Up until relatively recently, buy-to-let was a clear and compelling option for many people looking for an income in general and a retirement income in particular. Now, the changing political climate is increasing the challenges of buy-to-let and, in some cases, reducing its profitability, causing some landlords to ask themselves if it has become more hassle than it’s worth. Portfolio landlords in particular are likely to be looking at their options, but investors in this situation should be especially careful when making their plans since the disposal of significant investments such as a property portfolio can be far more complicated than the sale of a single property.
Changes to mortgage tax relief are set to hit higher-income landlords particularly hard, with the result that some may conclude that, for them at least, buy-to-let no longer makes financial sense. The obvious solution to this is that they will need to divest themselves of their property portfolio, but there are two key considerations to keep in mind when looking at this. The first is to minimize the impact of capital gains tax and the second is to ensure that landlords do not panic and dispose of a perfectly good investment with a lot of potential due to some short term financial uncertainty.
Capital gains tax
At this current time you can make a profit of up to £11K (or £5.5K for a trust) on the sale of investments (including property) without tax being payable. After that, any profits will be subject to CGT unless you take steps to manage this. One obvious step is to transfer a share in the property to a spouse/civil partner. Another option may be to make a lump sum contribution to a pension fund, which essentially uses the tax relief available to pension contributions, to reduce your CGT liability. There is also the option of using Enterprise Investment Schemes to crystallize the gain over a longer period, hence making the most of your allowance. It is, however, recommended to seek professional advice before taking up any of these options.
Divesting yourself of profitable investments
While it’s understandable that the recent flurry of changes directed at buy-to-let investments could make some landlords feel like giving up and moving on, it’s important to let your investment decisions be guided by your head rather than swayed by your emotions.
Before rushing to exit the buy-to-let market in despair, take a good look at your existing investments, possibly with the help of a financial adviser, to see if they could still generate a meaningful profit in the current climate.
You may find that simple changes such as moving to a new agent or remortgaging could be enough to move the sums back into your favour or, if not, you may wish to consider moving your properties into a limited company. If you are still not entirely convinced, you may wish to consider waiting to see whether the government’s stated aim of providing greater security for families renting in the private sector will translate into meaningful incentives to landlords to provide these, which might tilt the sums back in favour of buy-to-let at least in some cases.