Buy-to-Let Incorporation on the Rise: Hamptons Research & Why It’s Not Tax Avoidance

New research from Hamptons has revealed a significant increase in the number of landlords incorporating their buy-to-let businesses. In September 2024 alone, 5,312 new limited companies were established to hold buy-to-let properties, representing a 28% rise compared to the same period last year. By the end of 2024, between 60,000 and 62,000 new companies are expected to have been created, up from 50,004 in 2023. This surge means that the total number of buy-to-let companies in existence has now reached a record 350,980—the highest figure ever recorded.

Hamptons’ research shows that over 50% of new buy-to-let purchases in 2024 were made through limited companies, a significant increase from just 20% a decade ago. This shift reflects a growing trend among landlords to structure their property businesses through companies, primarily as a response to the changes introduced by Section 24 of the Finance Act 2015, which restricts the ability of individual landlords to fully deduct mortgage interest from their rental income. In contrast, limited companies are still able to claim full relief on mortgage interest, making incorporation an attractive and commercially sound option.

Incorporation: A Legitimate Commercial Response

The rise in incorporation is a rational, commercial response to changes in tax legislation, not a form of tax avoidance. Section 162 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) provides incorporation relief, allowing landlords to transfer their property businesses into limited companies without triggering immediate capital gains tax (CGT) liabilities, provided the business is transferred as a going concern in exchange for shares.

This relief encourages landlords to restructure their businesses without facing immediate tax consequences, reflecting the legislative intent behind TCGA 1992. Incorporation offers legitimate tax outcomes, helping landlords manage their portfolios more efficiently and legally, within the framework provided by UK tax law. Tax mitigation—where taxpayers arrange their affairs to achieve lawful tax outcomes—is distinct from tax avoidance, which involves artificial schemes designed solely to reduce tax liabilities.

CIOT Concerns in 2024: The Treatment of ESC D32 and S162

Despite the clear legal framework provided by Section 162, there are ongoing concerns about the interpretation of incorporation relief and related guidance. The Chartered Institute of Taxation (CIOT) has raised significant concerns in 2024, particularly around the application of Extra-Statutory Concession D32 (ESC D32) and the Section 162 incorporation relief rules.

ESC D32 was designed to prevent landlords from incurring a CGT charge when transferring a property business to a limited company, as long as the company’s assumption of liabilities (such as mortgages) doesn’t count as consideration for CGT purposes. However, the CIOT has expressed concern that the application of ESC D32 and the interpretation of “business liabilities” has become unclear, potentially leading to inconsistent outcomes for landlords seeking to incorporate.

In its 2024 budget submission, the CIOT called for greater clarity from HMRC on how liabilities transferred to a company during incorporation should be treated. The concern centres around whether the assumption of liabilities, such as mortgages, could inadvertently be treated as consideration for CGT purposes, which would restrict incorporation relief under Section 162. The CIOT’s stance is that liabilities should not be treated as additional consideration, provided the business is transferred as a going concern.

The Role of DOTAS: Why Incorporation Isn’t Avoidance

Incorporation does not fall within the Disclosure of Tax Avoidance Schemes (DOTAS) regime, which is designed to identify artificial schemes created solely to reduce tax. Incorporation is a legitimate restructuring mechanism recognised and facilitated by UK tax law. The incorporation relief under Section 162 TCGA 1992 allows landlords to defer CGT on the transfer of their businesses to a company, and this relief is a statutory provision designed to enable business continuity, not to artificially reduce tax liabilities.

DOTAS requires the disclosure of schemes that meet certain hallmarks, such as the use of artificial steps to generate a tax advantage. Incorporation, however, does not involve contrived or artificial steps; it is a well-recognised business strategy that provides legal separation between personal and business assets. The rise in incorporations seen in Hamptons’ data reflects landlords responding to legislative changes in a legal and commercially sound way, rather than engaging in avoidance.

Incorporation by the Numbers: A Closer Look at the Data

Hamptons’ data reveals that incorporation is particularly popular in the South of England, where higher interest rates and a larger proportion of higher-rate taxpayers make incorporation more attractive. In 2024, 59% of all new buy-to-let companies were formed in the South, while 41% were established in the North and Midlands.

This regional trend underscores how landlords, particularly those facing higher tax burdens, are turning to incorporation to structure their businesses more efficiently. The table below provides a clearer view of the ongoing rise in incorporations:

The total number of buy-to-let companies now stands at 350,980, the highest ever recorded, with the trend showing no signs of slowing down. Below is the regional distribution of these companies:

CIOT Recommendations for Greater Clarity on S162 Relief

In response to the growing trend of incorporations, the CIOT has recommended that HMRC provide clearer guidance on Section 162 incorporation relief and the treatment of business liabilities during the incorporation process. The lack of clarity around the definition of “business assets” and the treatment of liabilities—particularly mortgage liabilities—has left some landlords uncertain about whether they fully qualify for incorporation relief.

The CIOT has urged HMRC to update its guidance to ensure that landlords can confidently use incorporation as a legitimate tax-planning tool without fear of inadvertently triggering CGT or breaching anti-avoidance rules. In particular, they are seeking confirmation that business liabilities transferred during incorporation will not be treated as additional consideration, which could restrict access to Section 162 relief.

Conclusion

The surge in new buy-to-let companies, as highlighted by Hamptons, reflects a growing trend among landlords to restructure their portfolios through limited companies. This trend is not driven by tax avoidance but by changes in tax legislation and a desire to manage property businesses more efficiently within the law.

However, as the CIOT has noted, there are concerns around the treatment of liabilities during incorporation and the application of ESC D32 and Section 162 relief. Clearer guidance from HMRC is needed to ensure that landlords can continue to incorporate their businesses without unintended tax consequences.

Incorporation remains a legitimate and recognised strategy for landlords, providing tax outcomes consistent with UK law. It does not fall under DOTAS rules and serves a genuine commercial purpose, allowing landlords to navigate the complexities of taxation in the buy-to-let sector effectively.

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