The Daily Telegraph - Your Money
‘Are four properties enough to retire on?’
These readers want to structure their £340,000 property portfolio tax efficiently. Melissa Lawford seeks expert advice
Investing in property has long been a well-trodden path to a comfortable retirement. But in recent years the tax landscape has changed dramatically. Landlords have seen their profit margins hammered and they face an array of new regulations. So does the “property is my pension” strategy still work?
Chands Manani, 43, and his wife, Parul, 39, are both self- employed and live in the property above their business on a long-term commercial lease. As their housing costs form part of their business costs, their monthly outgoings are only around £900.
They each have two investment properties – three buy- to- lets in London and one holiday let on the Isle of Wight – with equity totalling about £340,000. The properties bring in £28,500 a year, on top of the Mananis’ self- employed income of £27,500. They are both making payments into stocks and shares Isas and personal pensions.
The Mananis plan to sell two of the properties within the next 10 years and use the money, combined with their Isa savings, to buy a family home in or around London. If they can, they would like to do this sooner, ideally within seven years.
“Then we are looking g to slow down from our mid-60s, hopefully using the two properties rties remaining in our portfolio and our two private pensions,” said Mr Manani. In retirement, they want to pay ay off the mortgage on their family home, me, travel to Las Vegas every other year and structure their investments to minimise inheritance tax x for their son, Khush, 11.
“What is the best and most tax- - efficient way to organise e all this?” Mr Manani asked. “And what is the e best way for us to plan for or our son?”
Chris Etherington ers. But they may not make full use of any losses. For example, if Mrs Manani makes losses on her buy-to-let properties in a year, Mr Manani would not be able to set them against his rental profits. They might consider putting the properties into joint ownership or into a partnership so that they can share their profits and losses. It would be sensible to do so before the stamp duty holiday ends. It could be achieved relatively simply with a deed of trust and no capital gains costs should arise. Individuals can make tax-free gains each year; the annual exemption currently stands at £ 12,300 per person. If the Mananis shared ownership of the properties, they would double the amount of tax-free gains on a sale. It probably makes sense to keep the holiday let, assuming it qualifies as a furnished holiday let. The income tax benefits afforded to FHLs include 100pc tax relief on mortgage interest and tax relief on capital expenditure in the form of capital allowances. Any taxable income also counts as “relevant earnings” for pension contributions, on which tax relief can be claimed, and gains on disposal can qualify for favourable capital gains tax treatment. Properties could also be sold in separate tax years, meaning that CGT exemptions p in multiple py years could be used. This could also low lower the CGT rate applied to the gains. T Those on residential property within th the basic-rate band are taxed at 18pc, compared com with 28pc in the higher-rate b band. Spreading disposals over a number num of years would allow for more of the gains to fall within their basic basic-rate bands. As for the future purchase of the family home home, buying it in their son’s nam name could prevent a three percentage point stamp stam duty surcharge fo for additional properti properties. However, the coup couple should be able to reclaim such a surch surcharge in any case if the new hom home replaces thei their old one. The There is no IHT adv advantage for suc such a plan but as it stands the cou couple do not hav have any exposure to IHT.
Associate director of mortgage broker SPF Private Clients The Mananis should focus on maximising income and capital growth in order to realise their goals. Three of the properties are let on what appear to be standard assured shorthold tenancy agreements. They could consider boosting their income by letting these on a room-by-room basis or as a small house in multiple occupation, which in some cases do not require a licence.
Some lenders will accept small HMOs with a maximum of five rooms let and still offer competitive terms. Small HMOs can work well in towns near universities as student lets, and you can still have one tenancy agreement to include all tenants.
With student lets you may have to arrange for a guarantor to countersign and ensure rent is paid.
If the properties are sufficiently large or have room for improvement, they can be converted to standard HMOs with bedsits, which typically require a certificate from the council – always check local regulations before works are carried out, as well as a property’s mortgage terms. Letting the rooms individually can result in more work, so the Mananis need to weigh up whether the hassle is worth the enhanced income.
The holiday let adds good diversification, particularly as many will now be keen to holiday closer to home, so it may make sense to keep it. The Mananis should check they are charging the going rate as demand will be high.
As their long-term goal is to generate capital from their investment properties to pay off the mortgage on their family home, this will require some investment. Adding an extension or converting a loft could increase the property’s value and improve rental income.
They should research the market, obtain relevant planning permissions and speak with local agents to discuss potential values. The costs for structural works are typically offset for CGT purposes, so keep receipts. They should start with just one property, so they will still have three properties producing income.