Buy-to-let has been a hugely popular means for affluent individuals in the UK to build their wealth, but a raft of tax reforms taking effect from April 2020 mean letting go of rental properties – and quickly – might be a wise move.
Meteoric house price increases – and a commensurately strong rental market – have led multitudes of wealthy individuals to plough their capital into buy-to-lets in recent decades, not to mention all those who have become “accidental landlords” by inheriting property. However, incoming tax changes may mean that letting go of rentals in the coming months is a very wise move.
A key reason to sell in short order is the halving of Private Residence Relief. This exempts owners from paying Capital Gains Tax on the sale of their home and has hitherto also been applicable to growth in the value of a second home for the last 18 months of ownership (if used as a residence). From April 2020, however, the relief will extend only to the final nine months of ownership, dramatically diminishing the protection for those who have to move into a new home before another has sold and closing a much-loved loophole for landlords who are prepared to move around in order to minimise CGT.
Property price growth has currently stalled, but a strong post-Brexit rebound could see valuations shoot up dramatically and leave landlords open to paying 28% CGT on another nine months of growth.
Property price growth has currently stalled, but a strong post-Brexit rebound could see valuations shoot up dramatically and leave landlords open to paying 28% CGT on another nine months of growth.
Also on the block is Lettings Relief, which allowed landlords to shield up to £40,000 in Capital Gains if their main residence was let for a period. From April, this relief will only apply to landlords who actually lived with their tenants.
As landlords will know to their cost, this latest round of reforms is only the latest salvo in a string of attacks on landlords. One of the most painful has been the phasing out of tax reliefs on mortgage interest payments, but buy-to-let owners will also have been spooked by curtailed rights to evict tenants.
Now, tax experts are warning that waiting past April to sell off rental properties could cost those diligently building their investment portfolios tens of thousands of pounds
The Treasury is seeking to raise half a billion pounds in additional tax receipts over the coming four years from what many see as an unwarranted attack on landlords. This assault has led thousands to sell up already, and many more to consider getting out. Now, tax experts are warning that waiting past April to sell off rental properties could cost those diligently building their investment portfolios tens of thousands of pounds.
Timing is all
If you are considering selling a buy-to-let property, then you should take tax planning advice without delay to see how your reliefs can be maximised. You could consider shifting residence temporarily in order to benefit from at least a portion of the PPR or Lettings Relief available, for instance, however there are important strictures around evidencing residence that must be observed.
The potential sale of a property must also be seen in the context of your wider financial situation and investment portfolio. Even without landlord-specific tax breaks, you can still benefit from normal CGT relief that protects the £12,000 of growth in any investment you sell (or £24,000 if combined with a spouse’s allowance). Yet using one year’s exemption for the sale of a property might mean that selling off another significant asset – such as a business – should wait.
You also need to have a firm plan in mind for what to do with the proceeds of a sale. With interest rates at rock-bottom levels, leaving significant amounts of capital in cash for any period of time could cost you dearly. If your savings and investments do not at least outstrip inflation then, in effect, you are losing money month after month.
Top Tip
The decades-long house price boom has led many to believe that a second property is the best way to build their wealth, yet few have considered what happens “when the music stops”. Void periods and hassle with tenants have always been par for the course, but with tax reliefs vanishing from view, alternatives to property are now rightly being sought even by newcomers to investment management. Wealth managers can be really precise in designing an investment portfolio to suit your income and growth needs – and you won’t be exposed to the vicissitudes of the property market or tax man!
Lee Goggin
Co-Founder
A better alternative to buy-to-let
There is good reason that buy-to-let has been so popular among the UK’s affluent. The prospect of getting a stable income stream for years to come from an asset that is also rising in value has seen many people plough into buy-to-let as way to power up their pension. But now the decades-long boom in amateur property investment seems to be coming to a close. Swingeing cuts to tax breaks and the spectre of troublesome tenants being nigh-on impossible to evict has led many to conclude that being a landlord is more trouble than it is worth.
Some 4,000 properties have been coming onto the market each month this year and have certainly seen evidence of a buy-to-let exodus, with scores of users coming to our service in recent months seeking advice on rental properties. Those already landlords have been questioning whether – and when – they should sell, while those with capital to invest have been questioning whether property really is “safe as houses” anymore. For both, alternative ways to deploy capital and still get similar results have been front of mind.
Some 4,000 properties have been coming onto the market each month this year and have certainly seen evidence of a buy-to-let exodus, with scores of users coming to our service in recent months seeking advice on rental properties
Motivations vary, but most people in or considering buy-to-let seek a combination of capital growth and steady income which will both stand them in good stead for retirement and build the family wealth that can be passed on. The good news is that all this is also achievable through a diversified investment portfolio – and much more besides.
Depending on your time-horizon and risk-profile, a wealth manager can design a portfolio which can provide an optimised mix of income and returns and then adjust this as your circumstances change (such as you entering retirement and your tax position being altered). Then if passing wealth on efficiently is a priority for you, a portfolio can also be used to great effect in minimising Inheritance Tax through investments that carry Business Property Relief.
Perhaps most important of all, however, are the risk management and liquidity benefits that come from holding a variety of assets classes. If a large part of your wealth is already tied up in your family home, then adding even more exposure to property may be very unwise. Property takes time to sell and there is no telling if market conditions will be right when you wish (or need) to do so. In contrast, a properly diversified portfolio should insulate you from any financial shocks that might lie ahead – and make it very much easier to access your capital when required.
Depending on your time-horizon and risk-profile, a wealth manager can design a portfolio which can provide an optimised mix of income and returns and then adjust this as your circumstances change (such as you entering retirement and your tax position being altered)
All in all, it seems like buy-to-let has very much lost its shine, and at a time when getting a decent rate on cash deposits can feel impossible. Stepping into the breach left by bricks and mortar and High Street banks are the wealth managers and private banks on our panel. Whether you are seeking alternative safe havens for your capital beyond cash, or tax advice on any property holdings that you have the leading firms on our panel will be able to help.
The best wealth management results come from taking a holistic view of your financial circumstances and goals, so why not arrange a no-obligation discussion of your ambitions today through our 3-minute search?
