Is it still worth investing in buy-to-let property?

27 September 2019 - Elizabeth O'Hanlon

The wisdom of investing in property has long been a subject asked of our financial planners at Scrutton Bland. Recent developments in government legislation for landlords have brought this question into focus once more, so Independent Financial Adviser Matt Merchant weighs up the pros and cons around buy-to-let investments, which may have left some investors asking “Is my buy-to-let investment still suitable?” and “What alternatives do I have?”
There is no right or wrong answer here, and the suitability of your Buy to Let investment will be dependent on individual circumstances including your tax position, other assets and your own objectives. It is clear though that recent developments are making this route less attractive for certain individuals. Scrutton Bland carried out research last year which showed that a well-balanced, medium-risk investment portfolio would have outperformed the average Buy to Let investment, even after factoring in the rental income and capital growth over a five or ten-year period. Our research also showed an investment portfolio would carry lower initial charges and exit charges compared to a Buy to Let investment.
One of the main stumbling blocks for any investors wishing to sell their Buy to Let property is the residential rates of Capital Gains Tax applicable to any increase in the value of the property beyond your Capital Gains Tax allowance, which are 18% or 28% depending on other income. There are however specialist investment vehicles known as Enterprise Investment Schemes which can be used to defer any Capital Gains incurred, with a view to releasing portions of the gain each year at lower rates of Capital Gains Tax which could be 10% or 20%. These investments can also provide Income Tax relief up to 30% of the amounts invested and 100% relief from Inheritance Tax but these are high risk investments and must be held for a minimum of three years to qualify for the Income Tax Relief and 2 years for the Inheritance Tax relief.
We often find that this is not an “either/or” scenario, and many clients hold both a property portfolio and investment portfolio, but the two forms of investment should work together as part of an overall strategy rather than being viewed separately. As advisers we are constantly talking about the need to diversify in order to spread risk, so it is important to take into account your property investments when building an investment portfolio. With a significant direct holding in property, there is an argument for not holding property within your investment portfolio as well in order to avoid having too many eggs in that particular basket, but this is something that is often overlooked. Obviously if property markets perform well then this will benefit you, but it would also mean poor performance would be amplified as well.

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