Tax squeeze pushes landlords towards limited company structures

The Autumn Budget saw chancellor Rachel Reeves confirm plans to increase the basic and higher rates of tax on property, dividend and savings income by two percentage points from April 2027. Industry reaction has been sharply critical, with the additional tax on rental income described as “disastrous” for landlords who are already dealing with higher costs and the forthcoming implementation of the Renters’ Rights Act.

Brokers say the buy-to-let market is becoming increasingly split between professional investors who see opportunity, and smaller or accidental landlords who feel under pressure or are heading for the exit.

Among long-standing investors, sentiment remains surprisingly positive. “The mood among professional landlords who have been in the sector for a while is definitely opportunistic, as the ones we work with, in general, are reporting an uptick in business of late,” said John Tarazi (pictured top left), director and co-founder at Echo Finance. “There will always be demand for homes, even in a challenging market, so many of our clients are looking beyond recent volatility and seeing the potential for long-term gains.”

By contrast, those with one or two properties often feel squeezed. “The mood among amateur and accidental landlords is less optimistic,” Tarazi added. “Many of them see the rental income tax increase as the latest in a series of blows and are now considering all options with regard to owning an investment property.”

That divergence is echoed elsewhere. “Landlords have become all too used to bad news in recent years and so the news of a higher rate of income tax on property income and dividends may have been met with a good degree of resignation,” noted David Hollingworth (pictured top centre), associate director at L&C Mortgages. “There’s bound to be frustration as well from those trying to provide good quality property for a fair rent, as higher costs put upward pressure on rents.”

Simon Upton (pictured top right), director at Independent Mortgage Solutions, put it more bluntly. “Without doubt, it is a case of ‘resigned’ – they feel they are ‘easy targets’ and have been for a couple of years form past Chancellors,” he said.

Exits rise, but in different ways

Brokers report more landlords reassessing their positions, but the pattern is uneven and not always a direct response to the latest Budget.

Tarazi said the clearest increase is among smaller and accidental landlords. “We are definitely seeing an increase in this among smaller-scale landlords and accidental landlords, but this isn’t something that the Budget has necessarily influenced,” he said. “There was already a trend in this direction for this type of landlord and it was exacerbated by the Renters’ Rights Act, but we haven’t noticed any real change since the Budget.”

Hollingworth said it is difficult to isolate the impact of any single change, but the direction of travel is clear. “It can be hard to measure how the introduction of each measure forces landlords to rethink their property investments,” he said. “However, there’s no doubt that more are looking carefully at the properties in their portfolio and assessing whether they continue to make sense. Some will adjust their holdings rather than exit entirely and even smaller landlords have shown resilience over the years.”

Upton is seeing a more dramatic response from some larger players. “Personally, I am seeing very much a ‘mixed bag’,” he said. “Some of my larger landlords have ‘had enough’ and are planning on exiting the buy-to-let market and will be selling off their portfolio as their existing mortgage deals expire. However, there is also those that see opportunities and will be looking to expand their portfolios.

“Strangely, I think it will be the more established portfolio landlords as they tend to be more aware of the forthcoming changes with regards to both tax and the tighter regulations. I had previously thought it would be the ‘accidental landlord’ but I’m not seeing it that way.”

Hollingworth also said recent rate movements may slow any near-term exodus, but not reverse the longer-term professionalisation of the sector. “Improving interest rates should help to keep more in the market for now but when the OBR recognises the pressure on landlords, there are bound to be more that decide to slim down or exit,” he said.

“Overall, the trend toward a more professionalised market is likely to continue and if there are new opportunities, it’s perhaps the larger landlords who will be watching most closely.”

Cumulative pressures behind selling decisions

Brokers are clear that decisions to sell are rarely down to one factor. For many smaller investors, Tarazi said, multiple pressures now converge. “Letting out property is no longer as profitable as it once was for them, and I’d say this began with interest rates hikes and cost-of-living woes for consumers,” he said. “But the introduction of the Renters’ Rights Act has compounded these issues for amateur and accidental landlords.”

Hollingworth pointed to a familiar list of headwinds. “Any restriction in the supply of rental property is unlikely to come down to any single measure,” he said. “The cumulative pressure of multiple changes will be the thing that results in some landlords deciding to exit the market.

“That will be a result of the limitation on tax relief on mortgage interest, tighter lending rules, higher stamp duty for purchases as well as higher interest rates and tougher income tax to come. Add in legislative changes and the need to think about energy efficiency improvements and landlords have had a lot to keep on top of.”

For Upton’s clients, tax remains central. “It’s definitely the tax implications that are having a huge impact,” he said.

Even so, brokers note that lender behaviour has helped to cushion some of the pressure. “Easing mortgage rates will help to a degree and lenders have been quick to add some flexibility in criteria and different product structures to provide some support,” said Hollingworth.

Tarazi pointed to targeted product innovation at the specialist end. “There are lenders who have done their best to help stimulate the market with the launch of specialist products tailored to certain types of landlord, and the introduction of rates that aren’t much different to those found on equivalent residential mortgages,” he said.

Upton added that the traditional pricing gap between residential and buy-to-let has narrowed. “I am genuinely surprised how competitive buy-to-let rates are now looking when compared to residential pricing of rates,” he said. “There was always a much larger premium for buy-to-let rates, but the gap is no longer as big as it was a few years back.”

Limited companies and the push to professional structures

One of the clearest structural shifts is the move from personal ownership into limited company and SPV structures, although brokers say this predates the latest tax announcement.

“Again, there was a trend in this direction already and I wouldn’t say the Budget has exacerbated it, at least not to the same extent as recent rates volatility and legislative changes,” said Tarazi. “A rising number of landlords are finding that SPV ownership is in their best interest and our advisers are often finding that they are guiding clients in this direction.”

He added that lender product development is following that trend. “Lenders such as BM Solutions are proving proactive when it comes to recognising this trend and rolling out products that specifically cater for buy-to-let mortgage holders who want to go down the SPV route,” Tarazi said.

Hollingworth agreed that limited company ownership is becoming the default for new purchases. “It’s too early to see a direct reaction to the Budget announcement but the growth in limited company ownership is only likely to continue,” he said. “It doesn’t remove the impact of the changes to come but with all the other pressures to account for as well, it suggests that new BTL purchases are more likely to be through limited company.”

For some smaller but established landlords, however, incorporation is not the only consideration. “Some smaller landlords will be well established though and may see their property investment as part of their retirement strategy,” Hollingworth added. “They may have continued to enjoy good capital growth, which suits them, even if there’s a tightening in yield.”

Upton is also seeing delayed but now growing adoption. “I am seeing the limited company model (at last) taking off,” he said. “It seems to have taken some landlords longer than I’d imagined to see the benefits of limited company ownership.”

More complex strategies and a shift in trends

Alongside structural changes, brokers say the economics of buy-to-let are driving landlords towards more professional, hands-on models.

“The recent changes have definitely forced landlords to think more professionally,” Tarazi pointed out. “Some treated their buy-to-let business as a casual side hustle but have now set up as a limited company or SPV. Some are also adopting tech, including property management platforms and automated compliance systems, to run things more efficiently.”

Geography and property type trends are also evolving. “Again, trends in the market that were already apparent over a long period of time continue to grow,” Tarazi continued. “The North of England and parts of Scotland are more desirable than ever among buy-to-let mortgage applicants due to the attractive rental yields on offer there, and there are certainly landlords who are now looking to property types such as HMOs to provide buffering against declining profits. They typically require more management, but are lucrative for some.”

Upton sees a similar move away from simple single-unit lets. “The days of the ‘vanilla property’ being purchased for investment purposes are long gone,” he said. “More diversified property types is the way forward for a far greater yield.”

Hollingworth expects portfolio reshaping to continue rather than a wholesale withdrawal. “I expect some will decide to leave BTL altogether but portfolio landlords are more likely to be more selective in which properties will work for them,” he said. “That could see a rebalancing through some disposals, but also considering whether different properties or regions could offer greater opportunity. Again, that points to professional landlords being the likely source of future growth in the market, with less to appeal to accidental landlords.”

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