Tax-Efficient Rental Property Purchasing

Published by Rana Zubair posted in Resources on 4 May 2024

A significant proportion of landlords (75%) who plan to acquire a new Rental Property in the coming year will opt for a limited company structure as a means of reducing their tax obligations. This trend towards purchasing through a company, a move influenced heavily by the insights from strategic tax planning, rather than as an individual landlord, has been primarily driven by changes in the tax system and the rising costs associated with managing a rental portfolio.

Tax Complexity and Rising Costs:

Due to these changes in tax structures, the costs have been further compounded by increasing interest rates of rental properties. The company route also offers the advantage of specialized tax advice, which can assist in navigating the complexities of tax system changes. Ultimately, tax planning, tax structures, and professional tax advice have become essential considerations in this changing landscape. Always consult with a professional to ensure you comply with the regulations. You can Book a free consultation with us today.

Landlords Flock to Limited Company Structure:

According to a study conducted by a leading bank and a buy-to-let specialist, 74% of landlords who intend to buy a buy-to-let property in the next 12 months will do so through a limited company. This marks the highest level ever recorded by a survey and represents a significant increase from the 62% of landlords who indicated a preference for a limited company structure in the first quarter of 2024.

Tax Rates & Financing Benefits for Limited Companies:

Depending on their profits, limited companies are subject to a corporation tax rate of 19% for those with profits under £50,000, which increases to 25% for those with higher profits. Additionally, limited company ownership can result in more favorable mortgage financing options, as most lenders require a lower interest coverage ratio of 125% for limited company applications, compared to 145% for higher-rate taxpayers. This, along with the ability to secure higher loan amounts, has further fuelled the adoption of this approach. However, rental property purchases may have tax implications, so always seek professional advice before making a decision. Please feel free to Book a free consultation with us today!

Rental Property Ownership in Limited Companies:

According to mortgage experts, the popularity of holding rental properties within a limited company structure has been on the rise since the government’s changes to mortgage interest relief in 2017 and has significantly accelerated in the past year. Lenders specializing in portfolio landlords always attracted a higher proportion of limited company lending, but this has increased even more as interest rates and mortgage pricing have gone up.

Landlords Favoring Limited Company Structures:

The research also revealed that the average portfolio size for landlords with at least one property or rental property in a limited company has increased since the final quarter of 2023, indicating that portfolio landlords continue to be active buyers in the market. In the second quarter of last year, the average portfolio size for these landlords was 16.9, up from 15.6 in the first quarter and 13.1 in the final quarter of 2023. Among these landlords, the average number of properties held within a limited company in Q3 was 12.3, compared to 11.7 in Q1 of 2023 and 7.8 in the final quarter of 2022.