In a striking shift within the UK’s property investment landscape, a groundbreaking 74% of prospective landlords planning to acquire rental properties in the upcoming year have chosen the limited company route, according to data unveiled by Paragon Bank. This notable figure marks a significant surge from the 62% of landlords who initially expressed their intent to adopt this corporate structure in the early months of the year, as reported in Paragon Bank’s quarterly survey.
The allure of purchasing buy-to-let properties via a limited company structure is predominantly rooted in the numerous tax advantages it offers. Notably, investors can deduct mortgage interest expenses from their company income, ultimately allowing them to pay taxes at the considerably lower corporation tax rates, as opposed to the personal income tax rates applicable to individual landlords.
Another compelling aspect contributing to this growing trend is the favourable lending conditions offered to limited company applicants. Paragon Bank highlights the fact that most lenders require higher-rate taxpayers to maintain interest coverage ratios of 145%, whereas limited company applicants benefit from a more lenient ratio of 125%. Consequently, limited company landlords can typically secure more substantial loan amounts, a factor further bolstering the adoption of this corporate structure.
Conversely, landlords planning to make property purchases under their individual names have witnessed a substantial decline in numbers. From a notable 41% recorded in the final quarter of 2021, this figure has plummeted to a mere 17% in the second quarter of this year, underscoring the growing popularity of limited companies among property investors.
The survey conducted by Paragon Bank also reveals a significant uptick in the average portfolio sizes of landlords who have embraced limited companies for their property investments. These portfolio landlords have not only increased the average number of properties held within a limited company structure but have also expanded their overall portfolio sizes since the final quarter of 2021. This data strongly suggests that portfolio landlords remain actively engaged in property acquisition.
In particular, the average portfolio size for landlords in the second quarter of this year surged to 16.9, marking a substantial rise from 15.6 in the previous three months and a noteworthy increase from 13.1 in the final quarter of 2021. Moreover, for landlords managing properties under limited companies, the average number of properties held per investor reached 12.3 in the second quarter of this year, showing a robust uptick from 11.7 in the preceding three months and a significant leap from 7.8 in the final quarter of 2021.
Commenting on this transformative trend, Paragon Bank’s Commercial Director of Mortgages, Louisa Sedgwick, emphasized, “Holding rental property within a limited company structure has been growing in popularity since the mortgage interest relief changes introduced by the government in 2017, but it has certainly accelerated in the past year.” She further noted, “As a lender that specializes in portfolio landlords, we have always attracted a higher proportion of limited company lending, but that has certainly increased, particularly as interest rates, and subsequently mortgage pricing, have risen.”
The data underscores the shifting landscape of property investment in the UK, with limited companies emerging as a favoured vehicle for investors looking to maximize tax efficiency and lending opportunities.