Landlords Using Limited Companies to Buy Property

According to recent data from Paragon Bank, a staggering 74% of landlords planning to purchase a rental property within the next year intend to do so under the banner of a limited company. This is up from 62% earlier this year. Why such a dramatic increase? Stick around, as we break down the numbers and the benefits of this growing trend.

Understanding The Jump: What’s Changed Since The Start of 2023?

At the beginning of the year, only 62% of landlords were planning to use a limited company for their next property purchase, according to Paragon Bank’s quarterly survey. Fast forward a few months, and that figure has shot up to 74%. This suggests that there’s something quite attractive about using a limited company to manage rental properties, and it appears to be catching on fast.

The Tax Incentives: Why It Makes Financial Sense

One of the main appeals of buying a property through a limited company is the tax benefits. In this structure, landlords can deduct mortgage interest from the company’s income, which isn’t an option when you buy as an individual. Plus, any profit you make is taxed at the corporation tax rate, which is usually lower than the income tax rates that individual landlords have to pay.

The Nitty-Gritty: How Loan Terms Differ

Lenders usually have something called an “interest coverage ratio,” which is a fancy way of saying they want to know you’ll earn enough rental income to cover your mortgage payments, and then some. For individual landlords who are higher-rate taxpayers, most lenders set this ratio at 145%. For limited companies, that drops to 125%.

In plain English, this means you don’t have to earn as much from the property to qualify for a mortgage if you’re buying through a limited company. What’s more, you can generally secure higher loan amounts, allowing you to aim for potentially more profitable properties.

The Decline of Individual Property Buying

While the limited company route is gaining steam, buying properties in individual names seems to be falling out of favour. These have declined from 41% in the final quarter of 2021 to a mere 17% in Q2 of 2023. It’s a dramatic drop and indicates that landlords are seeking more financially efficient ways to manage their portfolios.

Portfolio Sizes Are Increasing: Landlords Aren’t Slowing Down

Interestingly, the average number of properties in these limited company portfolios is also on the rise. At the end of 2021, a landlord holding properties in a limited company had an average of 7.8 properties. Fast forward to Q2 of 2023, and that number has climbed to 12.3. Overall, the average portfolio size for all landlords was 16.9 properties, up from 15.6 in the previous quarter and 13.1 in the final quarter of 2021.

So, not only are more landlords moving toward limited companies, but they’re also continuing to invest in multiple properties, highlighting sustained interest in property investment.

The Bigger Picture: What’s Fueling This Shift?

According to Louisa Sedgwick, Paragon Bank’s commercial director of mortgages, the attractiveness of using limited companies has been on the rise since 2017 when the government made changes to mortgage interest relief. This momentum has accelerated over the past year, especially as interest rates have risen, affecting mortgage pricing.

Survey Scope

For a bit of context, Paragon Bank’s insights come from a survey conducted between 1 July and 21 July, involving 983 landlords. This isn’t just a passing trend but a significant movement in the landlord community, backed by concrete data.

Conclusion: What Does This Mean For You?

If you’re an existing landlord or considering becoming one, now might be a good time to consider the limited company route for property investment. There are substantial tax benefits, and lenders are more inclined to offer you better loan conditions.

The trend suggests that landlords see real advantages in using limited companies, not just for a one-off property purchase but as a long-term strategy. So if you’re thinking about expanding your portfolio or stepping into property investment, going the limited company way seems like a savvy move, given the current landscape.