In the fourth quarter of last year 69% of all buy-to-let mortgage applications were made by limited companies, according to the Mortgages for Business’ latest Limited Company Buy to Let Index.
This represented a jump of six percentage points on the 63% observed in Q3. The number had tripled from the 21% recorded before the changes to tax relief on mortgage interest were unveiled by former Chancellor George Osborne in July 2015.
Under the new rules, the amount of tax relief landlords can get will gradually be cut from the marginal rate of income tax afforded under their existing tax bracket today, to a maximum of 20% by 2020, irrespective of which income tax banding you fall within.
However, by holding their properties in a limited company, landlords can get around paying tax on the interest on their mortgage payments altogether. While they have to pay corporation tax on taxable profits – currently at a rate of 20% – they can write off other costs of running their business as ‘allowable expense’.
Additionally, the Prudential Regulation Authority (PRA) published rules in the beginning of Q4, which imposed tighter underwriting requirements on buy-to-let lenders from January 2017, taking into effect the higher tax charges. Many in the industry thought this would push more landlords to become ‘professional’ using limited companies as holding vehicles.
Mortgages for Business managing director David Whittaker (pictured) said: “The sharp increase in purchase applications made by landlords using a limited company structure is unsurprising given the financial incentive to do so, and it is encouraging to see growing numbers of landlords approaching their investments intelligently. With the changes to tax relief set to be phased in from April 2017, this trend is unlikely to be reversed any time soon.”
Products do not match demand
According to the index, more landlords have also been selling their personally owned property to their limited company.
The proportion of remortgage applications made via professional structures also increased from 23% in Q3 to 31% in Q4.
However, while there has been a significant uptick in the number of purchase applications made by limited companies, the amount of lenders offering products for them remained flat – at 14 – while the number of available products increased only slightly from 195 in Q3 to 198 in Q4.
The proportion of products available to landlords using a limited company as a total of all buy-to-let products remained at 16%, Whittaker said.
He added: “Despite the growth in the number of purchase applications made via limited companies, the number of lenders and products catering to this part of the market has remained flat. Although many mainstream lenders do not yet have an offering for investors using limited companies, many smaller lenders have significant expertise when it comes to servicing this part of the market.”