Investing in buy to let property is not for those looking to make a fast buck. Most buy to let landlords these days view their investment as a project with potential to generate both income and capital gains, but over the long term. As with any investment, they can expect ups and downs, tough years and easier years. The last year has been pretty tough.
The typical interest rates charged on buy to let mortgages started rising slowly at the start of 2022, jumped up following Liz Truss’s ill-fated ‘mini Budget’ in September, and remain volatile. As a result, the cost of new loans is higher than landlords had become accustomed to during the many years of ultra-low interest rates we had previously enjoyed.
On the upside, strong growth in property values in recent years and a deep structural imbalance between supply and demand in the Private Rented Sector means the longer-term picture should remain positive for many buy to let investors. But each landlord needs to run their buy to let business as a going concern. How can they best do this while facing a significant uplift in interest payments?
There are various avenues landlords can explore: raising rents; paying down debt; selling up and exiting the market – or converting to/buying in a limited company wrapper.
Increasing rents is perhaps the most obvious move, and one many landlords have deployed, judging by the data. According to Rightmove, national average rents outside London went up 9.7% last year to hit a record of £1,172 a month at the end of 2022, Outer London rents hit a record £2,480 and inner London rents went through £3,000 a month for the first time. But price elasticity can only stretch so far before tenant affordability snaps, so landlords need alternative strategies.
In the current economic environment, paying down debt may not be a viable choice. In fact, leveraging to expand a portfolio can still make good sense given the huge demand for rental property in many parts of the UK. Indeed, a major piece of research we carried out in H2 2022 among Landlord Leaders, revealed that 80% of professional landlords and 40% of part-time landlords had or planned to buy more properties, while 68% of all landlords had or planned to invest in upgrading their rental stock to make it more energy-efficient ahead of any Energy Performance Certificate rule changes – proof positive that they are playing the long game. In the same vein, selling up could be the last thing any landlord desires, given the potential for long-term success.
Which leads us to limited company buy to let.
The steady reduction of tax relief on buy to let investments held in personal names has prompted a flight to the haven of company buy to lets over the past five years, with the number of companies registered doubling to more than 300,000 between 2017 and October 2022, according to Companies House data collated by Hamptons. The rise in the cost of borrowing is likely to support if not exacerbate this trend to incorporate, as the tax benefits can be very attractive.
In a limited company wrapper, landlords can still offset 100% of their interest payments against their tax bill – a relief no longer available on personal buy to lets. Rental income is taxed at a corporation tax rate of 19% to 25%, rather than a landlord’s personal tax rate, making incorporation particularly attractive to higher (40%) and top rate (45%) taxpayers. And limited company buy to lets are also more flexible in many ways, allowing owners to access equity in their properties via director’s loans, for example.
But they can come at a cost – and it is the job of a tax adviser to calculate whether that cost is worth paying for your clients, as every individual’s circumstances are different. As a broker you need to be aware of the basic rules, but direct your clients to a qualified tax adviser for further help.
This article first appeared on Mortgage Strategy website.