Is a buy-to-let still an attractive investment?


‘My property is my pension’ is often an answer you hear people give to whether they have a pension plan.

There is a general perception that property is a sound and solid investment and that owning a buy-to-let property in particular provides the best of both worlds: you receive a regular income to cover all outgoings (pehaps with a little on top) while the property itself increases in value until you’re ready to cash it in.

For a time, this might well have been the case.

However, things change, and as with all investments, it’s wise and advisable to compare all options. Even if the comparison doesn’t change your mind, you’re making an informed choice.

Property, as an investment, has had a chequered past

Before we look at other options, let’s look at the risks and limitations of going into the buy-to-let market – in other words, becoming a landlord.

On the financial side, you’re betting that property prices will rise, or at least hold their own. However, recent years have shown this is not always wise.

People tend to remember how things were a few decades ago, when times were good, without remembering that the property market is far from static.

As financial advisers, we remember that after the boom years, property prices took a nosedive in 2007 to 2008, and many homes and buildings lost half their value. Some have still not recovered.

Landlords burdened with mortgages for almost double the saleable value of their property learned the hard way that bricks and mortar can be far from a safe bet.

Now let’s consider the other financial aspects of owning property

Investing in property isn’t necessarily the most tax efficient way to invest. There’s income tax on rent to consider (mortgage interest can’t always be offset against this).

A property is a single asset, it cannot be sold piece by piece and, and as we mentioned, if its value has fallen considerably, you may not be able to sell it at all. If you do sell it, there is Capital Gains Tax to be paid, which can take a hefty bite out of your profit.

In addition, your family and beneficiaries could face a generous inheritance tax bill, as any property will form part of your estate on death.

Legislation is also moving to favour the tenant these days

Limiting the length of the lease, is just one example. Instead of being restricted to a set notice period, all tenants are now legally free to leave within just a month.

Even if you’re using an agent to manage your property, this can lead to considerable challenges that can come at a huge expense of time and effort – not to mention stress!

We’ve seen many clients who had planned for a worry-free retirement, but were still involved in aspects of property management, and could not shake off the need to watch how the markets were going.

What are the alternatives to property as an investment?

There are a number of alternatives that offer much greater tax efficiency. Money placed in one of the various types of Individual Savings Account (Isa) for example will allow you to invest up to £20,000 each year, at current rates, and you enjoy tax-free growth on that money.

Then there is the personal pension, which is the best possible way of saving in the long term. A basic rate taxpayer obtains tax relief at 20% on payments into the pension, so that for every £100 that goes in, £80 is paid by you and the other £20 is paid by the government as tax relief.

When you combine that with the power of compound interest over the medium to long term, a pension is a great way to make your money work hard for you.

In fact, the former pensions minister Ros Altmann once compared a pension to a shop where, over the longer term, you can buy £50 notes for £20!

So in short, if you are looking for a solid, long-term investment, it doesn’t necessarily need to be made of brick! It could be a combination of assets arranged within a diversified portfolio that takes advantage of all the tax allowances available to you, and is designed to suit your exact needs.

Please contact us if you’d like to know more.

‘My property is my pension’ is often an answer you hear people give to whether they have a pension plan.

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