Time to rethink your property portfolio? What you need to consider
Investing in property can still provide a strong return, but it needs careful planning to achieve the best outcomes. Just buying new properties without a clear strategy would be risky.
While it is true that rates of interest continue to increase, as do many of the costs associated with being a landlord, with the correct approach property can continue to provide a good income.
Many landlords enter the market by purchasing their property using a buy-to-let mortgage. In the past, these have provided a competitive means by which to purchase new houses with minimal deposits.
In many cases, landlords have even forgone paying off their mortgage favouring interest-only buy-to-let mortgages, which minimise their monthly outgoings to enjoy a greater overall return.
However, with the Bank of England steadily increasing the base rate, many lenders are also increasing their interest rates driving up the cost of debt.
For those on fixed-rate mortgage deals, their current rate shouldn’t change until their current offer ends, but for those on tracked and variable rates, which increase alongside the base rate, the costs of their mortgages could wipe out any profits.
Lenders are unlikely to offer any new fixed deals at lower rates for some time, so what can be done to cut mortgage costs? One option to consider if you already have multiple buy-to-let mortgages is consolidation.
Consolidating multiple debts into a single property loan could help to reduce the amount paid overall. Especially if you have a wide variety of rates on each previous loan. This could help to reduce the overall cost of your lending.
If you are considering further growth and you have multiple mortgages, you might want to consider a buy-to-let portfolio mortgage. Many lenders offer this kind of product, which allows you to combine your borrowing under a single web of loans, while also allowing you to use the equity within the portfolio to cover deposits for new homes.
If you currently operate as a sole trader it might be worth considering incorporating your portfolio into a limited company.
This carries with it several advantages, including:
- Limited companies currently pay Corporation Tax at 19 per cent. This is lower than income tax on profits, which if you are a higher-rate taxpayer is paid at 45 per cent.
- You can still enjoy a 100 per cent tax relief on the mortgage interest your limited company pays. This is restricted on personally held properties to just 20 per cent.
- It is easier to transfer limited company shares to beneficiaries or others than privately held property.
While incorporation has its benefits it also comes with the additional Companies House administration and you would have to pay Stamp Duty Land Tax on the transfer of your portfolio into a limited company, which could be costly.
Looking to sell?
We appreciate that given the current situation, some landlords might be looking to dispose of some or all of their property portfolio. If this is the case, then they need to consider the tax implications of doing so.
When a main home is sold, there is usually no Capital Gains Tax (CGT) due thanks to Principal Private Residence Relief, but tax may be owed on the gains you have made on a second home or investment property.
Higher and additional rate taxpayers pay CGT on property disposals at a rate of 28 per cent, while basic rate taxpayers may pay tax on some of their chargeable gains at a rate of 18 per cent.
Tax is only charged on the gains made on a property, not the total value of the sale, and most taxpayers benefit from an annual CGT tax-free allowance of £12,300 (2022/23).
Any CGT due on UK residential property disposals made by UK residents must be reported and paid within 60 days of completion.
Whether you are looking to grow or sell your portfolio it is important to have a plan in place and seek professional advice to make the most of your assets.
Speak to us today if you require any help or advice with your portfolio.