Whatever your reason for investing in property, at some point you will want or need to dispose of your property asset/s or pass them on to others to meet your financial goals. The problem is that not enough investors have a clear exit plan from the start; it’s something they will simply ‘figure out when the time comes’. And, although the likelihood is that you will always be able to sell a property, in order for it to be as sound a financial move as possible, exiting your investment needs to planned right from the start.
Whether you intend to sell or pass it on to family, there will be tax implications to offloading your property investment and you may be able to significantly minimise your tax liability by consulting a property tax expert and/or a wealth manager before you buy. They will be able to look at property alongside your other income and investments and advise you on how to structure your purchase and ownership, the best way for you to realise the return on your invested capital, and help you decide when and how to exit the investment.
As with all future plans, it is wise to have a contingency plan in mind, in case the property market or economic climate is not ideal at the time you want to sell. For instance, rather than selling, you might look at refinancing to release equity if you need a lump sum, or you could simply look at continuing to let and postpone your other financial plans for a while. You should also review your plans on an annual basis, as your own circumstances are likely to change over the lifetime of your property investment - typically between 15 and 20 years – and you might need to make adjustments to how you let and what you do with your profit.
Not fully understanding the tax implications
Property attracts tax liability at every stage of the investment. You have stamp duty to pay on acquisition, which now includes a 3% premium for the purchase of any property other than your own primary residence; any income you take from rent received is considered together with all your other earned income and taxed accordingly; when you sell, there is potentially capital gains tax to pay, and if you leave property to be inherited after your death, there may be inheritance tax to pay. There are ways to minimise the amount you are obliged to pay to HMRC, but it is complicated, so it’s essential you seek specialist tax advice, tailored to your own personal circumstances.
Three of the most common mistakes made around tax are:
1. Thinking capital gains tax is payable on the amount of equity you are left with after selling an investment property, when in fact it is payable on the difference between the purchase price and the sale price. In the most extreme cases, where investors have remortgaged several times, on an interest-only mortgage, it has meant them receiving a tax bill that is higher than the amount of capital they have been left with after selling.
2. Believing rental income is separate from your wages or salary. Some investors have made this mistake in the first year of owning a buy-to-let property and carefully kept the amount they’ve taken from rental income under the personal allowance limit, thinking that will mean they won’t need to pay tax on it. You need to be aware that all your income is viewed by HMRC as one amount and therefore must understand that the rental income you’re taking may push you into a higher-rate tax bracket and you may end up losing benefits, such as tax credits and child benefit.
3. Thinking that if a property is signed over to a family member more than seven years before your death, it will be free of inheritance or other tax. This is not necessarily the case, as transfer of ownership is generally regarded in the same way as a sale, therefore attracts both stamp duty for the new owner and capital gains tax for you, the ‘seller’. This is why any intention to leave investment property to someone else needs to be properly planned with an appropriate financial advisor right from the start.
Not investing in property upgrades
Success in buy to let depends on a property holding its capital value and always letting quickly for a decent level of rent. Tenants now rent the same property for 4 years, on average, so they are looking for a good-quality home, not simply a temporary place to stay until they find something more permanent. So one of the biggest problems for letting agents is landlords who refuse to spend money on upgrading boilers, kitchens and bathrooms when needed.
The consequences of not spending money on necessary upgrades tend to be higher void periods, lower rent when the property finally does let, and the capital value not keeping up with that of similar properties locally that are better-maintained. Essentially, while you might feel as though you are saving money by not spending on replacing and upgrading elements of your property, it is a false economy.
So, before you buy a property, budget properly for the lifetime of the investment so that you can plan your finances well ahead of time and make sure necessary upgrades are affordable. As a rough guide, over a 15 to 20-year investment, you are likely to need: two new boilers, between two and four new kitchens and bathrooms and redecoration every two years. With a clear budget and regular maintenance schedule, the property should continue to let well and hold its value for the long term.
Not carrying out regular expenditure reviews
The cost of the utilities, products and services you pay for as part of the business of running a buy to let are constantly changing. Whether that’s due to competition, availability or a wider economic influence, what you spend can go up and down, so it’s sensible to check whether a better deal might be available to you every 6-12 months.
If you are borrowing 50% or more to buy a property, one of your biggest monthly costs will be the mortgage and that market is a highly competitive one. So, to make sure you are not only always on the right rate for your situation, but also with a lender who will support your portfolio expansion plans, you should review your mortgage with a adviser every one or two years. In particular, if you are planning to hold property into your retirement, you must make sure you are with a lender who will allow you to retain your mortgage beyond 75 years of age.
Not tracking how well the investment is performing
Property can deliver great returns, but it’s critical to appreciate that not every property in every location will perform well. So, to make sure your capital is working as well as possible for you and property is still on track to deliver the returns you need, when you need them, you’ve got to do three things:
1. Know exactly how much income and capital growth your property is delivering
2. Compare those figures with both national and local average property returns
3. Compare your returns against those that can be realised via other forms of financial investment.
Only then will you be able to see whether you need to make adjustments. You may find you’re doing very well: on track to achieve your financial goals and seeing above average returns that you couldn’t realise elsewhere. You might find you need to make some small changes to maximise returns or perhaps your research will show that it would be better to sell your current investment and reinvest in a different type of property or let, possibly in another location. Occasionally, investors find themselves reassessing their whole strategy and exiting the property market in favour of a different form of investment.