. In contrast, others, including HMRC, argue the tax is due because of the investment nature of a property business.

Landlords looking to minimise their tax can avoid this potential CGT tax trap by purchasing new rental properties through a company while retaining personal ownership of any existing buy-to-lets. This allows them to use corporation tax rules to offset mortgage interest on new purchases while leaving the rest of the portfolio to claim a tax credit.

Many companies are set up as buy-to-let mortgages roll off fixed rates as the owners try to reduce the impact of rising interest rates on their investments.