Rise in Property Businesses Amidst Tax Changes

Buy-to-let landlords are racing to switch their property businesses from personal ownership to limited company operations to save tax.

The phasing in mortgage interest relief between April 2017 and April 2020 and changes to how taxable profits are calculated triggered the start of incorporation for landlords.

Property investors formed 15,800 companies in 2019, steadily growing each year to 28,130 in 2022.

The Companies House data, analysed by Dutch firm Easy Offices, also reveals more younger investors are buying homes to rent. Their number has swelled from 107 in 2019 to 1,178 last year. Younger landlords tend to base their property businesses in London, Manchester, Birmingham, Leeds and Leicester.

“This spike of new businesses following the pandemic shows how it drove a large number of people to take bold steps,” says John Williams, the chief marketing officer at Easy Offices.

“We have seen the number of sole traders and small businesses looking for office space leap year on year.

Rise of the midlife entrepreneur

“This trend is based on many more experienced workers leaving behind their white-collar jobs with blue-chip companies and looking to start their ventures after the pandemic.

“It is the rise of the midlife entrepreneur, similar to that we saw in the aftermath of the Global Financial Crisis in 2008.”

The largest age group for investors is the over 50s, who account for 40 per cent of last year’s incorporations.

The survey agrees with other research in pinpointing the coronavirus pandemic as the trigger for young entrepreneurs starting their businesses.

Latest figures, published last year by estate agents Hampton’s, confirmed 11 per cent of landlords run their property businesses through a company - that equates to 291,000 of England’s 2.65 million buy-to-let investors.

What are the benefits of property companies?

The switch from running a property rental business as an individual rather than a company dates from the government changing tax and accounting rules for landlords in 2017.

Between April 2017 and April 2020, mortgage interest relief on investment finance was phased out for private landlords paying higher (40 per cent) or additional rate (45 per cent) income tax on their profits.

At the same time, the way taxable profits were calculated changed.

This tax revamp left many landlords paying more tax from higher rental profits.

Incorporating a property business changed the figures, as companies can charge 100 per cent of mortgage interest, while individuals can only claim 20 per cent of the bill.

Companies and individuals also pay different tax rates.

A landlord pays tax at 20 per cent, 40 per cent or 45 per cent, depending on how much they earn in a year.

A company pays corporation tax at 19 per cent on profits of less than £50,000, with a main rate of 25 per cent.

Companies also have other benefits for landlords, such as easing succession and other inheritance tax issues.

Drawbacks of property companies

Trading as a property company does not suit everyone’s circumstances. The drawbacks include:

  • The costs of incorporating and running a company will likely outweigh the savings for basic rate taxpayers (20 per cent) with one or two rental properties. Keep an eye on earnings and rents, and if they tip taxable income into the higher tax bracket, then consider incorporation.
  • The time needed for back-office work and the cost of administration, such as accounting and record-keeping, increases on incorporation as company finances face more official scrutiny.
  • Hiring an accountant and paying recurring Companies House fees will cost from £1,000 to £1,500 a year.
  • How to take money from the company needs planning. Shareholders can draw a salary, borrow money or take dividends from a company. Still, these payments must dovetail with non-property income, like salaries or pensions, to avoid paying unnecessary taxes.
  • Buy-to-let mortgages are generally more expensive for a company than an individual borrower.

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