Farewell to the dinner party landlord and hello to the limited company

Paul Fryers is managing director at Zephyr Homeloans

Once a mainstay of noughties’ dinner parties, the ubiquitous figure of the part-time landlord is now about as rare as a prawn cocktail starter.

So what has happened to this person – who perhaps fell into second property ownership when moving in with a partner, or who bought a house for student children to live in during university – and whose tales about the triumphs and tribulations of landlording were as familiar a feature as a Thai green curry on the table just a few short years ago?

In short, their disappearance coincided with the increasing popularity of the Special Purpose Vehicle (SPV), a limited company with restricted trading rules specifically for buying and renting properties. Instead of paying tax as an individual, the SPV is liable for corporation tax.

We can potentially trace the demise of the part-time landlord back to the 2017-18 tax year, when the government began phasing in a new system for buy-to-let property owners.

During that year, the percentage of mortgage interest payments that a landlord could set off against rental income fell by 25%, followed by further 25% decrease every year until 2020, the year of the fully established system.

Since April 2020 landlords, now unable to deduct mortgage expenses from their rental income to reduce their tax bills, receive instead a tax credit based upon 20% of their mortgage payments.

Significant numbers of landlords, many who had effectively received 40% tax relief on their mortgage payments before the rules changed or who had found themselves in a high tax bracket as a result of the alterations, sold off their properties. These dwellings were in turn often bought by professional, cash-rich, buy-to-let landlords with larger property portfolios.

What started as a trickle of landlords setting up SPVs has turned into a flood, according to a recent report that noted a 14 % (47,400) rise in the number of new buy-to-let incorporated companies during 2021 alone, double the number in 2017.

In addition, the report shows that around 61% of the current total of 269,300 SPVs were created since April of that year.

I am always impressed by the BTL sector’s ability to find new business models during periods of considerable change. Whatever storms 2022 throw at the industry, I’m certain it will continue to adapt and thrive.