For landlords whose properties are registered under a limited company, mortgage interest is treated as a business expense, meaning it’s possible to deduct interest costs before paying corporation tax. What’s more, buy-to-let investors choosing to run their homes through a limited company are not liable for capital gains tax.
These firms now own more than 615,000 properties in the UK, an 82 per cent increase since the end of 2016 when tax changes made limited companies a more profitable way to let for some landlords. There was even more of an incentive last year, when a cycle of Bank of England increases led to the sharpest series of interest rate rises in three decades.
Pricey business
Even so, the cost of transferring privately owned rental homes to a company is an expensive process, given mortgage-transfer costs and the taxes applicable when a property is shifted. The expenses occurred in setting up a firm and running it can also be high.
Regardless, an eagerness to rein in costs saw the number of active limited buy-to-let companies rise to almost 350,000 at the start of this year, compared with just over 300,000 at the beginning of 2023.
In the first half of last year when mortgage rates were slowly declining from a post-mini-budget spike, the number of new buy-to-let incorporations ran at about 2 per cent below the same period in 2022, according to the report. However, as home loan costs surged again in the second half, the number of firms established ran 9 per cent above 2022 levels.
Almost two-thirds of limited companies in the North East were held in a buy-to-let firm that was set up outside the region last year, reflecting how landlords are targeting higher-yielding homes, particularly in northern England. Companies owning 20 or more properties were the only group to see the number of mortgage charges rise faster than the number of homes, suggesting these investors are leveraging up rather than reducing the debt on their portfolio.
A steady reduction in mortgage rates over recent months has eased the financial burden on some landlords, coinciding with softer rent increases.
Rent relief
Separate official figures showed London rental-price inflation has cooled for the first time in two years, providing relief to tenants who have faced a record rise in costs and a dwindling supply of available houses.
Rents in the UK capital climbed 6.8 per cent in the 12 months to December, a slight deceleration from the record 6.9 per cent increase the previous month, the Office for National Statistics said this week. UK-wide rents rose by 6.2 per cent, the first time the pace has not picked up since August 2021.
The figures suggest that recent improvements in the supply of rental properties and easing mortgage rates are feeding through to costs for tenants after a particularly acute squeeze in London.
A shortage of properties and landlords passing on higher mortgage rates have led to a scramble to secure rental homes, triggering double-digit increases in prices for new lets.
The ONS also said that house prices sank 2.1 per cent in the year through November, the sharpest fall in 12 years. In London, property values plunged 6 per cent.
Sentiment now is considerably more upbeat than during the summer and autumn of last year.
— Yellow Brick Mortgages MD Stephen Perkins
The official data is catching up with figures from the sector that have been showing falls of a similar and even bigger magnitude for some time. Recent industry surveys suggest that buyer demand is returning, helping to prop up house prices.
“Sentiment now is considerably more upbeat than during the summer and autumn of last year,” said Stephen Perkins, managing director at broker Yellow Brick Mortgages.
“There has been a bright start to the property market in 2024 and the blip in inflation will not halt that momentum.”
Valuations in the property market are expected to be helped by the price war among mortgage lenders driving down interest rates for borrowers. According to Moneyfacts, the average two-year fixed mortgage rate has fallen to 5.62 per cent, down from almost 7 per cent last summer.
“We expect house prices to recover over the remainder of the year, though, as falling mortgage rates and rising real incomes improve affordability materially,” said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics.
“The recent shift downwards in market expectations for bank rate over the past couple of months means the average quoted rate for a two-year fixed-rate mortgage with a 75 per cent loan-to-value ratio will drop below 4.5 per cent this quarter.”
Despite the hopeful signs, broker Hamptons warned that rents were unlikely to decline dramatically this year. The strain on tenants’ finances has been driven by higher landlord costs and a shortage of homes available to rent. These issues are unlikely to change significantly in the short-to-medium term, according to the report.
“The number of buy-to-let incorporations each year is likely to continue running in the region of 40,000-50,000 for the foreseeable future,” Hamptons’ Beveridge said.
“Longer term, the current tax regime could push half of all rental homes into a limited company, significantly reducing the existence of landlords who own buy-to-lets in their personal name.”
Bloomberg
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