A record number of landlords have set up companies to shelter their buy-to-let portfolios from soaring mortgage costs.
More than 50,000 buy-to-let companies were registered last year, surpassing the previous record of 48,502 established in 2022. Overall, there are now more than 345,000 active limited companies that are designed to hold buy-to-let property in Britain, up by 11pc compared with this time last year.
Moving to an incorporated business model allows landlords to offset their mortgage interest costs against income tax and tax on gains is lower than capital gains tax.
Aneisha Beveridge, of Hamptons, said rising interest rates had pushed more landlords toward moving to a more formal corporate structure. The average two-year fix on a buy-to-let residential mortgage is now 5.78pc, according to the analyst Moneyfacts.
“For as long as landlords continue rolling off cheap fixed-term mortgages onto rates which are twice or triple what they are paying, the number of homes being put into a corporate structure will remain high,” she said. “The number of buy-to-let incorporates each year is likely to continue running in the region of 40,000 to 50,000 for the foreseeable future.”
Ms Beveridge added that over the long term, half of all rental homes could end up within a limited company.
Landlord companies now own a total of 615,077 properties in Britain, up by more than 82pc since the end of 2016, according to analysis by the estate agent. This was when the tax law changed to make limited companies a more profitable way to hold buy-to-let properties for tens of thousands of landlords.
The average rent on a newly let property rose by a tenth in December, marking the highest level of end-of-year annual growth since Hamptons’ records began in 2014 and the ninth consecutive month that rents have risen faster than inflation.
Tenants in the East of England faced the steepest increases, where the average rent for a new property hit £1,299 per calendar month in December, a 13pc increase compared with a year ago. Rents in London, the Midlands and the North of England also recorded double-digit growth.
However, a separate report by Savills published last month found that landlord profitability has fallen to lower than 4pc of gross rent, levels not seen since 2007. Between 2014 and 2021, landlords were enjoying average profits of 23pc.
The taxman has also recently embarked on a letter-writing campaign to landlords who may have incorporated in recent years to check if their tax returns are correct.
The letter from HM Revenue and Customs (HMRC), seen by The Telegraph, states: “Information we hold suggests that too much incorporation relief may have been applied. This may mean you have not paid enough capital gains tax. This can happen if you’ve incorrectly calculated the amount of relief available to you.”
HMRC then suggests reasons an error with underpaying tax may have occurred, including that the capital gain resulting from the move to a corporation was bigger than the value of the landlord’s business or greater than the shares received from the change.
Experts have recommended that those who receive a letter should not speak to HMRC without first approaching a qualified tax adviser about their position.
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