The Daily Telegraph - Saturday - Money
‘How can I downsize and get a new buy-to-let?’
A reader wants to build a small portfolio to boost her income when she retires in five years. Melissa Lawford offers advice
Karron Lovatt-Fraser, 61, became an accidental landlord after the financial crisis, when she could not sell her home in West Sussex. “It was the best thing I ever did,” she said.
She bought the property for £134,000 in 2002. Today it is worth £320,000 and brings in a net annual income of £ 3,000 to £ 6,000. Ms Lovatt- Fraser is hands on. “I love being a landlord. I love the proactivity of it,” she said.
Now she wants to build a small portfolio to supplement her pensions, which she expects to be worth £16,000 a year together.
Fourteen years ago Ms LovattFraser’s husband had a brain haemorrhage and moved into care.
“He can’t live with us because of his memory loss, which means I have more or less been the sole provider for our family,” she said.
But now Ms Lovatt-Fraser’s son and daughter, who are 21 and 20, are at university and she is starting to plan for when she retires from being a teacher in five years. She wants to put time into volunteering, amateur dramatics – and managing another buy-to-let.
She is a basic- rate taxpayer with £ 77,700 in savings. The outstanding mortgage on her buy- to- let is £176,012. She also owns her home in London, which she bought in 2008 for £278,000. It is now worth about £525,000. She has £132,824 to pay off on her mortgage; her current mortgage deal ends in July.
Ms Lovatt-Fraser wants to know if she should remortgage her home me and let it out, using the loan to buy a new home, or sell it and use the money ney to downsize and buy a second rental. ental. She is keen to invest in a threeebedroom house for around d £ 425,000 near a Crossrail station.
She wants to make sure she is planning tax- efficiently and wants to put her home into a discretionary trust for her children. She also wants advice on the housing market. “Am I wasting time and losing money by not doing it now?” she asked.
Elena Todorova
Director of mortgage broker SPF Private Clients Ms Lovatt-Fraser has to make a fairly quick decision about her home. If she does nothing her mortgage will move on to a variable rate in July, which will be significantly higher. Her lender’s variable rate is 4.24pc, so her monthly payments would rise to £469 from £ 152. But if she decides to stay until her term expires, she could try to fix for two more years.
If the property is worth £ 525,000 with an outstanding mortgage of £ 132,824, selling now could release £ 392,176. Let ’ s assume she has £385,000 left after fees. She will need to set aside £24,000 for stamp duty on a £425,000 buy-to-let.
Buying outright would wipe out her cash reserves. Instead, she could raise a small mortgage of £64,000. Rates start at 2.3pc for a five-year fixed rate with a monthly payment of £123.
However, if she needs to buy a property to live in, ideally this would be with cash. This would protect her from sudden rate increases. With a net sum of £385,000 she can put aside a typical 25pc deposit for the buy-to-let, which on a property of £425,000 is £106,250 plus stamp duty, leaving her with £254,750 to buy a new home outright (£250,000 for the property, plus £4,750 stamp duty and legal costs).
With a 25pc deposit, she can then raise a mortgage for the remaining £ 318,750 on the buy- to-let. Depending on the rental income, rates start at 2.08pc for a five-year fixed rate, with monthly payments of £556.
Her existing buy-to-let mortgage has no early redemption charge. She can potentially potentia raise £234,667 on competitive rates rate as above, which after repaying her current cu mortgage would release £58,654 58,654. She could use this to boost the purchase pu price of her new home to £ 300,000-£308,000 (adjusting in the stamp duty accordingly) or o reduce the amount she borrows on the new buy- to-let. Her new monthly mortgage payment would be £410 for an interest only mortgage.
From a mortgage perspective it makes sense to sell and buy b a new home after her current re mortgage expires in July as a she is still employed and receives r earned income, which may help cover void periods on the rentals. She has only two years remaining on her
term, leaving her in a disadvantaged position if the market slumps when she comes to sell. My advice would be to act now.
Michael Martin Senior director, private clients at Seven Investment Management
Holding a property in a trust would make it exempt from inheritance tax, but Ms Lovatt-Fraser already has an inheritance tax allowance of £325,000 and a “main residence nil-rate band” of £125,000 (as she is leaving the property to her children), so her home will mostly be exempt from IHT.
Using trusts could be more of an option for her buy-to-lets. But although trusts help with inheritance tax, they do not make sense for income tax. The beneficiaries pay 45pc tax on the income. This bill could be more than the inheritance tax they would save.
As an example, on her current buyto-let, if the £ 1,100 monthly income was taxed at 45pc, Ms Lovatt-Fraser would be paying £5,940 a year to the taxman. The 40pc IHT bill on the property would be £ 128,000. Roughly speaking, after 22 years the income tax paid on the rent would be greater than the IHT. If the property was held in trust, there would also be capital gains tax on an eventual sale, though any growth in the property’s value inside the trust would be outside the estate. If Ms Lovatt-Fraser continues to hold the property directly, however, there would be no CGT on her death.
A better alternative would be to keep the properties (and therefore the income) in her name and take out a life assurance policy to cover the IHT liability. This would be written under a separate trust with the premiums paid monthly. On death, the policy proceeds would be used to settle the IHT.
The costs depend on the health of the person seeking cover. It would be worth getting a quote and comparing the benefit of this strategy against simply giving her children the properties, which would mean a decreasing tax liability over a seven-year period. The effectiveness of the life assurance strategy will diminish over time as the cumulative total of the premiums increase.