Do you invest in property? Are you rethinking your property portfolio?
Property investment can provide strong returns. However, you must plan carefully to achieve the best outcomes.
Just buying new properties without a clear strategy would be risky.
Although interest rates and costs incurred by landlords are increasing, the correct approach to property investment can deliver a successful income source.
Mortgages
Many landlords enter the market by purchasing their property using a buy-to-let mortgage.
Previously, but-to-let mortgages provided a competitive way to purchase new houses with minimal deposits.
For many landlords, opting for interest-only buy-to-let mortgages over paying off their mortgages has minimised 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 should not change until their current offer ends. However, 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 new fixed deals at lower rates for some time.
So, what can you do 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 you reduce the amount paid overall.
If you have a wide variety of rates on each previous loan, consolidating your debts could help to reduce the overall cost of your lending.
Are you considering further growth and have multiple mortgages? You might want to look at a buy-to-let portfolio mortgage.
Many lenders offer this product, allowing you to combine your borrowing under a single web of loans and use the equity within the portfolio to cover deposits for new homes.
Incorporation of a property portfolio
If you currently operate as a sole trader, it might be worth considering incorporating your portfolio into a limited company.
The advantages of incorporating your portfolio
- Limited companies currently pay Corporation Tax at 19%, lower than income tax on profits if you are a higher-rate taxpayer, which is paid at 45%.
- You can still enjoy a 100% tax relief on the mortgage interest your limited company pays. If you hold properties personally, this is restricted to 20%
- 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. You have to pay Stamp Duty Land Tax when transferring your portfolio into a limited company, which could be costly.
Selling a property portfolio
Given the current situation, some landlords might look to dispose of some or all of their property portfolio.
If this is the case, they need to consider the tax implications of doing so.
When selling the main home, there is usually no Capital Gains Tax (CGT) due, thanks to Principal Private Residence Relief. Although, you may owe tax on any gains made on a second home or investment property.
Higher and additional rate taxpayers pay CGT on property disposals at a rate of 28%. Basic rate taxpayers may pay tax on some of their chargeable gains at a rate of 18%.
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.
