"31% of all landlords and 38% of those with four or more buy-to-let mortgages plan to remortgage in the next 12 months, and will almost definitely see their monthly repayments go up."
Since 2018, the number of landlords who have put their buy-to-let properties into a company has doubled. In total, there were 47,400 new buy-to-let companies incorporated in 2021 across the UK according to Companies House data, reaching a new high of 269,300 by the end of last year.
Yet the BVA BDRC Landlord Survey carried out in Q2 of 2022 reveals that 77% of landlords still hold their buy-to-let properties in their personal name, rather than in a company. Since interest relief was finally phased out altogether in April 2021, it is logical to conclude that many more landlords currently falling within that 77%, particularly higher rate taxpayers, will look to buy investment properties in, or convert existing properties to, limited company status going forward. Indeed, the survey reveals that 62% of landlords intend to purchase their next investment property within a company structure, rising to 78% of those with six or more properties in their portfolio.
This course of action is all the more likely given the rising interest rate environment. Many landlords are currently on fixed rate deals which have protected them from the impact of increasing rates, but the survey tells us 31% of all landlords and 38% of those with four or more buy-to-let mortgages plan to remortgage in the next 12 months, and will almost definitely see their monthly repayments go up. Some will look to pass on their increased costs in higher rents – in fact, the survey reveals that 79% of landlords reported rising rents in their area in Q2, up 6% on Q1. But, with the cost of living crisis deepening, there are limits to how much tenants can afford. Our calculations suggest that if Bank Base Rate gets to 2.25%, a higher rate taxpayer with a 75% LTV mortgage on a property in their personal name could see their profit margin eroded to zero, due to the new calculation of interest relief being capped at 20%.
In such circumstances, buy-to-let investors have three options: sell up, pay down their debt, or convert their properties to limited company status. They may not want to choose the first option – many landlords view their buy-to-let as a long-term investment and will look to maximise their capital gain over multiple years. They may not be in a position to take the second option – paying off a chunk of your mortgage is great, but not necessarily easy given the worsening economic environment. So, for many, converting to limited company status may well hold the most appeal.
As a mortgage broker you will be aware of the potential tax benefits of limited companies, including a corporation tax level significantly lower than a higher rate tax payer’s income tax level, at 19% compared to 40% or 45%. But you will also be aware that giving tax advice falls outside of your remit, and you are required to refer your clients to a tax adviser (not an accountant!) who can assess their circumstances and make the appropriate recommendations.
With the torrent of company buy-to-lets set to become a flood, it makes sense to line up a suitably qualified tax adviser if you haven’t done so already, and make sure you’re familiar with what mortgage lenders operating in this sector have to offer your clients.
