The joys of owning a second property abroad hardly need explanation, but the potential pitfalls really do; depending on the location and tax regime, you could be in for some serious complexity.
The UK is often spoken of as “a nation of shopkeepers”, but increasingly it’s actually more the case that the UK is a nation of landlords. Rocketing house prices and (therefore) strong rental demand are stoking a huge buy-to-let boom. By mid-2014, UK investors held an incredible £1.25 trillion in residential property. When, from 2015, retirees are able to invest their pension funds as they choose we can probably expect even more people to pile in.
Of course, property investment does have a certain appeal. Anyone can understand the value of bricks and mortar as a long-term investment which can also yield a very healthy income if you rent the property out. There is also a growing trend of older family members buying rental properties with the intention of eventually gifting them to the younger generations. But buy-to-let also has many pitfalls. Too many people go into buy-to-let without taking professional advice on whether it is indeed the best investment for what they are trying to achieve. Furthermore, it’s likely that many people aren’t making their property investments work as hard as they might.
The first thing to remember is to plan for the worst, and that means always paying heed to the spectre of rising interest rates. The rents you charge will likely be fixed for a year at least and if interest rates rose dramatically you may not find them covering any mortgage you may have taken on to make up a funding shortfall.
You should always avoid becoming a forced seller too; housing markets are notoriously volatile and you could lose a lot of money if you are forced to sell in a down market. Putting the majority of your wealth into just one asset class – even if it is “safe as houses” – may not be the right investment strategy if you might need to access your money quickly.
A buy-to-let property is likely to have a big impact on your tax liabilities, both in terms of income and your estate. A professional adviser will ensure that all of your investments are managed tax-efficiently, and will help you understand all the tax implications buy-to-let brings. The cost of interest on landlord mortgages is tax-deductible, for example, which can make interest-only mortgages appealing to landlords. You may also be able to offset the cost of repairs/refurbishment against other tax liabilities, for example.
You could be able to obtain Principle Private Residence relief on the CGT arising from the sale of a property if you have used it as a main residence during the period of ownership. The proportion of the capital gain arising during residence is CGT-exempt (as are the gains accrued in the final 18 months of ownership), so living in for a period while prices are skyrocketing could pay significant dividends. Discussing things will a professional will probably uncover lots of useful strategies.
Many people fall into being a landlord through inheriting a property. Yet even those who make a conscious decision don’t always think things all the way through. However modest, your property portfolio needs to be treated like a business. That means you need to have a proper business plan in place which is aligned with your overall wealth strategy. Many wealth managers have specialist property advisers today and they will be able to help you formulate an appropriate exit strategy for your property investments.
Putting a significant chunk of your personal wealth into property will call for all of your investments to be reviewed. Diversifying your investments across asset classes is an incredibly important part of managing your investments. You also have to look at what you are hoping each element of your portfolio will deliver in terms of growth or income, and when you need it to do so.
Buy-to-let can be a very useful investment for high net worth individuals for a whole host of reasons. It shouldn’t necessarily be your go-to investment for the bulk of your wealth, however, as your profile and aims might call for something quite different. Talk to a professional before making any permanent moves.