How to move on from Buy to Let

Published by Emma Lunn on 04 May 2016.
Last updated on 04 May 2016

Leaving buy to let

The government has sent a stark message to landlords: it stands firmly in the camp of homebuyers and has little interest in property investors or their profits.

The latest blow to the buy-to-let sector came in the March Budget. Chancellor George Osborne announced that he was slashing the capital gains tax (CGT) rate for everyone except second homeowners.

The rate cut came into effect on 6 April: basic-rate taxpayers now pay 10% CGT, instead of 18% previously, while higher-rate taxpayers pay 20% instead of 28%. But, drawing the battle lines in the property market, Mr Osborne announced that landlords and second homeowners are excluded from the tax cut and will still pay the old higher rates on any capital gains they make when they sell a property.

The move is another blow to the buy-to-let sector, already reeling from changes to income tax and stamp duty, on which the Chancellor has refused to budge.


Landlords and second homeowners have had to pay a 3% surcharge on existing stamp duty land tax (SDLT) rates on properties bought from 1 April 2016. This means a first-time buyer purchasing a £250,000 property will pay £2,500 in stamp duty, whereas a landlord will pay £10,000.

Another big change for landlords coming up is the way rental income is taxed. Mr Osborne announced in the summer Budget in July 2015 that the government will slash the amount of tax relief on mortgage payments landlords can claim from the tax rate they currently pay to the basic rate of 20%. The changes will be phased in from April 2017. Landlords who pay basic-rate tax won’t see a change, but those on higher incomes will find themselves losing out.

The Bank of England has also announced proposals to clampdown on buy-to-let mortgages, with landlords facing probing affordability assessments and tougher interest-rate stress tests.

Is it time for landlords to sell up?

Jamie Morrison, partner at chartered accountant HW Fisher & Company, suggests landlords compare their net rental yield – that is, what they are left with each month after costs and tax – under the new rules with the interest they would get if they simply left the money in the bank.

“Savings accounts pay only very modest levels of interest, but they do offer security. If your net rental yield falls to similar levels, it’s time to reassess whether it’s still worth the hassle and risk of being a landlord,” he says.

The managing director of, Kate Faulkner, suggests landlords don’t decide until they have sought advice from an independent financial adviser.

“They need to be very clear on their financial objectives, stop crossing their fingers and hoping property will deliver, or have the attitude that ‘it’s done well in the past, so it’ll be fine in the future’,” she says. “What they need to be very clear on now is how to use the cash they are thinking of investing (or have already invested) in property. It could be more tax efficient to diversify into other things, especially if they own as a cash buyer and are in areas where capital growth is below inflation.”

The income tax changes are being phased in gradually between 6 April 2017 and 5 April 2021. Landlords with large mortgages are likely to see their yields reduce – and possibly even slip into net losses – with the gradual reduction of mortgage interest tax relief. They are also the most exposed to the impact of a rise in interest rates.

Accountants Smith & Williamson worked out that as a rule of thumb, if mortgage interest payments are more than approximately three quarters of the rent after deducting other costs, a landlord paying income tax at 40% will find their tax bill wipes out any profit on the rent.

Therefore, those who have borrowed heavily against the value of their property are likely to suffer the most. In contrast, those who own property outright, without any loans, will not be affected by the income tax changes.

However, selling up might not be a straightforward decision for some, as landlords have to factor in the potential for capital growth as well as rental yields.

The latest data from the Office for National Statistics (ONS) show that house prices are rising more quickly in some areas than others. The average London house price, for example, hit a record of £551,000 in January 2016. This was £15,000 up on December’s figure of £536,000 and translates into an increase of £484 a day.

But while London and the South East have enjoyed double-digit annual growth rates, the property markets in Wales, Scotland and Northern Ireland have slowed considerably.

Transfering to company ownership Donna McCreadie, a buy-to-let tax specialist at Perrys Chartered Accountants, says it is important not to make any rash decisions and suggests consulting with a property expert to assess all options available.


“Changing the ownership of the property may be beneficial, whether between spouses or by the use of a limited company, but there are many considerations to take into account to ensure that your overall net position can be improved,” she explains.

Charlie Owen, associate partner at Russell New, a West Sussex-based firm of business, tax, and charity consultants, points out that the option to transfer personally owned properties to a company has received a lot of publicity.

“Whether it’s a good idea very much depends on the individual circumstances and the forthcoming hike in dividend tax rates should be considered in this context,” he says, “In some cases, incorporation can be very efficient from a tax perspective although the wider commercial aspects should also be considered. Our message is that there is no ‘one size fits all’ solution here and each case needs to be reviewed on its own merits.”

Capital gains tax

Once an investor has sold a property, there could be CGT to pay. CGT is levied on the profit or ‘gain’ on the sale of any property that’s not your principal residence – including buy-to-let property and second homes. The gain is usually the difference between what you paid for the property and the amount you sold it for.

You can make a gain of £11,100 a year before you pay CGT – this is the ‘annual exempt amount’. However, there are a number of ways to further reduce the CGT you pay on property sales. “You can reduce your exposure to CGT by deducting all the costs you incur in the sale from your total gain. These include estate agent’s, lawyer’s and accountant’s fees. You also need to deduct not just what you paid for it, but all associated fees, such as stamp duty and conveyancing costs,” says Mr Morrison.

“There is another valuable way to limit your CGT bill in the form of Private Residence Relief. You can claim this if you lived in the property at some point while you owned it. There’s no minimum time requirement – the test for eligibility is about quality rather than quantity of occupation. You must be able to prove that when you lived at the property it was your primary residence.”

Currently, sellers selling a second property can work out the CGT after the end of the tax year as part of their tax return. So depending on when you sell, you’ll have plenty of time to do the calculations and pay the tax.

But that’s changing. The Autumn Statement in November 2015 included small print that means by 2019, CGT on second homes or rental property will be payable to HMRC 30 days after the property is sold.

What to do with the money from a property sale

Those landlords who do decide to sell up will need to think about the best home for their money.

Patrick Connolly, a chartered financial planner at financial adviser Chase De Vere, says as a starting point you need to decide what you want to achieve, how long you are planning to invest for and how much risk you are prepared to take. Investors must decide whether they need to replace the income generated from buy to let or whether their focus is on capital growth.

“Before investing, you should look at paying off any debts. This could be credit card debt or an outstanding mortgage on your main property,” says Mr Connolly. “You should also make sure you have put aside some money in cash to cater for any short-term emergencies or requirements. This should stop you going into debt or being forced to cash in your investments at the wrong time if you need to get hold of some money quickly.”

A big advantage of not investing in residential property is that you can access tax-efficient wrappers such as pensions and individual savings accounts (Isas). These benefits have increased in recent years, while the tax benefits of buy-to-let property have been diminished.

“Those with a large lump sum to invest after selling a property can use their annual pension and Isa allowances and will also be able to take advantage of the new tax-free Personal Savings Allowance for interest payments and the Dividend Allowance for dividends,” says Mr Connolly.

If you have a lump sum to invest, you can reduce risk by investing into a wide range of different asset classes including shares, fixed interest and commercial property. Diversification should give you the opportunity to make consistent returns and will also mean that all of your investments won’t fall at the same time.

If you would still like to invest in property, consider a property crowdfunding platform such as Property Partner. Investors can buy shares in individual buy-to-let properties in a similar way to how you invest in stocks. Once the property is fully funded, investors receive rental income in proportion to the number of shares they own.

Investors pay a one-off transaction fee of 2% on the purchase of a Property Partner investment, and 10.5% (plus VAT) of rental income, for advertising, letting and managing the property. Property Partner finds the tenants and manages the property, offering a hands- off investment.

Costs of selling up

Landlords who do decide to sell up will find that this comes with costs of its own. Estate agents generally charge between 1% and 3% of the agreed purchase price plus VAT as a fee for their work. Online estate agents are cheaper and normally charge fixed fees of between £400 and £1,000.

Anyone selling a home legally has to provide potential buyers with an energy performance certificate (EPC).This document gives information about the energy efficiency of a property with a rating from A to G. Landlords should already have an EPC – it’s one of the documents they are supposed to provide to tenants. Any landlords who don’t have an EPC can arrange for it to be carried out through an estate agent or by a domestic energy assessor for between £50 and £120.

Vendors also need to instruct a solicitor or licensed conveyancer to deal with the legal aspects of selling a property. Most charge a flat fee of between £500 and £1,500 depending on how complex the transaction is.

In most cases, any buyer will want vacant possession of a property. This means landlords will need to serve tenants notice to leave and factor in a void period between the tenants leaving and the sale completing.

“I will make a loss once landlord tax kicks in”

Landlord Jaye Cook, 38, and his wife Emma, 34 (pictured above with their children, Madison, four, and one-year-old Devon) own five rental properties in Kent but the upcoming tax hikes mean the couple have halted plans to expand their portfolio.

“I’m a Conservative voter and I was surprised at both the changes in the Budget and the Autumn Statement as I think they will alienate Tory voters,” says Mr Cook, “My biggest fear is that I’ll start to make a loss every month once this landlord tax kicks in as we’re going to be taxed on the revenue rather than the profit.These changes will force landlords to raise their rents to make ends meet or they’ll sell up and create a glut of buy-to-let properties on the market.

“My wife and I invested in buy to let instead of a pension and we planned to buy two more properties, but we won’t now. I still believe in property as a long- term investment so when we remortgaged one property late last year we over- borrowed and invested the money in property crowdfunding platform Property Partner instead. This way, we still get a rental yield but without the hassle of managing tenants. We will also benefit from capital growth.”

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