Growth in late rent payments and landlord limited companies

If you’re a landlord, you’ll know that margins have shrunk over recent years. The loss of mortgage interest relief, high inflation and the soaring cost of mortgages have all eaten into profits. Throw in the cost of living crisis and it’s little wonder than many landlords are experiencing late rent payments – with some moving their portfolios to limited companies to make them more tax efficient.

60% of landlords experiencing more late rent payments

New research by online mortgage lender Molo has found that 60% of landlords are experiencing an increase in late mortgage payments. On average, they are experiencing an average of 2.9 late rent payments per year. This figure rises to 3.4 late rent payments in Yorkshire and the North East of England.

In terms of cash, this means that landlords are owed an average of £725 from late rent. This jumps to £806 in London.

It’s highly likely that these late payments are, in large part, due to a much higher cost of living. This isn’t just resulting in late rent payments: 56% of landlords report tenants moving out because they can’t pay the rent. Coupled with this, 55% of landlords have reduced rents in order to support their clients. This number increases to 68% in Greater London and Yorkshire.

More landlords switch to limited companies

Given the current fragility of the private rental sector, many landlords are opting to set up limited companies to manage their portfolios.

According to a study by Hamptons, landlords set up 50,004 limited companies in 2023. This surpassed 2022’s record of 48,540 by 3%. Limited companies now own a total of 615,077 properties in England and Wales.

Interestingly, much of the growth in incorporations has been driven by smaller landlords. Over the last year, there was a 21.9% increase in the number of limited companies owning only one rental property.

Why are landlords switching to limited companies?

There are many factors influencing the switch to limited companies, of which late rent payments is only one. The principal reason is that holding properties via a limited company can be more tax efficient. If annual profits are below £50,000, the company pays Corporation Tax at the small profits rate of 19%. Companies are also still allowed to deduct mortgage interest from their profits, handing them a useful tax break. This can more than offset the fact that corporate mortgages tend to be more expensive than normal buy-to-let loans.

Should I set up limited company?

While it looks a good idea on the surface to set up a limited company, don’t rush into it! This is particularly true if you currently hold one or more properties as a personal landlord.

There are many tax traps involved in the process and we usually find that unless you have at least 10 let properties it’s not likely to be worthwhile.

If you transfer property to a limited company, it counts as a sale. This can land you with significant SDLT (Stamp Duty) and CGT (Capital Gains Tax) bills. More information can be found about this in our dedicated BTL section.

For these reasons, if you’re thinking of shifting to a corporate structure, we strongly recommend you talk to one of our buy-to-let experts first. They’ll be able to advise you on the most efficient ways of managing your portfolio.

How do I deal with late rent payments?

Moving to a corporate structure won’t solve your short-term problem with rent payments, even if it could increase your margins in the future.

If you’re currently experiencing late rent payments, you could consider talking to your tenant and setting up a payment plan. The Molo research we looked at earlier found that an average of 54% of landlords have set up payment plans at some point, rising to 77% in Birmingham. Much will depend on how confident you are than tenants will be able to repay you, but it’s worth remembering you can be out of pocket while a property is empty and you search for new tenants.

Additionally, if you are concerned about future rent arrears, you could consider take our Rent Guarantee Insurance which will pay out a set period after a tenant fails to pay.

That said, considering a limited company structure is certainly an option – especially if you’re planning to buy a new property. For more advice on managing your current portfolio, get in touch with our friendly team today. We’d be delighted to help you.