The rise of the company owner

The trend of buying BTL properties through limited companies is still proving popular with landlords

wning a BTL property via a limited company is proving increasingly popular as a result of changes to the law.

The main one came in the 2015 Finance Act, which impacted setting costs against tax. The biggest change was that landlords could no longer offset finance costs, such as mortgage payments and interest on loans taken out to furnish properties, against their property income.

Words by Jon Yarker

Since the act came in, interest relief was increasingly reduced over time until it became nonexistent from 2020/21. It was replaced by a 20% tax credit on finance costs. The changes have affected all client conversations, says Propp managing director Paul Elliott: “We did a lot of work at the time educating clients about the impact this was going to have and the potential benefits of incorporating, and that this was a tax issue they needed to discuss with their tax adviser.

“But it wasn’t until tax returns started to catch out landlords when people really began to consider how they could protect their cashflow.

“These days, we have that conversation with every client we talk to who is looking to buy a BTL property.”

Traditionally, the main benefits of corporate ownership were related to stress testing, but now tax is making more landlords turn to this option, as currently, profits are taxed at a flat rate of 19% corporation tax. From April 2023, the corporation tax will rise to 25% for profits over £250,000, while companies with profits of £50,000 or below will continue to pay 19%. For companies between the two thresholds, a system of marginal relief will apply. There is also no restriction on the amount of interest that can be deducted. In addition, limited companies are not liable to pay capital gains tax.

One tax adviser who has found himself talking to more landlords about the use of companies is Alexander & Co tax partner John McCaffery.

With changes in how landlords’ profits are calculated, higher-rate taxpayers are now having to pay more if they continue to hold properties in their own name, he explains.

To articulate why personal ownership may no longer work for some landlords, John gives the example of a BTL landlord owning their properties in their own name with £70,000 of rental income who would have previously deducted interest to drop down to the basic rate band.

“Now, you’re pushed into the higher rate bracket,” says John. “So you’d pay 40% on £20,000 even though your interest costs would have previously dropped you down a band. Obviously, a lot of these rates are variable. Your interest costs are increasing—therefore, your restriction is more painful.

“Tax is becoming a really problematic cost, especially when margins are tight and in relation to interest restriction. You have to make sure you’re making a living, and also know what your tax costs are.”

The tax benefits of incorporation are driving a surge in the number of landlords choosing this route. Research from Hamptons found a record 300,000 landlord companies existed in September 2022; the total number of BTL companies had doubled since 2017, when interest relief began to constrict significantly.

Now, estimates from Hamptons suggest around 40% of all new BTL purchases are made via a corporate structure, compared to just 10% in 2016 before section 24 of the 2015 Finance Act came into force.

Brokers highlight other benefits of this route, such as more structure for succession purposes, but tax is clearly the main driver of this trend.

Wait for it

Tax advice is therefore proving increasingly important for BTL landlords, both new and existing. The latter are taking an interest as properties can be transferred into a company ownership structure.

There are benefits to waiting to do this, explains Paul: “We have not seen a huge transfer, maybe because there is a lag for most of them; to get section 162 incorporation relief of the Taxation of Chargeable Gains Act 1992, they are going through the LLP route and most accountants suggest they have to hold an LLP for 18-24 months before getting this relief.”

Incorporation relief is an additional benefit of company structure, whereby a landlord can delay any capital gains tax payable on the transfer of properties into the company until they have disposed of their shares.

Less of a stress test

For new landlords, company ownership can also be advantageous when applying for mortgages. Lenders base rental cover stress testing on the marginal tax rate of the applicant—basic rate taxpayers must satisfy 125% rental cover, while this is 145% for those in higher rate tax bands. This can make matters difficult, explains Brightstar’s BTL consultant Neil Taverner: “For the higher rate taxpayers, the stress test, especially in this climate,

[makes it] a lot harder to make it fit with regard to the rental calculation.

“If you’re applying with a limited company, whether you’re a basic or higher rate taxpayer, the stress test is at 125% full stop.”

This means BTL landlords may be able to raise more money through a limited company than in their own name in a marker where interest rates are rising. This flat rate of 125% may prove advantageous for some, but Aria Finance sales and commercial director Joseph Aston warns this does not guarantee approval.

“It’s important to note that a lender will still need to review the credit profiles of directors and shareholders of the limited company, and you may still be required to provide a personal guarantee on the loan,” he notes.

Also, from a tax perspective, company ownership can raise its own challenges— namely extracting funds in an efficient way.

“A company allows you to manage the flow of cash out and when you pay tax, and who pays tax, to a certain extent,” says John. “The potential downside is there is a secondary tax charge on getting the funds out of the company, in terms of dividends etc. Dividends can be tax efficient, though.”

The current rules stipulate that, above an individual’s allowance of £2,000, dividends are taxed at 8.75% for basic rate taxpayers. Higher rate and additional rate taxpayers are taxed on dividends at 33.75% and 39.35% respectively.

Stay relevant

The move towards company ownership is becoming so popular among BTL landlords that many brokers expect this trend to continue.

Paul welcomes the changes he is now seeing: “When this first started to happen in 2015-2016, I had genuine conversations with product pricing guys at lenders who did not understand what they were talking about.

“However, the market has matured and lenders now understand they must have a limited company proposition if they want to stay relevant in the market. There are a couple of the bigger lenders who don’t currently offer this, but we know they are looking at getting into the space.”

Eagerness to return to normality after the pandemic has been a common discussion point in a range of businesses—including landlords. But normality—in terms of market conditions before Covid— never returned. A cocktail of numerous lockdowns and global events, such as the Ukraine war, meant the evolving landscape made markets more volatile. As a result, staycations have become more popular while the cost of living has risen, and both have consequences for how landlords and their advisers need to arrange insurance policies.

HMOs to holiday lets

In today’s age, landlords can be roughly split into three groups: property investors, accidental landlords, and those with holiday lets.

Property investors are often considered to be landlords in the traditional sense. While they may have niche requirements for their broad portfolios, the rise in HMOs has meant their need for more specialist insurance has grown.

Accidental landlords—those with an inherited single property they rent out—typically require straightforward cover, from an insurance perspective. However, those who manage holiday lets will almost certainly need specialist policies for their complex requirements.

Since the pandemic, holiday lets have become highly prominent, with the rise in the popularity of staycations leading to a 40% increase in the number of holiday lets between 2019 and 2022. Given the potential profitability of such ventures, the growth in that market segment shows no signs of slowing.

Although the likes of Airbnb and vrbo.com rentals have become well established, most insurers are unlikely to cover them under standard terms as tenancy agreements will not be in place.

While it is essential that advisers and their clients arrange tailored policies, the more intricate nature of specialist insurance should not be viewed as a negative. Instead, it provides another route through which advisers can offer significant value to their customers.

Accidental underinsurance

Without recognising and adapting to a changing market, it is easy for landlords to become underinsured. A policy that does not meet a client’s needs can end up being a costly problem.

Two timely examples of how this could happen in 2023 involve cover for the cost of rebuild and loss of rent. With some predicting a rise in building materials costs this year, and almost unprecedented inflation figures increasing wages across the board, the cost of rebuilding needs to be fully accounted for to prevent a financial headache, should the unfortunate happen. It would be easy for a policyholder to renew an existing policy without checking rebuilding costs, which may be substantially higher than they were 24–36 months ago. Not only that, but with an estimated 500,000 tenants in the UK behind on their rent, it makes sense to include loss of rent cover in a client’s policy.

So not only do specialist policies help to avoid invalid ones and underinsurance, but they are also more cost-effective than standard insurance as they are tailored to a landlord’s specific risks and needs, rather than offering a one-size-fits-all approach.

Moving with the times

Given the nature of the sector and the fast pace at which tenant requirements, and therefore landlords’ properties, are evolving, it’s only natural that insurance products also move with the times. Advisers need to stay alert and be aware of developments.

Changes have largely taken place in two main ways: first, the products themselves have been adapted to cater for specific clients, such as Airbnb and portfolio landlords. Second, the way in which advisers and their customers can purchase insurance is quickly developing. Technology simplifies online quote journeys and allows them to cater for specialist insurance enquiries.

Previously, advisers may have turned their customers to price comparison websites to try to find a quote that most closely aligned with their needs. Now, the developing nature of landlord requirements mean that it’s worthwhile looking elsewhere to meet specific needs.

Our own insurance technology automatically applies high-cover limits to a wide range of specialist insurance products that can then be customised to fit a client’s needs. This alleviates the risk of underinsurance, as well as massively simplifies traditionally complex quote and application journeys. Through Uinsure’s adviser platform, the same basic principles to generating quotes apply to specialist clients, as well as standard home insurance enquiries and, with simple training, advisers can get both the confidence and know-how to operate effectively in these spaces and be sure their clients have the right policy for their need.