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Getting out of Buy-to-Let? Think carefully about what you do with your profits

Buy-to-Let landlords have now seen the impact of recent changes in their tax returns. This is likely to result in a number withdrawing from the market – but what should they do with their money?

For Sale Sign

Gareth Hayward

in Features


Buy-to-Let (BTL) landlords have been subject to a significant tax grab by the UK government over the past few years. In April 2016, an additional 3% was added to the amount of stamp duty BTL buyers are expected to pay – and this was closely followed by cuts to mortgage interest tax relief. Borrowers requiring mortgages for BTL properties are also now subject to more stringent affordability testing under the Prudential Regulation Authority's tightened rules.

These changes created a “watershed” moment for the BTL sector, according to the Intermediary Mortgage Lenders Association (IMLA). The trade body warned that the tax returns that were due in at the end of January 2019 will be the first time many landlords will have seen the effects of these policies on their earnings. [1]

“These measures continue to erode the Buy-to-Let sector and, in turn, the whole private rental sector,” Kate Davies, executive director of IMLA said. "In fact, we may be approaching a watershed, as landlords will only be starting to feel the adverse effects of income tax changes when these are reflected in their tax bills for the first time."

With the returns falling – and the considerable time needed to administer the property ownership in terms of regulation, property maintenance and finding new tenants – many landlords are making the decision to sell their properties. The increased burden on the sector has resulted in many private landlords deciding to throw in the towel. With house price growth likely to be pedestrian over the next few years some, quite understandably, want to cash in their significant profits to ensure they don’t evaporate should the housing market tumble.

Indeed, the IMLA has calculated that BTL investment has slumped by 80% since 2015, with net investment in BTL property falling from £25bn in 2015 to just £5bn in 2017 [2]. It blamed this on “excessive regulatory intervention on the sector”.

There can be significant costs involved in selling out of BTL, including capital gains tax, legal and estate agency fees and any early repayment charges on a mortgage. These have to be considered, but perhaps the most important question for a BTL investor is the crucial question of what to do with their money instead, as this could potentially run into tens or even hundreds of thousands of pounds.

Cash savings of up to £85,000 per bank are covered by the Financial Services Compensation Scheme, and money would be “safe” split up between banks. However, low interest rates mean that savings rates are still close to historic lows. Should inflation rise, the value of these savings could be significantly eroded.

However, if you are selling up because of the hassle of running the property because government changes mean the numbers no longer add up, you may still want exposure to property – if not quite as much as previously. One way to do that is through a balanced equity portfolio that can still include exposure to real bricks and mortar.

The main way to invest in property in the UK stock market is through a Real Estate Investment Trust (REIT). This is a company that owns and manages property on behalf of shareholders. They tend to have a particular area of focus such as healthcare centres, destination shopping centres or warehousing facilities.  REITs effectively provide a way for investors to access the rewards of holding property assets without having to buy property directly. They are also liquid investments that can be easily bought and sold at a transparent price that is fixed by the market. Most REITS are, however, focused on commercial property rather than residential.

Although there is a degree of risk in holding shares and short-term movements are difficult to predict, the stock market has historically been one of the best places to invest money. The chart below shows the investment return in the FTSE 100 since 1999 including regular dividend payments (green) and how this compared with keeping money in a building society account (blue). It also shows how the FTSE 350 Real Estate Supersector (red), which includes the largest property-related investments on the UK stock market, has outperformed the blue chip index over the same time period.

Past performance is not a guide to future returns.
Source: Datastream

One of the most important factors for BTL investors is the yield they get on their investment. This factor is very important for investors in the stock market. Companies pay dividends to investors on a quarterly or six-month basis – and the UK market offers one of the best yields of any global markets. The index is currently yielding around 4.6%, significantly higher than can be achieved from a bank deposit. 

Past performance is not a guide to future returns.
Source: Datastream

The decision to sell any investment properties can be difficult – but choosing the next home for your hard-earned money can be just as tough. Charles Stanley is one of the oldest companies on the London Stock Exchange. Its origins lie in a banking partnership established in Sheffield in January 1792 and we have been managing family wealth for generations.

An important distinction with many of our competitors is that clients have direct contact with the very person making the underlying investment decisions – and will tailor your investments based on your investment objectives. You can speak directly to the individual running the portfolio and challenge the investment process. For a free no-obligation discussion on what you can do next with your realised BTL profits contact Gareth Hayward on [email protected] or call on 020 7149 6148.

 [1] https://www.ftadviser.com/mortgages/2019/01/21/landlords-to-feel-effects-of-buy-to-let-changes/

[2] http://www.imla.org.uk/news/post.php?s=2018-02-06-new-imla-report-buy-to-let-under-pressure

Past performance is not a guide to future returns. Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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