Limited appeal? The shifting face of UK buy-to-let

The UK buy-to-let sector is undergoing a shift, as investors continue to react to tax changes introduced by the government. The number of investors operating as limited companies has overtaken individual landlords for the first time, reveals new research from Mortgages for Business.

The report, published this week, shows that for the first time, over half the value of buy to let lending in Q2 2017 was provided to limited companies.

Landlords have faced a growing number of headwinds in the last year. In April 2016, the UK introduced a 3 per cent stamp duty surcharge for buy-to-let purchases, before phasing in the reduction of mortgage interest tax relief from April 2017. With letting agent fees for tenants also set to be banned, landlords are expected to face additional costs there, too.

The result may appear to be a less attractive sector for investors.

Rental growth has slowed significantly, with the average rent of a new letting in the UK rising by just 0.24 per cent in the first six months of 2017, according to Landbay – one-third of the 0.79 per cent growth seen during the same period in 2016.

This slowdown, which began in April 2015, is despite the forecast from many experts that landlords will hike rents to avoid making a loss. Indeed, there is a consensus among many that landlords are trying to avoid passing costs on to tenants for as long as possible.

“Landlords have had to face a catalogue of challenges over the past two years, from stricter regulation, a reduction in tax reliefs, and a significant stamp duty tax spike when buying a buy to let property,” John Goodall, CEO and founder of Landbay, says. “Yet despite these disincentives, they has been little sign of them leaving the market, and even less of them passing on these costs to tenants in the form of higher rents.”

The Council of Mortgage Lenders’ latest research shows that lending to individual landlords has dipped this year. Buy-to-let lending is now expected to total £35 billion in 2017, down from £40 billion in 2016 and down from the £38 billion originally forecast for the year.

The private rented sector, though, continues to grow, with 4.5 million privately rented homes now in the UK, up from 4 million in 2013. With the demand comes a reliable source of rental income, if investors can balance their buy-to-let tax costs. Indeed, while the CML data that might seem to spell an end to buy-to-let, the dip is being countered by a rise in limited landlords instead, as more and more investors turn to incorporation to avoid the new tax changes.

Of buy-to-let purchase completions in Q2 2017, 73 per cent were performed by limited companies, according to Mortgages for Business – up more than 10 per cent from 62 per cent in Q1. Similarly, limited companies accounted for 76 per cent of buy to let lending by volume, up from 63 per cent in Q1.

Incorporating is an expensive process and not suitable for everyone, but a growing number of landlords are using a limited company to secure more favourable conditions. While the government has insisted that its changes are designed to stop landlords from dominating the market and driving up prices for buyers, the new rules have led to a playing field that is not level: unlike normal house-hunters, landlords have to pay extra stamp duty, rental income tax, capital gains tax and cannot offset the interest on their mortgage as a deductible cost.

Goodall predicts that the current trend of cooling rents is “unlikely to continue”. The rise of limited landlords, though, is likely to continue for some time.