Where to turn for buy to let landlords?
We know many of our clients are buy to let (BTL) landlords, and there has been a growing trend of dissatisfaction amongst this cohort, mainly due to the combination of tax changes and higher interest rates in recent years.
This has made the prospect of cashing in on the properties more attractive, as shown by the fact that the percentage of properties for sale that were previously up for rent hit a record high in 2024.
But the question we often get asked is “where do I put the proceeds?”.
Now, some of you may wish to simply spend the money, perhaps to pay off debts or gift to family members, but here we will highlight three tax efficient strategies to invest the proceeds. There is often far greater flexibility and liquidity with investing the proceeds rather than keeping the money tied up in property, not to mention lower management costs and no more tenant headaches!
We also understand that people will have varying risk appetites, family situations and will be of varying ages, so the below suggestions will not all be suitable for each of you reading this. Though if one (or more) of the strategies mentioned below is of interest to you, just get in touch with your usual adviser here and they will be happy to discuss it with you in more detail.
What About Capital Gains Tax (CGT)?
If you were to sell your BTL property in the 25/26 tax year you will be liable to CGT at the following rates:
Basic: 18%
Higher/Additional: 24%
Any gain will be added to your other income sources, so if you are selling a property that you have owned for many years, it is likely you will need to pay the higher rate of 24% CGT, even if you currently pay income tax at the basic rate.
Paying CGT should be considered before you sell, and we’d advise you speak to your accountant to ensure you understand the full implications before doing so. Though as you will see below, one of our options does offer the advantage of potentially paying no CGT.
Option 1: Make Pension Contributions
If you are under 75 and looking for one of the most tax efficient ways to invest a lump sum, then you don’t need to look much further than making pension contributions. There are tax benefits on the way in and indeed on the way out. Moreover, depending on your earnings you can contribute up to £60,000 per year (this includes your own personal contributions, any basic rate tax relief and employer contributions).
If you don’t think you can squirrel away much more and stay under the £60,000 annual allowance, you do have the option of using carry forward rules. Carry forward lets you use unused annual allowance from up to 3 previous tax years to boost your pension contributions without triggering a tax charge. Though do check with your adviser if carry forward is a strategy you could use, as there are a couple of rules to ensure you comply with.
The main tax benefits of making pension contributions are as follows:
- Receive a bonus in the form of tax relief when making the contribution. If contributing into your private pension, the government will automatically add 20% basic rate relief. Furthermore, if you are a higher or additional rate tax payer you can claim back an extra 20% (higher) or 25% (additional) on your tax return. This means that if you are an additional rate tax payer and you would like £10,000 to be paid into your pension, the net cost to you would only be £5,500.
- Money within the pension is not subject to dividend tax nor CGT.
- 25% of your pension is tax free (generally up to a limit of £268,275). The greater the value of your pension will therefore increase the amount you can take out tax free.
We use our inhouse investment portfolios for all money invested into a pension, and you have 24/7 online access to view your account.
Option 2: Using Onshore Bonds
If you have already used your pension & ISA allowances, and are concerned about inheritance tax, then using an onshore bond could be hugely beneficial.
Onshore bonds are an investable life policy, and the unique tax structure means there is potentially nothing to declare on your tax return, even if you are taking withdrawals. This is because you can take up to 5% of the invested capital via tax-deferred withdrawals each year, and this 5% rolls over for each year you don’t touch the bond. For example, if you don’t take any money from the bond for 5 years, then you can take 25% of the capital tax-free in year 5.
Bonds are also not liable to capital gains or dividend tax on the funds within them, and they can also be placed in trust to carry an inheritance tax benefit as well. This ensures the proceeds of the bond can be distributed to your intended beneficiaries, and potentially not subject to lengthy probate.
Unlike making ISA or pension contributions, there is no maximum limit on how much you can pay into a bond, and can be done on a regular or upfront basis.
Just like the pensions option, we use our inhouse investment portfolios for all money invested into an onshore bond, and you have 24/7 online access to view your portfolio.
Option 3: Enterprise Investment Schemes (EIS)
Launched in 1994, the EIS encourages investors to hold shares in early-stage businesses by offering valuable tax reliefs including upfront income tax relief, tax-free capital gains, and no IHT after 2 years. Not to mention you can offset losses against your income tax bill.
Going down the EIS avenue is most certainly for those who are content with taking a high risk approach with their investments. It is arguably the most tax efficient product of them all, if you are prepared to adopt the associated risk.
Perhaps the most attractive element of the EIS is the ability to defer the gain you have made on your property indefinitely. Let’s see how it would work in practice:
As you can see there are huge tax benefits of using an EIS, however an EIS is a complexed product, and will only be suitable for a small number of people. There are inherently higher risks involved in investing in EIS shares, including liquidity risk, higher investment risk and indeed legislative risk. We would generally only recommend EIS products to clients with high net assets, excess cash, a potentially large IHT bill, and most likely with high incomes as well.
Managing an EIS product is a very specialist area, and we outsource the day-to-day investment management of the EIS to a third party, these are big established companies such as Octopus or Downing, for example.
If you are considering selling a BTL property, or indeed are already in the process of doing so, then please feel free to reach out to your usual adviser and they will be happy to discuss the best available options.
