Lenders continue to respond to the changing needs of landlords and how these affect the support they seek from intermediaries and advisers. While significant changes have shaken up the buy-to-let market, its evolution is not yet over.
The PRS remains an important tenure within a healthy housing market, yet there is a significant shortfall of homes in the UK, whether to rent or buy.
So many of the current pressures on the sector will remain unresolved until the bigger issue of supply is addressed. We’ve been widely quoted on the sorry fact that now is the hardest time to afford to buy a home since 1875, the year Leeds Building Society was founded.
Slow mini Budget recovery
If that wasn’t challenging enough, the housing market contraction caused by last autumn’s mini Budget has not corrected fully – although that shock is gradually reversing.
Recovery in buy to let generally has been slower than for the residential market and the difference between buy-to-let lending to limited companies and private individuals has been particularly stark, with the former showing much greater resilience.
This may be down to the difference in yields – we’d warned in recent years that the time of “passive” property portfolio management had passed. In a rising rate environment landlords must play a more active role to secure yields, almost as they might manage a stocks and shares portfolio.
When the government announced sector tax changes in 2017, one rationale was to encourage greater “professionalism” among landlords, potentially improving property standards for tenants, and it’s true some “amateur” or “accidental” landlords have left the sector.
The cuts to tax relief for landlords were phased in over the next three years, with a lower tax relief of 20 per cent effective from April 2020.
Greater professionalisation
These changes seem to have been a key driver in landlords incorporating their businesses – since 2016 the number of registrations of new companies for the purpose of purchasing a property has more than doubled.
Landlords may choose to switch to a limited company structure for various reasons, and brokers and tax advisers will be able to advise on potential benefits and risks.
Clearly, tax liabilities when operating as a limited company will be one consideration, especially when looking at longer term tax planning.
The company structure also can provide greater flexibility in inheritance planning, with company share transfers potentially simpler for family directors rather than passing privately-owned property directly from person to person.
Since the shift from individual ownership gathered momentum, limited company activity has been strong in acquisition and industry research suggests almost two thirds of landlords – up from half a year ago – intend to buy their next property within a limited company structure.
In contrast, landlords are much less likely to transfer property already held in their own name to a limited company.
Few are choosing to make such transfers at present, probably deterred by potential bills for stamp duty or capital gains tax. We anticipate many existing buy-to-let properties will remain in private ownership but predict the demand for refinancing of limited company property will continue to grow as new loans mature.
So while we expect the shift towards greater levels of ownership by landlords which are limited companies, we’ll continue to serve the market as a whole and our intermediary partners who advise clients in this sector.
