Why are landlords setting up companies? Law changes explained, what it means if you’re renting
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With a cost of living crisis currently hitting household budgets for people up and down the UK, living standards are facing their biggest squeeze in decades.
Those in the rental sector have faced a particular squeeze, with average monthly rents soaring well above the rate of inflation. Rightmove has found monthly rents are now at a record high of £1,172 per month in Britain (excluding London), with the reason behind the spike in letting said to be high demand.
Finding a place to live has become very difficult for some renters. But those who have managed to secure a property may have noticed something different when they sign their tenancy agreements - the landlord who owns the property is listed as a company rather than a person.
According to reporting by The Times, there were 309,643 buy-to-let companies in the UK by the end of 2022 - up from 228,743 two years earlier. The newspaper also quoted a mortgage brokerage, which revealed that limited company landlords now make up 65% of its loan applications - up from 40% in January 2016.
Indeed, some landlord organisations are now recommending their members look into setting these sorts of companies up. But why are landlords doing this - and what does it mean for tenants?
What issues do landlords face?
With the government tightening rental market legislation and mortgages having soared in the wake of the Liz Truss mini budget, landlords have been facing constraints on their profitability.
Many have felt compelled to exit the industry. And almost a third of those who remain said they plan to cut the number of properties they rent out, according to recent research from the National Residential Landlords Association.
According to the Bank of England’s latest Monetary Policy report - a document it published alongside the interest rates hike on 2 February - “tax and regulation, higher maintenance and borrowing costs, and an inability to recoup increased costs in rents” were factors that had led to a drop in the number of landlords - something which has exacerbated rocketing levels of demand.
According to Marc von Grundherr, director of London estate agency Benham and Reeves, changes to buy-to-let stamp duty thresholds, a tightening of HMO (house in multiple occupation) regulations in many local authority areas, changes to energy efficiency requirements and alterations to capital gains and income tax allowances have all “increased investment costs or reduced the profit margins” landlords can expect.
These have hit at the same time as higher mortgage costs. According to research by financial advice website Moneyfacts, the average rate for a new buy-to-let mortgage had jumped from 2.8% in December 2021 to 5.95% at the start of February 2023. It means a landlord with a £150,000 interest-only loan has seen monthly repayments more than double from £350 to £743.
Why are landlords setting up companies?
How tax now works in relation to mortgage interest costs is one of the main reasons why greater numbers of landlords have opted to set up companies. Changes to income tax legislation in April 2020 have meant that individual landlords have been unable to claim the same level of mortgage relief they could access before.
In the past, a landlord could deduct mortgage interest payments from the rental income they received before declaring it for tax purposes. Basically, it lowered their tax bills. But this was halted by the government in favour of a less lucrative tax credit system.
“This has spurred many landlords to set up limited companies so that they avoid a hike in their income tax and pay corporation tax instead,” explained Von Grundherr. “But not only is this approach more tax efficient, it provides a greater degree of long term security and the benefits of incorporating compounds with the size of the portfolio.”
The tactic is not without its pitfalls. Landlords transferring existing properties into company ownership expose themselves to stamp duty, capital gains tax and other potential fees because the process is treated as a property sale. Commercial mortgage rates also tend to be higher than residential ones. But many landlords think it’s a risk worth taking.
What do renters say?
While letting out properties through a company has advantages for the landlord, the situation is a lose-lose for tenants - especially those who let their homes directly from the landlord - according to Living Rent, a tenant’s union in Scotland which represents private and social renters.
Speaking to NationalWorld, the union’s secretary Aditi Jehangir said: “Setting up unaccountable companies to buy homes is just another way for landlords to absolve themselves of their responsibilities.
“This let’s landlords hide behind faceless companies, making it harder for their tenants to contact them if there is need for repairs, if they need to discuss their circumstances or just to have the dialogue required to ensure that a home is fit for purpose.”
She added that it was the latest saga in the “financialisation” of the housing market. “Though landlords often claim to say they provide a service, tendencies like these just remind us that landlords are just motivated by the pursuit of profit to the detriment of tenants’ rights and wellbeing,” said Ms Jehangir.