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Selling A Buy-to-Let Property

Whether it’s due to Section 24 of the Finance (No. 2) Act 2015, Prudential Regulation Authority (PRA) borrowing restrictions or the spate of other regulatory measures, buy-to-let’s attractiveness as an asset class has certainly waned in recent years.

The New Buy-to-Let Paradigm

Nonetheless, although some 4,000 rental properties are being sold every month, talk of a ‘mass exodus’ of landlords is arguably exaggerated.

Section 24, in reality, will affect about a third of those operating in the sector.  Those that can comfortably remain in the lower tax threshold should not face too much extra liability.  Similarly, those that are lowly-geared or own their assets in Limited company structures should be able to weather the storm (assuming there are no other changes on the horizon).

Since the 2015 announcement, landlords have also been exploring whether it’s possible to legally mitigate the effects of the legislation – particularly when its full force is felt from the 2020/21 tax year onwards.  Bearing in mind that there are extra stamp duty and capital gains tax implications, incorporation is one such strategy[1].  Others are consolidating their existing holdings, perhaps by selling off one or two properties to reduce their overall exposure.

Indeed, it’s arguable that the current environment presents a unique buying opportunity.  There are a reported 1,400 rental property purchases completed every month, often using special purpose vehicles (which are exempt from the mortgage interest relief restrictions).  Investors are taking more of a ‘belt and braces’ approach and focusing on the long-term benefits of buy-to-let investment.

This more professional approach comes in line with the growing institutional build to rent sector, where an unprecedented number purpose-built and professionally managed units are cropping up in larger cities – pushing out the smaller-scaled landlords to a certain degree.

You may be interested in reading the Property Solvers Landlord’s Report (Better Decision Making in the Modern Buy-to-Let Environment) which goes into this theme in detail.

So Why Sell a Buy-to-Let Property?

Although the sector’s external pressures may force landlords to reluctantly sell in the coming years, many are choosing to exit as a life decision.

The large majority of modern-day UK landlords are ‘accidental’ – perhaps they decided to rent out a property they previously lived in or inherited.  Many already have full-time working commitments, don’t want to deal with the extra hassles or simply want to release built-up equity.  In many parts of London and the South East, for example, prices have almost doubled since the financial crisis.  With net yields so low, selling up properties in these locations can make a lot of sense.

Ultimately, every landlord’s situation is different and whether you sell will come down to your own financial circumstances, your level of gearing (secured debt exposure) and a range of other factors.

But before making any hasty decisions, speak to a suitably qualified accountant/tax advisor who can look at your annual cash flow statements and examine where your real liabilities are[2].  Remember you will also incur capital gains tax once your property is sold (although there are some reliefs available).  If you’re a portfolio landlord, perhaps you can consider some relatively simple restructuring, sell over-leveraged assets or explore other strategies to boost your cash flow and drive net yields upwards.

Buy-to-Let Property Sales Routes

If you’ve decided that selling up is the best course of action, your main options are to use an estate agent, auction house or a quick/cash buying company (typically another landlord).

Each has its relative pros and cons.  With an estate agent, you’ll be able to attract a wider pool of buyers. But, at the same time, the property will need to be vacated and you’ll probably need to spend money on refurbishment / presentation to get an optimum price.  There will also be a number of months where you won’t be getting any rent.

On the other hand, landlords and auction buyers are usually not too concerned about the condition or other issues and you will usually be able to get rent right up to the point of exchange.

Should You Sell with a Tenant ‘In-Situ’?

If the tenants wish to remain in the property, the transition from one landlord to another is usually smoother and you won’t have to worry about the risks costly eviction.  At the same time, however, landlord-buyer offers will factor in the costs of the works in addition to key financial metrics such as gross/net yield and ROI.

Extracted from the Property Solvers guide to selling a rental property, the calculator below enables you to weigh up whether you should sell with tenants in situ or not.  Factoring in voids, refurbishment, ongoing mortgage payments, holding and other costs – you may be surprised that the difference is not as significant as you may first think…

Sell House with Sitting Tenants

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Refurbing then Selling Property

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[1] Readers should be wary of the questionable tax mitigation strategies propagated across landlord forums and social media, many of which have not received legitimate clearance from HM Revenue & Customs.

[2] You may want to check out The Property Investor’s Blog post which interviewed over 23 tax professionals on the back of phase 2 of Section 24.

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October 2018

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