As more buy-to-let landlords switch to limited company structures for tax savings, industry experts warn that personal assets, including homes and savings, may still be at risk. The rise in limited companies for buy-to-let purposes has surged by 28% year on year, but a personal guarantee is often required for mortgages under these structures, leaving landlords vulnerable.
Surge in limited company buy-to-let operations
September 2024 saw a significant increase in landlords forming limited companies for their buy-to-let portfolios. According to Hamptons, over 5,300 new limited companies were established for buy-to-let purposes that month, a 28% rise from the previous year. Further data from Paragon Bank reveals that 67% of landlords planning to invest in the next 12 months intend to do so through a limited company structure.
The trend is largely driven by tax advantages. Landlords operating under limited company structures can benefit from lower corporation tax rates, with profits under £50,000 taxed at 19%, compared to up to 45% for individuals paying the additional rate of income tax.
Todd Davison, Managing Director of Purbeck Insurance Services, explains, “There has been a steady rise in landlords choosing to operate in limited company structures for the tax advantages. More recently, concerns over potential changes to Capital Gains Tax (CGT) appear to have driven a big rise in new businesses established as buy-to-let operations.”
Personal guarantees and the hidden risk
While the tax benefits are appealing, many landlords may not be fully aware of the personal risks involved. Most buy-to-let mortgages taken out by limited companies require the company directors to provide a personal guarantee. This means that if the company cannot meet its mortgage obligations, the landlord’s personal assets, such as their family home or savings, could be used to cover the debt.
Davison highlights the risk, saying, “When mortgaging or remortgaging, the director will need to sign a personal guarantee. This would put their personal assets such as their family home and savings on the line if for some reason they could not meet the mortgage payments.”
Insurance to mitigate personal risk
To address these concerns, some landlords are turning to insurance products designed to protect against the financial fallout if their buy-to-let investments go wrong.
Davison adds, “It’s a worrying time for buy-to-let landlords, but there are steps they can take to minimise some of the risks.” Insurance products like Purbeck’s help landlords reduce their exposure to personal financial loss, giving them more security while operating under limited company structures.
Landlords are advised to fully understand the risks associated with their investments, even when taking advantage of the potential tax benefits of limited company structures. With the right planning and protection in place, landlords can safeguard both their portfolios and personal assets from unexpected financial difficulties.
