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How Bobbie’s adviser helped her following the sale of her buy-to-let property

Times have gotten tougher for buy-to-let investors. So much so that many have decided to exit altogether and sell down their property portfolio.

But selling an additional property is a significant financial event. There are many considerations for landlords, notably the impact of capital gains on the sale of their property and how they might supplement their income having sold a yielding asset.

The good news is that the sale of additional properties is a great opportunity for financial advisers to help clients. This article talks through a scenario illustrating how, with some clever planning, you could add real value for a client.

Tougher conditions for buy-to-let

The outlook for clients who own rental properties has progressively worsened.

Until 2017, buy-to-let landlords could deduct their mortgage interest from their rental income and only pay tax on the net income. Today, landlords only receive a tax credit equivalent to the basic rate of tax. That means higher and additional-rate taxpayers don’t get all the tax back on their mortgage interest payments. In addition, the recent hike in interest rates can make paying off a mortgage more expensive.

The Government also plans to make it harder for landlords to evict tenants1 as well as ensuring all new tenancies meet higher energy efficiency ratings by 2025.2

These are just some of the additional costs and complexities being added to the buy-to-let market.

Understandably many landlords are considering selling up and putting their money to work in a different way.

However, this has various potential implications, including tax implications. In fact, the Treasury received a record £14 billion in capital gains tax in the 2020/21 tax year with a big contributor being the sale of second homes.3

Now is a good time to speak to clients who are landlords to see how you might support them.

Bobbie’s situation

Bobbie currently has an additional property which she rents to supplement her income.

However, she’s finding that income is being squeezed by legislation and being a landlord has become more burdensome.

She meets with her financial adviser and explains that she’d prefer to sell her property and do something else with the money. However, because of house price inflation in the UK over the past few years, she would realise a sizeable gain if she sold her rental property. This is made more significant by the fact Bobbie has already used her full capital gains tax allowance (£12,300) for the current tax year against another gain.

Bobbie would also miss the additional stream of rental income.

She asks her adviser what her options are.

What Bobbie’s adviser recommends

As she’s experienced in making early-stage investments such as VCTs and is comfortable making a high risk investment, Bobbie’s adviser recommends she consider making a different tax-efficient investment.

Bobbie purchased her rental property for £800,000 and its market value today is £900,000. Her adviser explains that Bobbie could sell her property and invest the portion of the proceeds which represents a capital gain – an amount of £100,000 – in a portfolio of EIS-qualifying shares.